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1.. PRICING IN A REGULATORY FRAMEWORK
Market Failures And Price Regulations
Market failures and need for regulation.
Regulations and market structure, firm behavior etc.
Price regulations .
2.Framework
Market Failures And Price Regulations
Market failures and need for regulation.
Regulations and market structure, firm behavior etc.
Price regulations .
2.Framework
3.Types of Market
Perfectly Competitive Market
Goods/services offered are all same
Numerous buyers and sellers and no single buyer or seller can influence the market price - price takers
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
4.What is a Market Failure
Market failure occurs when freely functioning markets, operating without government intervention, fail to deliver an efficient or optimal allocation of resources
Therefore economic and social welfare may not be maximized
This leads to a loss of economic efficiency
5.Market failure when the competitive outcome of markets is not efficient from the point of view of the economy as a whole
This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits as a whole
“a case in which a market fails to efficiently provide or allocate goods and services” in comparison to some ideal standard, such as the perfect competition model”
6.Why Government Intervention
The economic rationale for Government intervention
(i) Correction for market failure/loss of economic efficiency
(ii) Desire for greater degree of equity in the distribution of income and wealth
To employ the diagnostic approach, analysts attempt to identify both the precise type of problem that gives rise to the market failure
Policy analysts argue that existence of a market failure provides a necessary, not a sufficient justification for public policy interventions. A double market failure test is required. (Weimer & Vining, 1992).
Sufficiency is established when the gains from government intervention outwieghs the dangers of government intervention
7.How Government Intervention
(1) Command and Control technique (including regulation)
(2) Government subsidy and other forms of financial assistance (including research grants and tax allowances/tax exemptions)
(3) Taxation (including indirect taxes designed to control pollution)
(4) Policies to increase competition and reduce the immobility of factors of production
(5) Provision and finance of public and merit goods
(6) Introduction/expansion of market based incentives to change both consumer and producer behaviour
Perfectly Competitive Market
Goods/services offered are all same
Numerous buyers and sellers and no single buyer or seller can influence the market price - price takers
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
4.What is a Market Failure
Market failure occurs when freely functioning markets, operating without government intervention, fail to deliver an efficient or optimal allocation of resources
Therefore economic and social welfare may not be maximized
This leads to a loss of economic efficiency
5.Market failure when the competitive outcome of markets is not efficient from the point of view of the economy as a whole
This is usually because the benefits that the market confers on individuals or firms carrying out a particular activity diverge from the benefits as a whole
“a case in which a market fails to efficiently provide or allocate goods and services” in comparison to some ideal standard, such as the perfect competition model”
6.Why Government Intervention
The economic rationale for Government intervention
(i) Correction for market failure/loss of economic efficiency
(ii) Desire for greater degree of equity in the distribution of income and wealth
To employ the diagnostic approach, analysts attempt to identify both the precise type of problem that gives rise to the market failure
Policy analysts argue that existence of a market failure provides a necessary, not a sufficient justification for public policy interventions. A double market failure test is required. (Weimer & Vining, 1992).
Sufficiency is established when the gains from government intervention outwieghs the dangers of government intervention
7.How Government Intervention
(1) Command and Control technique (including regulation)
(2) Government subsidy and other forms of financial assistance (including research grants and tax allowances/tax exemptions)
(3) Taxation (including indirect taxes designed to control pollution)
(4) Policies to increase competition and reduce the immobility of factors of production
(5) Provision and finance of public and merit goods
(6) Introduction/expansion of market based incentives to change both consumer and producer behaviour
8.Market failures and regulation.
The possibility of market failure underpin the economic rationale for state regulation of market economies.
Regulations can take different forms with different roles
Health, safety regulations and environmental regulations can be rationalized on the basis of imperfect information and externalities
Economic regulation of public utilities can be explained by economies of scale and scope and need to protect the consumers from monopoly exploitation
Aspects of fiscal policy can be rationalized on the basis in terms of wealth and income redistribution
Regulatory intervention for universal service obligations etc.
The possibility of market failure underpin the economic rationale for state regulation of market economies.
Regulations can take different forms with different roles
Health, safety regulations and environmental regulations can be rationalized on the basis of imperfect information and externalities
Economic regulation of public utilities can be explained by economies of scale and scope and need to protect the consumers from monopoly exploitation
Aspects of fiscal policy can be rationalized on the basis in terms of wealth and income redistribution
Regulatory intervention for universal service obligations etc.
9.Regulation
Regulation cannot be limited to economic issues – means to ultimately achieve non-economic ends
Intentions and outcomes are therefore defined by a combination of economic, social, political and bureaucratic factors and cannot be attributed to one set of factors alone
Involvement of disciplines other than economics (law, political science, sociology etc.)
Broad definition – “ the use of public authority to set and apply rules and standards” (Hood et al, 1999)
As an effort by the state “to address social risk, market failure or equity concerns through rule based direction of individual and society” (Planning Commission consultation paper on Regulation)
Regulation cannot be limited to economic issues – means to ultimately achieve non-economic ends
Intentions and outcomes are therefore defined by a combination of economic, social, political and bureaucratic factors and cannot be attributed to one set of factors alone
Involvement of disciplines other than economics (law, political science, sociology etc.)
Broad definition – “ the use of public authority to set and apply rules and standards” (Hood et al, 1999)
As an effort by the state “to address social risk, market failure or equity concerns through rule based direction of individual and society” (Planning Commission consultation paper on Regulation)
10.Regulation
Regulation is a complex balancing act between advancing the interests of consumers, competitors and investors, while promoting a wider, ‘public interest’ agenda.
minimum prices to benefit the consumer (maximize consumer surplus);
ensure adequate profits are earned to finance the proper investment needs of the industry (earn at least a normal rate of return on capital employed);
provide an environment conducive for new firms to enter the industry and expand competition (police anti-competitive behavior by the dominant supplier);
preserve or improve the quality of service (ensure higher profitability is not achieved by cutting services to reduce costs);
identify those parts of the business which are naturally monopolistic (statutory monopolies that are not necessarily justified in terms of either economies of scale or scope);
take into consideration social and environmental issues (e.g. when removing cross subsidization of services).
Regulation is a complex balancing act between advancing the interests of consumers, competitors and investors, while promoting a wider, ‘public interest’ agenda.
minimum prices to benefit the consumer (maximize consumer surplus);
ensure adequate profits are earned to finance the proper investment needs of the industry (earn at least a normal rate of return on capital employed);
provide an environment conducive for new firms to enter the industry and expand competition (police anti-competitive behavior by the dominant supplier);
preserve or improve the quality of service (ensure higher profitability is not achieved by cutting services to reduce costs);
identify those parts of the business which are naturally monopolistic (statutory monopolies that are not necessarily justified in terms of either economies of scale or scope);
take into consideration social and environmental issues (e.g. when removing cross subsidization of services).
11.Some regulating act in India
12.Policies to reduce poverty (wealth distribution)
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