Beruflich Dokumente
Kultur Dokumente
Jogendra Behera
8th February, 2008
RRS I – What is a
Regulation
Emergence of Broad Framework of Study
Market
Regulation
Failure
Regulation Equitable
Distribution
Oligopoly
Few sellers
Each participant is aware of the actions of the others
Monopolistic
Goods/services are slightly differentiated
Numerous sellers – each seller has some ability to influence the price
Monopoly
No substitute available for the goods/services offered
Only one seller and this seller sets the price – price maker
Perfectly Competitive
Market
Free markets allocate
Supply of goods to the buyers who
values them most
Demand for goods to the sellers
who can produce them at least
cost
John Stuart Mill, Henry Sidgwick mark a turning point in the literature of
market failure
Imperfect Asymmetry
Adverse Selection – Ignorant party lacks information while negotiating a
transaction (Akerlof – Lemon’s Problem);
Moral Hazards – ignorant party lacks information about performance of
the of the agreed upon transaction (Peltzman argument on insured driver
taking more risks);
Positive Externalities
Under consumption/provision of merit goods where the
social benefit > private benefit
Information failure may lead to under-consumption
(individuals not fully aware of the benefits to themselves
of consuming a merit good)
Market Failure due to
Externalities
People take a free ride when they benefit from consuming a good
or a service without paying for the costs of provision
Many goods have a public element but they are not pure public
goods – congested motorway
Because people are not charged for their use of common resources,
they tend to use them excessively (The Tragedy of Commons, Garret
Hardin 1968)
Market Failure due to
Market Power
Monopoly – A price maker compared to price
taker of a firm in competitive market
Telecommunications, electricity,
water, railways etc. are some
natural monopolies
(Mankiw, 2007)
Market Failure due to Oligopoly
In reality a firm is neither perfectly competitive or monopoly in nature rather
somewhere between.
Finally the market for poor quality of cars only exist – Good products and good
customers are under represented while bad products and bad customers are
over represented
(Pindyck and Rubinfeld (2001)
Moral Hazards – Shirking of
Workers
The higher the current rate of unemployment, and the higher the wage
paid over the market wage, the more effective will be the threat of
dismissal
There are four principal components of this regulation that in combination distinguish
the public utility from other sectors of the economy: control of entry, price fixing,
prescription of quality and conditions of service, and an imposition of an obligation to
serve all applicants under reasonable conditions.
(The principles of economic regulation, A.E.Kahn)
Some regulating act in
India
Sectors Type of Market Failure Regulator Type of Regulation Relevant Statutes
Utilities Natural Monopoly, CERC, SERCs Licensing, Tariff fixation, Electricity Act 2003
Externalities, Public Good, QoS standards, Dispute
Resolution
Oil & Gas Natural Monopoly, Petroleum and Natural Licensing, Tariff fixation, Petroleum and Natural
Externalities Gas Regulatory Board QoS standards, Dispute Gas Regulatory Board Act
Resolution 2006
Petroleum Act 1934
Petroleum and Minerals
Pipelines Act, 1962
Tele Communications Monopolistic, Oligopoly TRAI Licensing, Tariff fixation, TRAI Act 1997
QoS standards,
Interconnection, Spectrum
Management (Advisory)
Consultation paper on Approach to Regulation Issues and Options, Planning Commission India
Theorem of Welfare
Economics
First Theorem
If (1) households and firms act perfectly competitively, taking price as
parametric, (2) there is a full set of markets, and (3) there is perfect
information, then a competitive equilibrium, if it exists, is Pareto
efficient
Second Theorem
If household indifference maps and firm production sets are convex, if
there is a full set of markets, if there is perfect information, and if
lump sum transfers and taxes may be carried out costlessly, then and
Pareto efficient allocation can be achieved as a competitive equilibrium
with appropriate lump sum transfers and taxes (The size of output is
not shrunk)
Ideally, this would be achieved through measures that did not destroy
the efficiency properties, and much of welfare economics is based on
the assumption that non-discriminatory taxes and transfers can be
carried out
Liberalism
Libertarianism
Policies to reduce
poverty
Minimum Wage Laws
Welfare
In-kind transfers
(Mankiw, 2007)
Regulation - Summary
The possibility of market failure underpin the economic
rationale for state regulation of market economies.
(Parker, 2000)
References
Books
1. Mankiw, N. Gregory. (2007). Principles of Economics. 3rd Indian Edition,
4. Michael, A. & Hahnel, R,. A quiet revolution in welfare economics. Online book.
Journals
1. Dollery, B. and Worthington, A. (1996). The Evaluation of Public Policy.
Normative Economic Theories of Government Failure. Journal of Interdisciplinary
Economics 7(1):pp. 27-39.
2. Medema, G. Steven. (2004). Mill, Sidgwick, and the evolution of the theory of
market failure. History of Political Economy
7. Dollery, B., & Wallis, J. (2001). The theory of market failure and
policy making in contemporary Local Government. Working Paper in
Economics