Applied Microeconomics
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Applied Microeconomics
Applied Microeconomics
Economics of the Environment
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
The economy and the environment
Factor services Goods and services
Resources
Waste
Amenity value
(Clipart for the environment: e.g. countryside scene)
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
✜
amenity
✦a
source of primary products
✦a
dump for waste
conflicts between these uses
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
✜
conflicts between these uses
✜
population pressures and limited resources
Accelerating environmental damage
Environmental damage
Total damage
O
W1
Waste
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
✜
conflicts between these uses
✜
population pressures and limited resources
✜
case for optimism
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
making optimum decisions
Optimum level of an activity that involves pollution
Costs and benefits (£)
MC pollution P4
P3 P2 O
Q1
Q2
Q3
Output of good
Q4
MB− MC
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures ✜
environment as a public good
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜
Optimum level of an activity that involves pollution
Costs and benefits (£)
MC pollution P4
P3
O
Q1
Q3 Output of good
Q4
MB− MC
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜ ignorance ✜
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜ ignorance ✜ inter-generational problems ✜
ECONOMICS OF THE ENVIRONMENT ■
Market-based policies ✜
extending private property rights
✜
charging for use of the environment
An emissions charge
Costs and benefits (£)
MSC
P2
MB = MSB P1 = 0
L2 Level of emission
L1
ECONOMICS OF THE ENVIRONMENT ■
Market-based policies ✜
extending private property rights
✜
charging for use of the environment
✜
environmental ('green') taxes
A socially efficient green tax
Costs and benefits (£)
MC pollution
Socially efficient green tax P1
O
Q1 Output of good
Q2
MB− MC
Green tax revenues as a % of GDP
Green tax revenues as a % of GDP
ECONOMICS OF THE ENVIRONMENT ■
Non-market-based policies ✜
command-and-control systems ✦ technology-based ✦ ambient-based ✦ social-impact
standards
standards
standards
✜
voluntary agreements
✜
education
ECONOMICS OF THE ENVIRONMENT ■
■
Tradable permits ✜
how they work
✜
assessment of the system
Can we rely on governments? ✜
game theory and international agreements
Outcomes for countries from strategies of pollution reduction
Other countries’ strategy
Cut pollution
USA’s strategy Don’t cut pollution
A
None cut pollution
Some cut pollution
All cut pollution
B
C
Moderate net gain for all
Small loss for USA Gain for countries not cutting pollution
D
E
F
High gain for USA Small gain for other countries
Fairly high gain for USA Loss for other countries
Large loss for USA Slight gain for other countries
No gain for any country
Applied Microeconomics
Traffic Congestion and Transport Policies
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants
of demand
Cars per thousand population
Increase in car ownership
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Sweden
Belgium
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Germany
W Germany Sweden
Belgium
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Germany
W Germany Sweden
UK
Belgium
Spain
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
of demand
price and income elasticities of demand
Motoring costs as % of household expenditure
Motoring costs as % of UK household expenditure: 2000/1
Quintile groups of household income
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space ✦ short
run
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space ✦ short ✦ long
run
run
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
✦ environmental
costs
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
✦ environmental
✜
costs
socially efficient level of road usage
Costs and benefits (£)
Actual and optimum road usage
MSB O Cars per minute
Costs and benefits (£)
Actual and optimum road usage
MC (private)
a MSB O Cars per minute
Costs and benefits (£)
Actual and optimum road usage
MC (private)
a
e
MSB O
Q1 Cars per minute
Actual and optimum road usage
Costs and benefits (£)
MSC
MC (private)
b a
e
MSB O
Q1 Cars per minute
Actual and optimum road usage
Costs and benefits (£)
MSC
MC (private)
b a
Optimum charge
d c
e
MSB O
Q2
Q1
Cars per minute
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
■
Policy 1: direct provision ✜
the road solution
✜
public transport
Policy 2: regulation and legislation ✜
restricting car access ✦ bus ✦ no
and cycle lanes
entry to side streets
✦ pedestrian-only
✜
areas
parking restrictions
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Policy 3: changing market signals ✜
extending existing taxes
✜
road pricing ✦ variable
tolls
✦ supplementary ✦ electronic
✜
licences
road pricing
subsidising alternative means of transport
Applied Microeconomics
Competition Policy
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC
Monopoly P1
AR = D
MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC ( = supply under perfect competition)
Comparison with Perfect competition
P1 P2
AR = D
MR O
Q1
Q2
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves £
MCmonopoly
P1
AR = D MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves MC ( = supply)perfect competition
£
MCmonopoly P2
ACmonopoly
P1
x
P3 P4
AR = D MR O
Q2
Q1
Q3
Q4
Q
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
✜
mergers
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
✜
mergers
✜
oligopolistic collusion: restrictive practices
COMPETITION POLICY ■
EU legislation ✜
Article 81: restrictive practices
✜
Article 82: monopolies and mergers
✜
merger control measures
✜
assessing EU policy
COMPETITION POLICY ■
UK competition policy ✜
the OFT and the Competition Commission
✜
restrictive practices policy ✦ Chapter ✦ types
of anti-competitive behaviour
✦ powers
✜
1 prohibition of the OFT
monopoly policy ✦ Chapter
2 prohibition
✦ market-share ✦ market
criterion
contestability
✦ anti-competitive
practices
COMPETITION POLICY ■
UK competition policy (cont.) ✜
merger policy ✦ role
of OFT and Competition Commission
✦ criteria
✜
for judgement
features of the 2002 Enterprise Act
UK competition legislation
COMPETITION POLICY ■
Assessment of competition policy ✜
focus on behaviour rather than market structure
✜
prohibition of certain practices
✜
tougher powers to identify secret collusion
Applied Microeconomics
Privatisation
PRIVATISATION ■
Nationalisation and privatisation ✜
history of nationalisation
✜
forms and history of privatisation
Nationalisation and privatisation in the UK
Nationalisation and privatisation in the UK
Nationalisation and privatisation in the UK
PRIVATISATION ■
Arguments for privatisation ✜
market forces ✦ greater
competition in the goods market
✦ greater
competition for finance
✦ accountability
to shareholders
✜
reduced government interference
✜
reducing the PSNCR
✜
increased share ownership
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
Profit-maximising natural monopoly £
LRAC
Q
Profit-maximising natural monopoly £
LRAC LRMC
Q
Profit-maximising natural monopoly £
LRAC LRMC D
Q
Profit-maximising natural monopoly £
LRAC LRMC D MR
Q
Profit-maximising natural monopoly £
Pm
LRAC LRMC D Qm
MR
Q
Profit-maximising natural monopoly £
Pm
LRACm LRAC LRMC D Qm
MR
Q
Profit-maximising natural monopoly £
Pm
LRACm LRAC
Pn
LRMC D Qm
MR
Qn
Q
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
✜
problems with the PSNCR
PRIVATISATION ■
■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
✜
problems with the PSNCR
Ownership and the public interest
Applied Microeconomics
Regulation
REGULATION ■
Identifying short-run optimum price and output ✜
industry has monopoly power ✦ the
first-best situation
✦ second-best
■
pricing rules
✜
industry produces externalities
✜
questions of fairness
Identifying long-run optimum price and output
Short-run and long-run marginal cost pricing £ MSC
PS
D = AR O
QS
Q
Short-run and long-run marginal cost pricing £ MSC
PS
LRMSC
PL
D = AR O
QS
QL
Q
REGULATION ■ ■
Regulation in practice: RPI – X formula Advantages of UK regulation discretionary; flexible ✜ incentives ✜
■
Disadvantages of UK regulation disincentives of changes to X ✜ excessive power of regulator? ✜ playing ‘games’ with industry ✜ alternatively, regulatory capture ✜ complexity of regulation ✜
REGULATION ■
Increasing competition in the privatised industries ✜
limited extent of true natural monopoly
✜
allowing competition where there is no natural monopoly
✜
allowing access to grids by competitors
✜
forbidding suppliers from being grid owners
✜
capping market share of established firms
✜
competitive franchising to make monopolies contestable
Applied Microeconomics
Privatisation in Transition Economies
PRIVATISATION IN TRANSITION ECONOMIES ■
■
State ownership under communism ✜
the system of central planning
✜
problems of inconsistency
✜
inappropriate success indicators and rewards
✜
results
Transition to a market economy ✜
forms of market liberalisation
✜
degree of transition achieved
PRIVATISATION IN TRANSITION ECONOMIES ■
■
Privatisation ✜
forms of privatisation
✜
insider and outsider privatisation
Requirements for successful privatisation ✜
supportive environment
✜
price liberalisation
✜
restructuring of firms
✜
corporate governance
Applied Microeconomics
Economics of the Environment
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
The economy and the environment
Factor services Goods and services
Resources
Waste
Amenity value
(Clipart for the environment: e.g. countryside scene)
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
✜
amenity
✦a
source of primary products
✦a
dump for waste
conflicts between these uses
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
✜
conflicts between these uses
✜
population pressures and limited resources
Accelerating environmental damage
Environmental damage
Total damage
O
W1
Waste
ECONOMICS OF THE ENVIRONMENT ■
The environmental problem ✜
use of the environment as: ✦ an
amenity
✦a
source of primary products
✦a
dump for waste
✜
conflicts between these uses
✜
population pressures and limited resources
✜
case for optimism
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
making optimum decisions
Optimum level of an activity that involves pollution
Costs and benefits (£)
MC pollution P4
P3 P2 O
Q1
Q2
Q3
Output of good
Q4
MB− MC
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures ✜
environment as a public good
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜
Optimum level of an activity that involves pollution
Costs and benefits (£)
MC pollution P4
P3
O
Q1
Q3 Output of good
Q4
MB− MC
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜ ignorance ✜
ECONOMICS OF THE ENVIRONMENT ■
An optimum use of the environment ✜
different approaches to sustainability ✦ free-market
approach ✦ social efficiency approach ✦ conservationist approach ✦ Gaia approach ✜
■
making optimum decisions
Market failures environment as a public good ✜ externalities ✜ ignorance ✜ inter-generational problems ✜
ECONOMICS OF THE ENVIRONMENT ■
Market-based policies ✜
extending private property rights
✜
charging for use of the environment
An emissions charge
Costs and benefits (£)
MSC
P2
MB = MSB P1 = 0
L2 Level of emission
L1
ECONOMICS OF THE ENVIRONMENT ■
Market-based policies ✜
extending private property rights
✜
charging for use of the environment
✜
environmental ('green') taxes
A socially efficient green tax
Costs and benefits (£)
MC pollution
Socially efficient green tax P1
O
Q1 Output of good
Q2
MB− MC
Green tax revenues as a % of GDP
Green tax revenues as a % of GDP
ECONOMICS OF THE ENVIRONMENT ■
Non-market-based policies ✜
command-and-control systems ✦ technology-based ✦ ambient-based ✦ social-impact
standards
standards
standards
✜
voluntary agreements
✜
education
ECONOMICS OF THE ENVIRONMENT ■
■
Tradable permits ✜
how they work
✜
assessment of the system
Can we rely on governments? ✜
game theory and international agreements
Outcomes for countries from strategies of pollution reduction
Other countries’ strategy
Cut pollution
USA’s strategy Don’t cut pollution
A
None cut pollution
Some cut pollution
All cut pollution
B
C
Moderate net gain for all
Small loss for USA Gain for countries not cutting pollution
D
E
F
High gain for USA Small gain for other countries
Fairly high gain for USA Loss for other countries
Large loss for USA Slight gain for other countries
No gain for any country
Applied Microeconomics
Traffic Congestion and Transport Policies
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants
of demand
Cars per thousand population
Increase in car ownership
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Sweden
Belgium
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Germany
W Germany Sweden
Belgium
UK
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
Cars per thousand population
Increase in car ownership USA
Germany
W Germany Sweden
UK
Belgium
Spain
Energy and Transport in Figures (EC, 2002); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
of demand
price and income elasticities of demand
Motoring costs as % of household expenditure
Motoring costs as % of UK household expenditure: 2000/1
Quintile groups of household income
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
Passenger transport in Great Britain (percentage of passenger kilometres by road)
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space ✦ short
run
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
The allocation of road space ✜
demand for road space ✦a
derived demand
✦ determinants ✦ the
✜
of demand
price and income elasticities of demand
supply of road space ✦ short ✦ long
run
run
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
Time taken to travel between two points along a given road
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
✦ environmental
costs
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Social optimum level of road usage ✜
marginal social benefit
✜
marginal social cost ✦ congestion
costs: time
✦ congestion
costs: monetary
✦ environmental
✜
costs
socially efficient level of road usage
Costs and benefits (£)
Actual and optimum road usage
MSB O Cars per minute
Costs and benefits (£)
Actual and optimum road usage
MC (private)
a MSB O Cars per minute
Costs and benefits (£)
Actual and optimum road usage
MC (private)
a
e
MSB O
Q1 Cars per minute
Actual and optimum road usage
Costs and benefits (£)
MSC
MC (private)
b a
e
MSB O
Q1 Cars per minute
Actual and optimum road usage
Costs and benefits (£)
MSC
MC (private)
b a
Optimum charge
d c
e
MSB O
Q2
Q1
Cars per minute
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
■
Policy 1: direct provision ✜
the road solution
✜
public transport
Policy 2: regulation and legislation ✜
restricting car access ✦ bus ✦ no
and cycle lanes
entry to side streets
✦ pedestrian-only
✜
areas
parking restrictions
TRAFFIC CONGESTION AND TRANSPORT POLICIES ■
Policy 3: changing market signals ✜
extending existing taxes
✜
road pricing ✦ variable
tolls
✦ supplementary ✦ electronic
✜
licences
road pricing
subsidising alternative means of transport
Applied Microeconomics
Competition Policy
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC
Monopoly P1
AR = D
MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with the same MC curve £
MC ( = supply under perfect competition)
Comparison with Perfect competition
P1 P2
AR = D
MR O
Q1
Q2
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves £
MCmonopoly
P1
AR = D MR O
Q1
Q
Equilibrium of industry under perfect competition and monopoly: with different MC curves MC ( = supply)perfect competition
£
MCmonopoly P2
ACmonopoly
P1
x
P3 P4
AR = D MR O
Q2
Q1
Q3
Q4
Q
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
✜
mergers
COMPETITION POLICY ■
Competition, monopoly and the public interest
■
The targets of policy ✜
abuse of monopoly power
✜
mergers
✜
oligopolistic collusion: restrictive practices
COMPETITION POLICY ■
EU legislation ✜
Article 81: restrictive practices
✜
Article 82: monopolies and mergers
✜
merger control measures
✜
assessing EU policy
COMPETITION POLICY ■
UK competition policy ✜
the OFT and the Competition Commission
✜
restrictive practices policy ✦ Chapter ✦ types
of anti-competitive behaviour
✦ powers
✜
1 prohibition of the OFT
monopoly policy ✦ Chapter
2 prohibition
✦ market-share ✦ market
criterion
contestability
✦ anti-competitive
practices
COMPETITION POLICY ■
UK competition policy (cont.) ✜
merger policy ✦ role
of OFT and Competition Commission
✦ criteria
✜
for judgement
features of the 2002 Enterprise Act
UK competition legislation
COMPETITION POLICY ■
Assessment of competition policy ✜
focus on behaviour rather than market structure
✜
prohibition of certain practices
✜
tougher powers to identify secret collusion
Applied Microeconomics
Privatisation
PRIVATISATION ■
Nationalisation and privatisation ✜
history of nationalisation
✜
forms and history of privatisation
Nationalisation and privatisation in the UK
Nationalisation and privatisation in the UK
Nationalisation and privatisation in the UK
PRIVATISATION ■
Arguments for privatisation ✜
market forces ✦ greater
competition in the goods market
✦ greater
competition for finance
✦ accountability
to shareholders
✜
reduced government interference
✜
reducing the PSNCR
✜
increased share ownership
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
Profit-maximising natural monopoly £
LRAC
Q
Profit-maximising natural monopoly £
LRAC LRMC
Q
Profit-maximising natural monopoly £
LRAC LRMC D
Q
Profit-maximising natural monopoly £
LRAC LRMC D MR
Q
Profit-maximising natural monopoly £
Pm
LRAC LRMC D Qm
MR
Q
Profit-maximising natural monopoly £
Pm
LRACm LRAC LRMC D Qm
MR
Q
Profit-maximising natural monopoly £
Pm
LRACm LRAC
Pn
LRMC D Qm
MR
Qn
Q
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
PRIVATISATION ■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
✜
problems with the PSNCR
PRIVATISATION ■
■
Arguments against privatisation ✜
natural monopolies
✜
capital costs and entry barriers
✜
lack of co-ordination of industries
✜
externalities
✜
fairness and social justice
✜
problems with the PSNCR
Ownership and the public interest
Applied Microeconomics
Regulation
REGULATION ■
Identifying short-run optimum price and output ✜
industry has monopoly power ✦ the
first-best situation
✦ second-best
■
pricing rules
✜
industry produces externalities
✜
questions of fairness
Identifying long-run optimum price and output
Short-run and long-run marginal cost pricing £ MSC
PS
D = AR O
QS
Q
Short-run and long-run marginal cost pricing £ MSC
PS
LRMSC
PL
D = AR O
QS
QL
Q
REGULATION ■ ■
Regulation in practice: RPI – X formula Advantages of UK regulation discretionary; flexible ✜ incentives ✜
■
Disadvantages of UK regulation disincentives of changes to X ✜ excessive power of regulator? ✜ playing ‘games’ with industry ✜ alternatively, regulatory capture ✜ complexity of regulation ✜
REGULATION ■
Increasing competition in the privatised industries ✜
limited extent of true natural monopoly
✜
allowing competition where there is no natural monopoly
✜
allowing access to grids by competitors
✜
forbidding suppliers from being grid owners
✜
capping market share of established firms
✜
competitive franchising to make monopolies contestable
Applied Microeconomics
Privatisation in Transition Economies
PRIVATISATION IN TRANSITION ECONOMIES ■
■
State ownership under communism ✜
the system of central planning
✜
problems of inconsistency
✜
inappropriate success indicators and rewards
✜
results
Transition to a market economy ✜
forms of market liberalisation
✜
degree of transition achieved
PRIVATISATION IN TRANSITION ECONOMIES ■
■
Privatisation ✜
forms of privatisation
✜
insider and outsider privatisation
Requirements for successful privatisation ✜
supportive environment
✜
price liberalisation
✜
restructuring of firms
✜
corporate governance
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