Post on 17-Jul-2015
Reasons for Government Intervention
� Government intervention and social objectives
� The objective of social efficiency� marginal social benefits and costs
� MSB > MSC → produce (or consume) more� MSC > MSB → produce (or consume) less
� socially efficient output where MSB = MSC
� Equity� concepts of fairness
� Trade-offs between equity and efficiency
O
MC = S
DP
MSC
Co
sts
and
ben
efits
Quantity
External cost
Q1Q2
Social optimum
External costs in production
Types of Market Failure
� Externalities
� External costs of production MSC > MC
� External benefits of production MSC < MC
O
MSC
DP
Q1
External benefit
Co
sts
and
ben
efits
Quantity
MC = S
Q2Social optimum
External benefits in production
O
MC = S
DP
Q1Q2
Cos
ts a
nd b
enef
its (
£)
Quantity
MSC
External cost
(a ) External costs
O
DP
Q2Q1
Cos
ts a
nd b
enef
its (
£)
Quantity
MSCMC = S
External benefit
(b) External benefits
External costs and benefits in production
Types of Market Failure
� Externalities� External costs of production
MSC > MC
� External benefits of production MSC < MC
� External costs of consumption MSB < MB
Types of Market Failure
� Externalities� External costs of production
MSC > MC
� External benefits of production MSC < MC
� External costs of consumption MSB < MB
� External benefits of consumption MSB > MB
Types of Market Failure
� Externalities� External costs of production
MSC > MC
� External benefits of production MSC < MC
� External costs of consumption MSB < MB
� External benefits of consumption MSB > MB
� Public goods
Types of Market Failure
� Externalities� External costs of production
MSC > MC
� External benefits of production MSC < MC
� External costs of consumption MSB < MB
� External benefits of consumption MSB > MB
� Public goods� non-rivalry
Types of Market Failure
� Externalities� External costs of production
MSC > MC
� External benefits of production MSC < MC
� External costs of consumption MSB < MB
� External benefits of consumption MSB > MB
� Public goods� non-rivalry� non-excludability and the free-rider problem
Types of Market Failure
� Market power
� market power can be used to raise the price above the perfectly competitive level
� output below the socially efficient level
� MSB > MSC
O
P1
MC1
MC = MSC
Q1
MRAR = MSB
Q2
P2 = MSB
= MSC
£
QMonopoly output Perfectly competitive output
A monopolist producing less than the social optimum
Types of Market Failure
� Imperfect information
� by consumers
� by firms
� Protecting people’s interests
� dependants
� merit goods
Business Ethics & Corporate Social Responsibility
� Firms and social responsibility� are managers solely responsible to shareholders?
� are they simply concerned to maximise profits?
� broader social interests
� Business ethics� a stakeholding society
� corporate social responsibility
� environmental scanning
� Economic performance and social responsibility
O
MC = S
DP
MSC
Co
sts
and
ben
efits
Quantity
External cost
Q1Q2
Social optimum
Using taxes to correct a market distortion
Q2
MC
Q1O
P
Co
sts
and
ben
efits
Quantity
Optimum tax = MSC – MC
MC = SMSC
D
Using taxes to correct a market distortion
� Taxes and subsidies
� to correct externalities
� to correct for monopoly
Government Intervention in the Market
� Taxes and subsidies
� to correct externalities
� to correct for monopoly
� advantages of taxes and subsidies
� can vary the rate according to the size of the market distortion
Government Intervention in the Market
� Taxes and subsidies
� to correct externalities
� to correct for monopoly
� advantages of taxes and subsidies
� can vary the rate according to the size of the market distortion
� disadvantages of taxes and subsidies
� infeasible to use different tax and subsidy rates
� lack of knowledge
Government Intervention in the Market
� Legislation
� to control activities causing externalities
� to prevent firms giving inaccurate information
� to prevent the abuse of monopoly power
� Regulatory bodies
� purely investigative
� with powers to act (e.g. OFT)
Government Intervention in the Market
Environmental Policy
� The environment and production
� Green taxes and subsidies
� use of green taxes around the world
Environmental Policy
� Green taxes and subsidies (cont.)
� choosing the tax rate
� tax rate should equal the marginal external cost
� advantages of taxes and subsidies
� allows market to operate
� can vary with the size of the externality
� disadvantages of taxes and subsidies
� infeasible to use different tax rates
� lack of knowledge on extent of externality
Environmental Policy
� Laws and regulations� the command-and-control approach� advantages
� simple to operate� safe approach when size of externality not known
� disadvantages� requires robust monitoring and enforcement� lack of incentives for firms to do better
� Tradable permits� how tradable permits work� assessing tradable permits
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits� economies of scale
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits� economies of scale
� investment and innovation
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits� economies of scale
� investment and innovation
� approaches to competition policy
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits� economies of scale
� investment and innovation
� approaches to competition policy� banning various activities
Competition Policy
� Competition, monopoly and the public interest� the abuse of market power
� higher prices and profits
� lack of incentive to innovate
� market power can also bring benefits� economies of scale
� investment and innovation
� approaches to competition policy� banning various activities
� examining each case on its merits
Competition Policy
UK competition policy� the OFT and the Competition Commission
� restrictive practices policy
� legislation under 2002 Enterprise Act
� criminal to engage in cartel arrangements
• price fixing, limiting supply, sharing out markets, collusive tendering, agreements to pay low prices to suppliers
� OFT has discretion with other types of agreement
• vertical price fixing, agreements to exchange information
� powers of the OFT
� difficulties in rooting out collusion
� UK competition policy (cont.)� monopoly policy
� Chapter 2 prohibition of 1998 Competition Act• market-share criterion• market contestability
� anti-competitive practices• charging excessively high prices, price
discrimination, predatory pricing, vertical restraints
� test: do such practices restrict competition?� merger policy (2002 Enterprise Act)
� role of OFT and Competition Commission� criteria for judgment
� Assessment of competition policy
Competition Policy
The Regulation of Business
� Regulation and the privatised industries
� nationalisation and privatisation
� Regulation in practice:
� use of general competition policy
� specific regulation
� regulatory offices
� price-cap regulation
� the CPI–X formula
� Advantages of UK regulation
� discretionary
� flexible
� incentives
� Disadvantages of UK regulation
� disincentives of changes to X
� complexity of regulation
� principal–agent problems between regulator and industry managers
The Regulation of Business
� Policies to increase competition� allowing competition where there is no
natural monopoly
� limited extent of true natural monopoly
� allowing access to grids by competitors
� forbidding suppliers from being grid owners
� competitive franchising to make monopolies contestable
� Still need for regulation to prevent abuse of monopoly power
The Regulation of Business