Government intervention


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Government intervention

  2. 2. Public vs. Private Goods <ul><li>THE PRODUCT DIVISIBLITY </li></ul><ul><li>In the case of some goods in an economy, it is possible to limit the number of consumers using these goods by higher prices, so that those who cannot afford the purchase will not buy the good. These goods become divisible so far its use is concerned. </li></ul><ul><li>Because these goods may be priced, the principle of exclusion can be applied. Those who cannot pay the market price, are excluded from its use. </li></ul><ul><li>Thus we can say that the ability to price the goods, its divisibility and the exclusion principle, all go together. </li></ul><ul><li>THESE ARE PRIVATE GOODS. </li></ul>
  3. 3. PUBLIC GOODS <ul><li>The goods that cannot be divisible or are indivisible are referred to as public goods. </li></ul><ul><li>Eg. Every person, immaterial if he pays the taxes or not, is equally allowed to enjoy the street light, road pathways etc. </li></ul><ul><li>The defense services that are provided for a nation cannot be limited to a few individuals. Every citizen of the country is equally secure from the foreign aggressions. </li></ul><ul><li>These services are hence indivisible. </li></ul><ul><li>It cannot be priced in the market in order to deprive some members from its use or benefit. </li></ul><ul><li>In these cases, a consumer cannot surrender these services even if he wants to. He cannot refuse the benefits of reduced pollution, street light etc. </li></ul>
  4. 4. The Problem of Free Rider <ul><li>It is possible for the members of the society to voluntarily purchase or not purchase the Private goods, as they are divisible. </li></ul><ul><li>But in case of Public goods, because each one gets the benefits even if he pays or not, every individual will argue that even if he does not pay for the good, he will still get the benefits, and so everyone will prefer not to pay. </li></ul><ul><li>Hence the payments of such products or services has to be done by compulsory contributions form every member through tools such as taxation. </li></ul>
  5. 5. <ul><li>The indivisible goods whose benefits cannot be priced, and hence the principle of exclusion does not apply are called as pure public goods. </li></ul><ul><li>Pure private goods are completely divisible and to them, the principle of exclusion applies in full measures. </li></ul><ul><li>The financing of public goods should be through public expenditure and this means that the pure public goods should be in the hands of the Public Sector only. </li></ul>
  6. 6. The concept of externalities <ul><li>One important concept of pure public goods and in many cases, private goods too, is the factor of externality. It refers to the economic effects which flow from the production or use of the good to another parties or economic units. </li></ul><ul><li>These effects are also called as spill over effects, neighborhood effects, or third party effects. </li></ul>
  7. 7. <ul><li>Eg. A powerhouse using coal would cause a lot of ash throwing in the neighborhood through its chimneys. </li></ul><ul><li>Similarly, the coal engines that drive the railways puts the near by residential to a lot of suffering on account of smoke nuisance. </li></ul><ul><li>This is a cost to the society and not to the individual power house or the railway department. </li></ul><ul><li>THESE ARE SOCIAL COSTS. </li></ul>
  8. 8. Marginal Cost <ul><li>An important characteristic of a pure public good is that its marginal cost would be zero. </li></ul><ul><li>I.e. implies that, an additional member of the society can be benefited by its use without adding much to its total cost. </li></ul><ul><li>The use of a pure public good, by one more member of the society does not reduce its availability to others. </li></ul>
  9. 9. <ul><li>Modern economics talks about the concept of “free enterprise” where there is least control of the Government over the choices, preferences, priorities of the individuals over their economic pursuits. </li></ul><ul><li>The reality is however quiet different. In practice, the government holds tremendous authority not only to influence private business decisions, but also to control and regulate the private business activities. </li></ul>
  10. 10. . The government can <ul><li>Enact laws against production of certain goods </li></ul><ul><li>Sale of certain goods </li></ul><ul><li>Consumption of certain goods </li></ul><ul><li>Prevent entry of private firms into certain industries through its Industrial Policy </li></ul><ul><li>Limit the growth of private firms beyond a certain limit ( MRTP Acts, Competition Acts etc) </li></ul><ul><li>Nationalize certain industries whenever necessary and desirable </li></ul><ul><li>Formulate and implement various kinds of economic policies that include fiscal policy, monetary or credit policy, industrial licensing policy, commercial policy, exchange control policy, etc. </li></ul>
  11. 11. . The government can <ul><li>Besides all these, the government at some occasions becomes a competitor of private firms in input markets. The public sector gets preference in the allocation of scarce resources. </li></ul><ul><li>All these measures adopted by the governments amounts to GOVERNMENT INTERVNTION. </li></ul>
  12. 12. Need for Government Intervention <ul><li>Any economy ( whether market, communist, or mixed) should ensure that : </li></ul><ul><li>All those who are willing to work at prevailing wage rate get employment </li></ul><ul><li>All those who are working get paid according to their contribution to the total productivity. </li></ul><ul><li>Factors of production are optimally allocated between various industries </li></ul><ul><li>The entire population gets sufficient income to cover at least basic requirements of food, shelter and clothing. </li></ul>
  13. 13. Need for Government Intervention <ul><li>The world has realized that the free market system has failed to meet the above expectations. The outcome of the failure of the free system has resulted in the following outcome : </li></ul><ul><li>Inequalities of Income and Wealth : The market mechanism finds that Income and wealth get concentrated in a few hands. Those who possess productive resources and mental abilities find it easy to access wealth. </li></ul>
  14. 14. <ul><li>Emergence of Monopolies : In a free system, those firms who have exceptional organizational abilities often take over the inefficient ones thereby giving rise to monopolies. </li></ul><ul><li>Failure to provide full employment : The market economy does not ensure full employment. </li></ul><ul><li>Instability : Balance cannot be achieved with millions of buyers and millions of sellers taking their own independent decisions. This imbalance gives rise to frictional disturbances and cyclical booms and depressions. </li></ul>
  15. 15. Need for Government Intervention <ul><li>Wastages of Market economy : Whenever there is a depression in a market system, the resources of production remain unutilized. These productive resources can take care of provide a living for the poor. </li></ul><ul><li>Indifference to and sacrifice of social welfare : In a market since the sole aim is to maximize profits, no one pays any heed to social welfare. </li></ul><ul><li>Presence of externalities : Diversion between social & private costs and benefits </li></ul><ul><li>Poverty in the midst of plenty : In an economy which is based on the principle of private profit maximization, tremendous technological advancement has taken place. This has resulted in tremendous rise in production. But due to institution of private property and the law of inheritance, the rich become richer and poor masses continue to be exploited. </li></ul>
  16. 16. Need for Government Intervention <ul><li>Exploitation of backward areas and world rivalry: By their MNC’s and MNE’s and by selling arms and ammunition to poorer and underdeveloped countries, the developed countries keep on exploiting backward countries of African and Asia. These countries also put restrictions on exports from developing countries and inversely try to dump their products in developing countries. This hampers the rapid economic development of developing countries. </li></ul>
  17. 17. GOVERNMENT INTERVENTION IN INDIA <ul><li>A wide range of measures are in place to stabilize economy and reduce the gap between rich and poor. These measures are : </li></ul><ul><li>Fiscal measures : To reduce the fiscal and revenue deficit the government of India has a strong control over its own expenditure. In 1984, the government announced a package programme to curtail public expenditure and to postpone fresh recruitments to government jobs. Post 1991 ( after adoption of LPG ), the govt. has curbed the size of ministries to control fiscal deficit ( difference between govt expenditure & govt. revenue ). </li></ul><ul><li>Monetary measures : The monetary policy of RBI, consists of extensive use of general and selective control credit. The main thrust has been to restrict the bank credit against the inflation of sensitive goods and to influence the cost and availability of commercial bank credit. The CRR was raised from 6% to 15% to have control over liquidity and expansion and contraction of credit. </li></ul>
  18. 18. GOVERNMENT INTERVENTION IN INDIA <ul><li>Supply Management : Supply Management is related to the volume of supply and its distribution system. The government has focused its attention in having greater control over the prices of wheat, rice, sugar, oils and other commodities of mass consumption. Some important measures are : </li></ul><ul><li>Fixation of maximum prices : For the elimination of incentives for hoarding and speculative activity of foodgrains the government fixes the maximum wholesale and retail prices of foodgrains. It also fixes minimum procurement price for major crops to protect the interests of farmers. </li></ul><ul><li>The system of dual prices : The items of mass consumption are made available to the people below poverty line at subsidized rates. </li></ul><ul><li>Increase in the supplies of foodgrains : The government takes care of additional requirement of foodgrains through heavy imports in situations of shortage. </li></ul>
  19. 19. GOVERNMENT INTERVENTION IN INDIA <ul><li>Adoption of Open General License ( OGL ) import policy for importing sugar and pulses. </li></ul><ul><li>Adjustments in trade and tariff policies in the Central Government budgets to ensure that domestic prices of Industrial products remain competitive. </li></ul><ul><li>Great reduction in excise duties on a number of items is expected to accelerate the speed of industrial revival and raise industrial growth. </li></ul><ul><li>A number of acts of have been formulated to protect the interest of Consumers. Stern action is taken against those found guilty. </li></ul><ul><li>A number of acts are also in place to take care of protection of environment, ecology, water and air pollution. Due to the global awareness about environment protection, various incentive schemes for eco – friendly products have been formulated. </li></ul>