Hey 101! Thanks a lot for putting your effort into the blog!
Hope that you would not think that I am naggy during this period of time.

Here are the winners of the Economics competition:

1st Place: S107

http://econs107.blogspot.com/

2nd Place: S101

3rd Place S102

http://09s102economics.livejournal.com/

Keep the Blog Alive! (:

Zhen Qiang

We know that one of the way the government tries to intervene in the case of market power is through taxes. But did you know that taxes imposed by government on monopolistic firms have a special name given to them? (This is just additional information)

These taxes are called Windfall Taxes.

What Does Windfall Tax Mean?
A tax levied by governments against certain industries when economic conditions allow those industries to experience above-average profits. Windfall taxes are primarily levied on the companies in the targeted industry that have benefited the most from the economic windfall, most often commodity-based businesses.

Investopedia explains Windfall Tax
As with all tax initiatives instituted by governments, there is always a divide between those who are for and those who are against the tax. The benefits of a windfall tax include proceeds being directly used by governments to bolster funding for social programs. However, those against windfall taxes claim that they reduce companies' initiatives to seek out profits. They also believe that profits should be reinvested to promote innovation that will in turn benefit society as a whole. Windfall taxes will always be a contentious issue debated between the shareholders of profitable companies and the rest of society. This issue came to a head in 2005, when oil and gas companies, such as Exxon Mobil who reported profits of US$36 billion for the year, experienced unusually large profits due to rising energy prices.

(Taken from: http://www.investopedia.com/terms/w/windfalltax.asp)


Jun Hao

Get to know more about Perfect Competition!

The model of perfect competition is built on four assumptions:

• Firms are Price takers. There are so many firms in the industry that each one produces an insignificantly small portion of total industry supply, and therefore has no power whatsoever to affect the price of the product. It faces a horizontal demand 'curve' at the market price: the price determined by the interaction of demand and supply in the whole market.
• There is complete freedom of entry of new firms into industry. Existing firms are unable to stop new firms setting up in business. Setting up a business takes time, however. Freedom of entry, therefore, applies in the long run. An extension of this assumption is that there is complete factor mobility in the long run. If profits are higher than elsewhere, capital will be freely attracted into that industry. Likewise if wages are higher than for equivalent work elsewhere, workers will freely move into that industry and will meet no barriers.
• All firms produce an identical product. (The product is homogeneous) There is therefore no branding or advertising.
• Producers and consumers have perfect knowledge of the market. That is, producers are fully aware of prices, costs and market opportunities. Consumers are fully aware of the price, quantity and availability of product.

These assumptions are very strict. Few, if any, industries in the real world meet these conditions. Certain agricultural markets are perhaps the closest to perfect competition. The market for fresh vegetables is an example.

The model can be used as a standard against which to judge the shortcomings of real-world industries. It can help government to formulate policies towards industry.

Taken from John sloman Economics Fourth edition

- - Yingying

Hey friends! A comic to kick start your thinking process!

Question 1: How is...

1. Demand and Supply
2. Productive Efficiency
3. Market Failure
4. Government Intervention

shown in the above comic strip?

Question 2: What does...

1. The Boy
2. The Girl
3. The Women

represent in a market?

Question 3: What should...

1. The boy do to increase profits?
2. The women do to solve the problem?

Question 4: In comic box 9...

What is the girl doing and what decision making is going through her head?

Some thoughts...

How is the boy acting like a monopolist?
Is there any point in Economics which the comic has wrongly potrayed?

Zhen Qiang (:

Labels: Monopoly

What's wrong with this video?

Concept: Public goods and the free rider problem. What happens in the video? Two office workers discuss a new swear jar into which co-workers are supposed to put a quarter each time they swear. The man asks what the money will be used for and the woman says, "I don't know--we'll use it to buy something for the office, like a case of Bud Light or something." The rest of the video shows office workers swearing every chance they can. (Note: This exercise may not be appropriate for high school students, since it promotes both beer and profanity.)

The commercial assumes that the office workers don't object to contributing to a pool of money that will be used to buy a collective good--beer that can be consumed by anyone in the office, regardless of how much they contributed to the swear jar.

If people really behaved this way, there would be less need for the government to provide public goods like fireworks, roads, police protection, and lighthouses, since these services could be financed through private contributions. But the free rider problem suggests that consumers tend to contribute less to public goods than the cost of what they expect to consume. In this case, economists would predict that the office workers wouldn't contribute enthusiastically to the swear jar, since they'd be able to consume beer whether they contributed or not. (Note: Beer isn't a pure public good. It's non-excludable, but rival.)

source: http://www.econoclass.com/whatswrongwithvideo.html

Mervyn

Types of Market Failure

Competitive markets:
• provide the most efficient means of allocating resources to maximise the benefits to the community
• ensure the goods and services that consumers demand are produced efficiently, and
• encourage innovation and broader consumer choice.

‘Market failure’ has a very precise meaning in economics. It does not simply mean dissatisfaction with market outcomes. It refers to a situation when a market left to itself does not allocate resources efficiently. Where market failures exist, there is a potential role for government to improve outcomes for the community, the environment, businesses and the economy.

Governments may intervene to change the behaviour of businesses or individuals to address market failure or to achieve social and environmental benefits that would otherwise not be delivered. Government intervention is not warranted in every instance of market failure; in some cases the private sector can find alternative solutions.

There are four main types of market failure which are outlined below.

Public Goods

Public goods exist where provision of a good (product, service, resource) for one person means it is available to all people at no extra cost. Public goods are therefore said to be ‘non-excludable’ and ‘non-rival’. Free-riding is a problem with public goods. Because the good is non-excludable, everyone can use it once provided. This makes it impossible to recoup the costs of provision by extracting payment from users. The definition of a public good should not be confused with phrases such as ‘good for the public’, ‘public interest’ or ‘publicly produced goods’. There are very few absolutely public goods. Examples include national defence, law enforcement, clean air, street lights and flood control dams.
There may be a role for government in providing public goods or funding private provision. However, such intervention should only take place where it is clear the market would not find a solution to this form of market failure. Government intervention should not stifle private innovation.

Externalities

Externalities are costs or benefits arising from an economic transaction received by parties not involved in the transaction. Externalities can be either positive (external benefit) or negative (external cost). The existence of externalities can result in too much or too little of goods and services being produced and consumed than is economically efficient. For example, where the cost of producing a good does not include its full costs, say in relation to environmental damage, then a negative externality is said to exist. This results in the good being over-produced (and under-priced).

The government may try to address negative externalities through:
• regulation that mandates corrective measures
• persuasion (eg an advertising campaign to ‘Do the right thing’ and not litter)
• establishing property rights in the externality, and
• charging for pollution generating behavior

Goods associated with positive externalities are sometimes termed ‘merit goods’. Governments may have a role in encouraging increased consumption of merit goods through subsidisation of or public provision of such goods (eg free access to vaccinations). Mandating consumption is a regulatory alternative (eg compulsory schooling for all children).

Information Asymmetry

Information asymmetry occurs when one party to a transaction has more or better information than the other party. Typically, it is the seller that knows more about the product than the buyer, however, it is possible for the reverse to be true. Information asymmetry can prevent consumers from making fully informed decisions.
Regulation requiring information disclosure or placing restrictions on dangerous goods can be used to address this type of market failure. For example, when providing financial advice, financial service providers are required to disclose information about significant benefits and risks, and the fees and charges associated with the financial products, as well as remuneration they receive in relation to the services offered.
It should be noted, however, that information disclosure alone may not be sufficient to change behaviour where there is information asymmetry. Behavioural economics suggests that individuals do not always make decisions in their best interests based on the information provided. It may be necessary to use other instruments in conjunction with providing information to overcome this market failure.

Imperfect Competition and Market Power

Market power exists when one buyer or seller in a market has the ability to exert significant influence over the quantity of goods or services traded, or the price at which they are traded.
In perfectly competitive markets, market participants have no market power. The ability of an incumbent firm to raise its price above competitive levels is limited by the existence of or threat of competition.
The existence of market power can result in economic inefficiency because it may:
• allow firms to increase prices without a commensurate reduction in demand
• restrict competition by creating barriers to entry by other firms.
Examples of market power include monopoly (where there is a single supplier) and oligopoly (where a small number of firms control the market). Where market power exists, governments may intervene to correct the operation of the market or set prices at a competitive level.

Source: www.betterregulation.nsw.gov.au

Soon Ren Hao

Labels: Public

Today we went through the question on
"The govt should only intervene in the case of public good provision because too much govt intervention is undesirable". Discuss (25m)
For these that did not come today or miss up some point, here are the points. Good luck in writing your essay.

INTRO:
Explain government intervention
Objective of government intervention: to correct inequity or inefficiency
Define economic efficiency: Economic efficiency is achieved when it is not possible to change the existing allocation of resources in a way that makes one person better off without making someone else worse off.

THESIS: government should only intervene in the case if public good provision because too much government intervention is undesirable.
Why government should intervene in the case of public good:
Public has the feature of non-excludability and non-rivalry.
Result in free rider problem- weaken incentive for consumers to offer to pay(no demand revealed) The market failed because no resources will be allocated to their production.

Importance of public good: (external benefit of missing market)
Undesirable(inefficient) of over intervention
Problem of government intervention:
Tax-Hard to measure external cost, disincentive to investment.
Legislation- Need a lot of manpower to monitor and enforce-> more money needed -> result in government collecting more tax.
Subsidy- Hard to measure exact value of external benefit, requires high tax to finance.
Direct provision- Hard to estimate the right amount to provide, overconsumption.
Explain government failure:
Information failure- Hard to obtain exact information such as extent of externalities and social benefit gained from public goods.
Bureaucracy and time lags- Slow procedure
Disincentive effects
Pursuit of self-interest of politicians and public employees
Distributional problems
This failures results in wasting of the state resources and still unable to solve the problem of market failure.
Even if government did not intervene in private sector, producers will still produce goods, just that the cost is not at socially efficient level. For the case of public good, if no government intervention, there is no production. So, it is essential for government to intervene in the case of public good.

ANTI-THESIS: Government should not only intervene in public good and should intervene in other goods too.
Other good also have market failure. Intervention is needed to correct the externalities.
State all sources of market failure.
Externalities
Demerit goods
Inequity
Information failure
Explain at least 3 sources of market failure in detail.
Negative externalities in production. Lead to deadweight loss. Tax is required to reduce the deadweight loss.
Merit good. Under consumption. Require subsidy.
Monopoly power(market dominance). Requires government to intervene(tax, legislation, state ownership, competition policies, maximum price).

CONCLUSION:
Government need to intervene not only in public goods but also in other goods as well. However, too much intervention is undesirable. Government can ensure the correct amount of intervention by using cost benefit analysis (CBA).

-Wee Chong

Public Goods and Merit Goods

In a free market economy goods and services will only be provided if firms can ensure they will receive payment for them. They will then provide whatever quantity is the most profitable. In doing this, they take account only of the costs and benefits to them. If there are external costs or benefits, they will not take account of these. This may mean that they don't provide the socially optimal level of output. Public goods and merit goods are goods that would either not be provided at all or would not be provided in sufficient quantity, for these reasons.

Public goods

Public goods are goods that would not be provided in a free market system, because firms would not be able to adequately charge for them. This situation arises because public goods have two particular characteristics. They are:

1. Non-excludable - once the goods are provided, it is not possible to exclude people from using them even if they haven't paid. This allows 'free-riders' to consume the good without paying.
2. Non-rival - this means that consumption of the goods by one person does not diminish the amount available for the next person.

We can see this if we look at the case of street lights. If a street light is provided by a firm, then it cannot exclude people from benefiting from it. It is not possible to charge people who walk under it. When people walk under it, it is also true that they don't make it go dimmer - they don't diminish the amount available for the next person. Street lights are therefore non-excludable and non-rival - they are public goods.

Merit goods

Merit goods are goods that would be provided in a free market system, but would almost certainly be under-provided. Take the case of education. If there were no state education provided at all, there would still be private schools for those who could afford them, and indeed many new private schools might open. However, there would not be nearly enough education provided for everyone to benefit. This happens because the market only takes account of the private costs and benefits. It does not take account of the external benefits that may arise to society from everyone being educated. For this reason, merit goods will be under-provided by the market.

If the private sector won't provide these goods in sufficient quantity, then the only way more will be provided is either if the government encourages firms to produce more (perhaps by subsidising the good or service) or if provides them itself. A significant proportion of government expenditure arises from the government providing merit goods. The main examples are:

• Education
• Health
• Fire service

Sarthak Rastogi :)

Labels: Merit, Public

Traffic Congestion

Advantages of Electronic Road Pricing in the UK:

1. Raises Revenue for the Government. If the governments gets more tax revenue it can mean either:
a. other taxes can fall
b. the government can spend more on public transport
c. or the budget deficit can reduce

Nobody likes new taxes, but whether money is collected from new or old taxes makes no difference to the disposable income of the tax payer.

2. Increase social efficiency. In a free market the consumption of cars are overconsumed. When driving people ignore the negative externalities of congestion and pollution. The social cost is much greater than the private cost. Therefore it makes sense for the government to charge a much higher price of driving in congested areas.

3. Congestion is Inefficient Congestion costs the UK economy over £20 billion a year in lost output and wasted time. This should be tackled.

4. Reduce pollution and global warming. Pollution from cars is a significant contributor to CO2 emissions in the UK. Road charging should encourage people to look for other forms of transport which don't pollute as much.

5. Save Journey Time - If you earn £15 an hour, why would you not like the idea of paying £7 to get home an hour earlier? Who enjoys sitting in a traffic jam?

Arguments against Road Pricing that are no good:

1. It is an intrusion on liberty. To drive you need countless documents. When you use electricity the electric companies measure exactly how much electricity you use. When you make a telephone call the telecom company know exactly whom you ring and charge accordingly. Why should driving be any different.

2. Govt is just using it to raise money. Is that not a purpose of income tax, VAT and every other type of tax? Raising money from a new tax enables other taxes to be lowered or spending to be increased.

3. Economic output is more important than Global warming. We shouldn't worry about the future, the most important thing is keeping taxes low for the current motorist.

4. Increases Inequality. This is true to an extent. A road pricing charge is a higher % of tax for those on low incomes. But so is the cost of buying a car and petrol. If concern about equality of distribution is an issue the govt can alter other taxes and benefits. A tax which increases efficiency need not be stopped on equality grounds. It is always possible to compensate the effects to others.

Source: http://www.economicshelp.org/2007/02/advantages-of-electronic-road-pricing.html
Amelia =)

Contestable markets

Profits as a signal for firms

When the possession of market power is profitable, it should attract new entrants into the industry. If entry is easy, then the existence of very few or even only one firm may not result in economic inefficiency. The threat of potential entry may be enough competition to keep the industry operating at or close to the competitive price and output. In this case the market is a contestable market.

However, if entry is not easy, but there are significant barriers to entry, the threat of competition is less. Barriers to entry exist when there are sunk costs, expenses which cannot be recovered once a firm has entered the industry. Where these costs are high, the industry probably operates as the theory of monopoly suggests it will.

One seller but still some competition

The theory of contestable markets suggests that even if there is only one seller, the seller may be forced to act as if there were many more. In contrast, there are times when great numbers of sellers are able to organize and act as a unified seller. Sellers have the incentive to act in this way because it will increase profits. The key to their success is their ability to restrict sales.

Costless entry and exit

A perfectly contestable market is one in which entry and exit are absolutely costless. In such a market, competitive pressures supplied by the perpetual threat of entry, as well as by the presence of actual current rivals, can prevent monopoly behaviour (higher prices and restricted output)

Markets that have become more contestable in recent years

Internet Service Providers (including the entry of "free" ISP's - over 200 of these in September 1999

• Online Communications (including video conferencing; virtual reality games; publishing; home shopping; travel services; information services; databases)

• Home Banking and Financial Services

• Electricity and Gas Supply

• Parcel delivery

• Opticians

• Low cost domestic airlines

• Road Haulage Companies

In a contestable market there are no structural barriers to the entry of firms in the long-run. If existing businesses are enjoying high economic profits, there is an incentive for new firms to enter the industry. This increases market competition and dilutes monopoly profits for the incumbent firms.

Market contestability requires there are few sunk costs. A sunk cost is committed by a producer when entering an industry but cannot be recovered if a firm decides to leave a market. Examples include marketing and advertising spending and outlays on industry specific items of capital.

RETAIL BANKING UNDERGOES A REVOLUTION

Retail commercial banking is undergoing a revolution with dramatic implications for the way we experience banking and related financial services. Consider a few of the many changes both in the market for retail savings and loans and mortgages in recent years.

• Many former building societies including Halifax plc have de-mutualised and become fully-fledged commercial banks.

• National food retailers such as Tesco and Sainsbury have launched hugely successful banking operations with millions of customers.

• Tesco's Clubcard Plus scheme provides a full range of financial services including mortgages and travel insurance.

• The market for mortgage finance and long-term savings in equities and deposit accounts has been affected by the entry of companies such as Virgin Direct, Egg and Standard Life Bank. Standard Life has built up a "mortgage book" in excess of £1.7 billion even though its operation started in January 1999. It has taken a 15% share of the market for new mortgage lending!

• European and North American mortgage lenders are entering the UK market in increasing numbers.

EGG AND THE BATTLE FOR HOUSEHOLD SAVINGS

Egg smashed its way into UK retail banking in October 1998. Owned and run by Prudential - one of the world's largest insurance companies, EGG offered high-interest savings accounts (initially a guaranteed interest rate of 6% on all deposits) plus low mortgage rates (priced at 5.99%). Prudential set a target of attracting £5 billion worth of deposits in the first five years. This was exceeded in little more than six months! The cost of market entry was put at £77m in the first year, rising to £200m over three years. Egg is now limiting new accounts to those customers with Internet accounts - whose banking costs are much lower than traditional customers.

CREAM-SKIMMING IN THE MARKET FOR SAVINGS AND LOANS

One feature of a contestable market is that new entrants may seek to "cream skim" the most profitable segments of an industry. The trick is to identify which sectors of a market offer the best returns and then successfully target existing customers.

The largest UK banks make profits of hundreds of millions of pound every year - but most of this money comes from user-services such as foreign exchange commission and high interest loans to a relatively small number of customers.

Many accounts in high street banks are loss-makers - particularly those held by people with tiny savings balances who rarely use other bank services.

Source: http://tutor2u.net/economics/content/topics/monopoly/contestable_markets.htm
Q: How many economists does it take to change a light bulb?
A: None, they're all waiting for the 'invisible hand of the market' to correct the lighting disequilibrium.
Mervyn

Externalities - Mind Map

• Negative Externalities
  • Consumption
    • Smoking
    • Litter
    • Noise
    • Anti-Social Behaviour
  • Production
    • Pollution:
      • Air
      • Land
      • Water
      • Noise
    • Congestion
    • Intensive Farming
    • Development
      
    • Crime
• Positive Externalities
• Consumption
  • Preventative Medicine - Vaccinations
  • Health education
  • Hygiene
  • Public Transport
  • Attractive environment
• Production
• Human Resource Development
  • Training
  • Education
• Research and Development
  

Sarthak Rastogi :)

"People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices. It is impossible indeed to prevent such meetings, by any law which either could be executed, or would be consistent with liberty and justice. But though the law cannot hinder people of the same trade from sometimes assembling together, it ought to do nothing to facilitate such assemblies; much less to render them necessary."

-Adam Smith, The Wealth of Nations

One of the public transport in Singapore is the Mass Rapid Transit or MRT which is ran by 2 operators, SMRT and SBS Transit. In economics, when there are only 2 dominant producers in a single market, it is called a Duopoly. Duopoly is a specific type of oligopoly. Oligopoly is a market form in which it is dominated by a small number of sellers.

Often, in a oligopolistic competition, firms collaborate together in hope of rising prices and restrict production in the same way a monopoly firm does. An example would be the Organisation of the Petroleum Exporting Countries or OPEC. OPEC is a cartel of 12 countries made up of Algeria, Angola, Ecuador, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, the United Arab Emirates and Venezuela. A cartel is a form of agreement where firms agree to coordinate prices and production.

From wikipedia:
Above the kink(E), demand is relatively elastic because all other firm's prices remain unchanged. Below the kink, demand is relatively inelastic because all other firms will introduce a similar price cut, eventually leading to a price war. Therefore, the best option for the oligopolist is to produce at point E which is the equilibrium point and kink point.

Previously, before the opening of the North-East Line, the Mass Rapid Transit is only ran by 1 firm, SMRT. To prevent monopoly, the governement has given SBS Transit to be the operator for the North-East Line. On top o0f that, any price changes would have to be approved by the Public Transport Council.

Zhen Qiang

Labels: Monopoly

Hi people!

In review of the lectures this week, we have learnt:

• Public good has 2 characteristics: Non-Excludabilty and Non-Rivalry. Examples: National Defence, Overhead bridges, Traffic Lights.

• Non-Excludability give rise to Free-Rider Problem.
• Since the demand for consumers are not shown, it results in a Missing Market.
• As firms tries to maximise their profits, no firms are willing to invest in the sector.
• This results in no allocation of resources.

• Non-Rivalry results in zero marginal cost of admitting another user.
• This results in socially ideal price to be zero. Where, MSB=MSC.
• No allocation of resources occurs as firms are profit motivated.

• Solution: Direct Provision, financed through taxes.

• Market Dominance/Monopoly, results in benefits of perfect competition not reaped.
• Thus, its inefficient and inequiable.

• To maximise profits, dominant firms supply at a quantity lower than market equilibrium.
• This results in Price to be greater than Marginal Cost (P>MC)
• Underallocation occurs, allocative efficiency not achieved.
• Large firms earn excessive profits, which goes to shareholders. Inequity occurs.

• Solutions: Taxation, Legislations, Direct Provision, Competition Policies, Maximum Price.

Here are the questions, start posting!

1. Since Mircosoft enjoys monopolistic power in the PC operating systems market, can it set as high a price as it likes for its internet browser? In what ways do you think that Microsoft might be inefficient?
2. Can you suggest cases of monopolistic power in the Singapore context? Explain your choices.

Here are some websites, hope that they will be helpful!

1. http://money.cnn.com/1999/11/05/technology/microsoft_finding/
   
2. http://news.bbc.co.uk/2/hi/business/507039.stm
   
3. http://news.bbc.co.uk/2/hi/special_report/1998/04/98/microsoft/80303.stm
   

Study Hard for the Upcoming CE! and Happy Labours' Day!

Zhen Qiang

"But no country can achieve global public good on its own, and neither can
the global market place. Thus our efforts must now focus on the missing theme of
the equation: global public goods"

- Kofi Anran

Global public goods are those public goods that can't be provided by one country acting alone but only by the joint efforts of many nations. Like public goods, they also hve the properities of non-excludability and non-rivalry. Examples are health, peace, financial system, environmental sustainability. These cannot be confined to a single nation. These are the goods whose benefit reach beyond a nation, generation or population groups. Several global public goods have existed since ages such as oceans, seas, atomsphere, etc... Many others have developed as a result of globalisation and cross border influences.


Another new team which has recently emerged is the global public bads, which are also non-excludable, non-rivarous and their removal is desirable. Example, communicable diseases, drug smuggling.


We face problems in provision of global public goods because of the gap of externalities between different nations. Hence an efficient allocation of resources to global public goods on an international level is very diffcult to achieve. Many failures have also been due to the lack of political consensus to implement policies to ensure adequate provision of global public goods.


The need for collective action to devise mechanisms for providing global public goods has increased in the globalised world. With integration of market, financial crisis affects many countries simultaneously. Spread of HIV/AIDS or drug smuggling are issues which concern all nations.


Providing global public goods, according to a study "Providing Public Gooods - Managing Population" includes 2 processes: Policital Decision Making, whereby stakeholders decide what and how to produce and ths other is Production Involving Financing on allocation of resources efficiently to global public goods. To solve this market failure, international co-operation and incentive is required.


Sanchita Shandilya

Labels: Public