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Government and Industry <ul><li>The Rationale for Government Involvement in a Market Economy </li></ul><ul><li>Doing Busin...
Government Involvement  in a Market Economy <ul><li>Functions of Government in a Market Economy </li></ul><ul><ul><li>Prov...
Government Involvement  in a Market Economy <ul><li>Functions of Government in a Market Economy </li></ul><ul><ul><li>Prov...
<ul><li>Competitive Framework: Antitrust Laws </li></ul><ul><li>Sherman Anti-Trust Act </li></ul><ul><li>Clayton Act </li>...
Government Involvement  in a Market Economy <ul><li>The purpose of antitrust laws </li></ul><ul><li>Two schools of thought...
Government Involvement  in a Market Economy <ul><li>Dealing with market externalities </li></ul><ul><li>Under perfect comp...
Government Involvement  in a Market Economy <ul><li>Dealing with market externalities </li></ul><ul><li>However, if all co...
Government Involvement  in a Market Economy <ul><li>A  benefit externality  (positive externality) arises if certain benef...
Government Involvement  in a Market Economy <ul><li>A  cost externality  (negative externality) arises if some of the cost...
Government Involvement  in a Market Economy <ul><li>Benefit externality </li></ul><ul><ul><li>Private garden </li></ul></u...
Government Involvement  in a Market Economy <ul><li>MC p  = marginal production cost </li></ul><ul><li>MC pol  = marginal ...
Government Involvement  in a Market Economy <ul><li>P 1  = market price </li></ul><ul><li>P opt  = socially optimal price ...
Government Involvement  in a Market Economy <ul><li>Socially optimal price  occurs where the price of the product equals t...
Government Involvement  in a Market Economy <ul><li>How can the optimal equilibrium be attained? </li></ul><ul><li>Governm...
Government Involvement  in a Market Economy <ul><li>Coase Theorem :  The idea that government intervention to eliminate th...
Government Involvement  in a Market Economy <ul><li>Problems with Coasian bargaining </li></ul><ul><ul><li>Normative issue...
Government Involvement  in a Market Economy <ul><li>Stabilization of the Aggregate Economy </li></ul><ul><li>Monetary Poli...
Government Involvement  in a Market Economy <ul><li>Monetary Policy </li></ul><ul><li>The primary goals of monetary policy...
Government Involvement  in a Market Economy <ul><li>The  Federal Funds rate  is the interest rate at which banks are able ...
Government Involvement  in a Market Economy <ul><li>The Fed may have to engage in open market operations to bring the rate...
Government Involvement  in a Market Economy <ul><li>Fiscal Policy </li></ul><ul><li>Fiscal Policy is designed to achieve m...
Government Involvement  in a Market Economy <ul><li>To stimulate the economy, the government will: </li></ul><ul><li>decre...
Government Involvement  in a Market Economy <ul><li>Policy Lags </li></ul><ul><li>Recognition </li></ul><ul><li>Implementa...
Doing Business with the  U.S. Government <ul><li>Monopsony:  A market in which there is only one buyer.  </li></ul><ul><li...
Doing Business with the  U.S. Government <ul><li>What the U.S. government buys is influenced by: </li></ul><ul><li>Governm...
Doing Business with the  U.S. Government <ul><li>Government acquisition is controlled by: </li></ul><ul><ul><li>Armed Serv...
Doing Business with the  U.S. Government <ul><li>Competition requirements </li></ul><ul><li>Profit restrictions </li></ul>...
Government Deregulation,  Mergers, and Acquisitions <ul><li>From the late 1970’s through the 1990’s the government elimina...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Deregulation has resulted in more competitive environment. </l...
Government Deregulation,  Mergers, and Acquisitions <ul><li>The basic motivation for mergers is to increase the value of t...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Incentives to Merge </li></ul><ul><li>Synergies in production ...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Improved management </li></ul><ul><li>The merger may create an...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Tax consequences </li></ul><ul><li>The merger may reduce the t...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Managerial power </li></ul><ul><li>A merger may occur when the...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Diversification </li></ul><ul><li>Mergers among unrelated firm...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Market power </li></ul><ul><li>Mergers may decrease competitio...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Stockholders of the target firm gain substantially. </li></ul>...
Government Deregulation,  Mergers, and Acquisitions <ul><li>Evidence regarding profitability of merged firms is mixed. </l...
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Ch15

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Transcript of "Ch15"

  1. 2. Government and Industry <ul><li>The Rationale for Government Involvement in a Market Economy </li></ul><ul><li>Doing Business with the U.S. Government </li></ul><ul><li>Government Deregulation, Mergers, and Acquisitions </li></ul>
  2. 3. Government Involvement in a Market Economy <ul><li>Functions of Government in a Market Economy </li></ul><ul><ul><li>Provide legal and social framework </li></ul></ul><ul><ul><li>Redistribution of income and wealth </li></ul></ul><ul><ul><li>Regulation of natural monopolies </li></ul></ul>
  3. 4. Government Involvement in a Market Economy <ul><li>Functions of Government in a Market Economy </li></ul><ul><ul><li>Provide for a competitive framework </li></ul></ul><ul><ul><li>Reallocation of resources in the presence of externalities </li></ul></ul><ul><ul><li>Stabilization of the aggregate economy </li></ul></ul>
  4. 5. <ul><li>Competitive Framework: Antitrust Laws </li></ul><ul><li>Sherman Anti-Trust Act </li></ul><ul><li>Clayton Act </li></ul><ul><li>Federal Trade Commission Act </li></ul>Government Involvement in a Market Economy
  5. 6. Government Involvement in a Market Economy <ul><li>The purpose of antitrust laws </li></ul><ul><li>Two schools of thought </li></ul><ul><li>Economic efficiency </li></ul><ul><li>Protection of small independent firms </li></ul>
  6. 7. Government Involvement in a Market Economy <ul><li>Dealing with market externalities </li></ul><ul><li>Under perfect competition: </li></ul><ul><li>resources are efficiently allocated </li></ul><ul><li>social welfare is maximized </li></ul>
  7. 8. Government Involvement in a Market Economy <ul><li>Dealing with market externalities </li></ul><ul><li>However, if all costs are not included in the price or all costs are not compensated, market failure results. </li></ul>
  8. 9. Government Involvement in a Market Economy <ul><li>A benefit externality (positive externality) arises if certain benefits of the production or consumption of a good or service accrue to third parties. </li></ul><ul><li>Producers cannot appropriate all the revenue so too little may be produced. </li></ul>
  9. 10. Government Involvement in a Market Economy <ul><li>A cost externality (negative externality) arises if some of the costs of production or consumption of a good or service are borne by third parties. </li></ul><ul><li>The product’s price will be lower than if it had been fully costed and too much of the product will be produced. </li></ul>
  10. 11. Government Involvement in a Market Economy <ul><li>Benefit externality </li></ul><ul><ul><li>Private garden </li></ul></ul><ul><ul><li>Information </li></ul></ul><ul><ul><li>Innovations </li></ul></ul><ul><li> </li></ul><ul><li> Cost externality </li></ul><ul><ul><li>Pollution </li></ul></ul> Examples
  11. 12. Government Involvement in a Market Economy <ul><li>MC p = marginal production cost </li></ul><ul><li>MC pol = marginal pollution cost </li></ul><ul><li>MC s = marginal social cost </li></ul>
  12. 13. Government Involvement in a Market Economy <ul><li>P 1 = market price </li></ul><ul><li>P opt = socially optimal price </li></ul><ul><li>Q 1 = market clearing quantity </li></ul><ul><li>Q opt = socially optimal quantity </li></ul>
  13. 14. Government Involvement in a Market Economy <ul><li>Socially optimal price occurs where the price of the product equals the marginal social cost. </li></ul><ul><li>At this point, less pollution will be produced than under competitive conditions. (Q opt < Q 1 ) </li></ul>
  14. 15. Government Involvement in a Market Economy <ul><li>How can the optimal equilibrium be attained? </li></ul><ul><li>Government can restrict production to Q opt . </li></ul><ul><li>Government can impose a pollution tax equal to MC pol . </li></ul><ul><li>Government can set maximum pollution levels for the industry then sell (tradable) pollution licenses. </li></ul>
  15. 16. Government Involvement in a Market Economy <ul><li>Coase Theorem : The idea that government intervention to eliminate the effect of externalities is not necessary if property rights are correctly and clearly defined. </li></ul><ul><li>If property rights (i.e. pollution permits) are assigned, bargaining between the parties involved would result in an optimal solution. </li></ul>
  16. 17. Government Involvement in a Market Economy <ul><li>Problems with Coasian bargaining </li></ul><ul><ul><li>Normative issues </li></ul></ul><ul><ul><li>Transaction costs </li></ul></ul><ul><ul><li>Unfair bargaining </li></ul></ul><ul><ul><li>Incomplete information </li></ul></ul>
  17. 18. Government Involvement in a Market Economy <ul><li>Stabilization of the Aggregate Economy </li></ul><ul><li>Monetary Policy : the use of the money supply and interest rates by the Federal Reserve System to influence the macroeconomy </li></ul><ul><li>Fiscal Policy : the use of taxes and government spending to influence the macroeconomy </li></ul>
  18. 19. Government Involvement in a Market Economy <ul><li>Monetary Policy </li></ul><ul><li>The primary goals of monetary policy are to achieve a certain level of economic activity and price level. </li></ul><ul><li>Recently monetary policy has involved influencing the Federal Funds rate . </li></ul>
  19. 20. Government Involvement in a Market Economy <ul><li>The Federal Funds rate is the interest rate at which banks are able to borrow funds from other banks. </li></ul><ul><li>The Federal Open Market Committee determines whether the Federal Funds rate target should be changed. </li></ul>Monetary Policy
  20. 21. Government Involvement in a Market Economy <ul><li>The Fed may have to engage in open market operations to bring the rate to its desired (target) level. </li></ul><ul><li>Open market operations involves buying and selling government securities in the market in order to increase or decrease the money supply, thus influencing interest rates. </li></ul>Monetary Policy
  21. 22. Government Involvement in a Market Economy <ul><li>Fiscal Policy </li></ul><ul><li>Fiscal Policy is designed to achieve macroeconomic goals relating to output and employment. </li></ul><ul><li>By manipulating receipts and expenditures, a surplus or deficit is created. </li></ul>
  22. 23. Government Involvement in a Market Economy <ul><li>To stimulate the economy, the government will: </li></ul><ul><li>decrease taxes </li></ul><ul><li>increase expenditures, </li></ul><ul><li>which shifts the federal budget toward deficit. </li></ul>Fiscal Policy
  23. 24. Government Involvement in a Market Economy <ul><li>Policy Lags </li></ul><ul><li>Recognition </li></ul><ul><li>Implementation </li></ul><ul><li>Operational </li></ul>
  24. 25. Doing Business with the U.S. Government <ul><li>Monopsony: A market in which there is only one buyer. </li></ul><ul><li>The government procurement office is often cited as a good example of a monopsony. </li></ul>
  25. 26. Doing Business with the U.S. Government <ul><li>What the U.S. government buys is influenced by: </li></ul><ul><li>Government strategic plans </li></ul><ul><li>Budget and program input from federal departments </li></ul><ul><li>Priorities set by the President </li></ul><ul><li>Availability of appropriated funds </li></ul><ul><li>Congressionally mandated requirements </li></ul><ul><li>Surplus/deficit conditions </li></ul><ul><li>Politics </li></ul>
  26. 27. Doing Business with the U.S. Government <ul><li>Government acquisition is controlled by: </li></ul><ul><ul><li>Armed Services Procurement Act </li></ul></ul><ul><ul><li>Federal Property and Administrative Act </li></ul></ul>
  27. 28. Doing Business with the U.S. Government <ul><li>Competition requirements </li></ul><ul><li>Profit restrictions </li></ul><ul><li>Audits </li></ul><ul><li>Bid protest rules </li></ul><ul><li>Accounting requirements </li></ul><ul><li>Socioeconomic Programs </li></ul>Companies doing business with the government must comply with:
  28. 29. Government Deregulation, Mergers, and Acquisitions <ul><li>From the late 1970’s through the 1990’s the government eliminated most regulatory control in the following industries: </li></ul><ul><ul><li>Telecommunications </li></ul></ul><ul><ul><li>Electric and gas utilities </li></ul></ul><ul><ul><li>Airlines </li></ul></ul><ul><ul><li>Commercial banks </li></ul></ul>
  29. 30. Government Deregulation, Mergers, and Acquisitions <ul><li>Deregulation has resulted in more competitive environment. </li></ul><ul><li>Many companies have sought to merge with or acquire other companies in order to survive and grow. </li></ul>
  30. 31. Government Deregulation, Mergers, and Acquisitions <ul><li>The basic motivation for mergers is to increase the value of the combined firms. </li></ul><ul><li>V A+B > (V A + V B ) </li></ul><ul><li>V = total market value </li></ul><ul><li>A & B = companies involved </li></ul>
  31. 32. Government Deregulation, Mergers, and Acquisitions <ul><li>Incentives to Merge </li></ul><ul><li>Synergies in production </li></ul><ul><ul><li>Revenue enhancements </li></ul></ul><ul><ul><li>Operating economies </li></ul></ul><ul><ul><li>Financial economies </li></ul></ul>
  32. 33. Government Deregulation, Mergers, and Acquisitions <ul><li>Improved management </li></ul><ul><li>The merger may create an opportunity for improving the overall management level by eliminating poor managers. </li></ul>Incentives to Merge
  33. 34. Government Deregulation, Mergers, and Acquisitions <ul><li>Tax consequences </li></ul><ul><li>The merger may reduce the tax bill of the two combined companies. </li></ul>Incentives to Merge
  34. 35. Government Deregulation, Mergers, and Acquisitions <ul><li>Managerial power </li></ul><ul><li>A merger may occur when the acquiring company’s managers are seeking to increase their span of authority. </li></ul>Incentives to Merge
  35. 36. Government Deregulation, Mergers, and Acquisitions <ul><li>Diversification </li></ul><ul><li>Mergers among unrelated firms was said to decrease the variability of sales and earnings and thus benefit stockholders. </li></ul>Incentives to Merge
  36. 37. Government Deregulation, Mergers, and Acquisitions <ul><li>Market power </li></ul><ul><li>Mergers may decrease competition in an industry, thus leading to higher profits for the remaining firms. </li></ul>Incentives to Merge
  37. 38. Government Deregulation, Mergers, and Acquisitions <ul><li>Stockholders of the target firm gain substantially. </li></ul><ul><li>Stockholders of the acquiring firm gain very little. </li></ul><ul><li>Overall increase in value of combined firms. </li></ul>
  38. 39. Government Deregulation, Mergers, and Acquisitions <ul><li>Evidence regarding profitability of merged firms is mixed. </li></ul><ul><li>Merger activity does not appear to have increased the level of industry concentration. </li></ul><ul><li>There appears to be no decrease in research and development of merged firms. </li></ul>
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