Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-1 Chapter 7 Government market intervention in the Australian economy LAWS Regulations Market failure

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-2 In a market economic system there are two main advantages: 1.Allocative efficiency 2.Economic freedom However, consumers’ welfare is maximised when no firm has excessive market power and firms are unable to manipulate market forces The Market Economic System and Consumers

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-3 Why Intervene? Two main reasons for government intervention –To overcome market failure, and –To overcome market power

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-4 The government can overcome market failure through: 1.Redistribution of income 2.Provision of goods and services 3.Regulation against negative externalities 4.Maintaining competition and efficient resource allocation 5.Stabilisation of the economy Overcoming Market Failure

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-5 The price system encourages inequality in the distribution of income That is, it may fail to provide adequately for all members of society Redistribution refers to the manner in which the government intervenes to transfer income from high to low- and zero-income earners 1. Redistribution of Income

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-6 Progressive income tax – Where the proportion of income paid to the government as tax increases as income increases Transfer payments (social security) – Usually paid on the basis of need and are targeted towards low- and zero-income earners (e.g. the aged, sick, unemployed, dependents) Methods Used to Redistribute Income

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-7 Goods/services which would not be produced by the market system because they cannot be sold to individual buyers If made available to one, public goods are available to all, that is, they are non-exclusionary, e.g. street lighting, national defence, police force 2. Provision of Public Goods and Services (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-8 The private sector (motivated by profit) would not provide public goods due to this ‘free-rider effect’ (where people can receive benefits from a good/service without contributing to its costs) In these instances the market would fail unless the government intervened to provide these public goods (financed through taxation) Provision of Public Goods and Services (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-9 Externalities (spillovers) = the cost or benefit borne by parties external to the firm, that is, side-effects of production Externalities may be positive (e.g. education, transport) or negative (e.g. pollution), depending on whether third parties are advantaged or disadvantaged Governments attempt to reduce negative externalities via legislation or specific taxes 3. Regulation Against Negative Externalities

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-10 Positive externalities benefit the entire community and for which payment may not be required – causing an under-allocation of resources by the market Governments attempt to promote positive externalities by subsidising producers or by government provision Promotion of Positive Externalities

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-11 In a perfectly competitive market the consumer benefits from producers competing to supply the best product at the lowest price Competition is reduced by monopolist behaviour (e.g. by restricting supply to raise prices and earn excessive profits) The government controls monopolies through: – Government ownership (e.g. natural monopolies) – Legislation and regulation against anti-competitive behaviour (see below) – Setting maximum monopoly prices 4. Maintaining Competition and Efficient Resource Allocation

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser Stabilisation of the economy Booms and recessions The government intervenes to even out the business cycle through various macroeconomic policies (e.g. fiscal, monetary)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-13 Another method used by the government to overcome market power is by reducing restrictive trade practices Restrictive trade practices = actions undertaken with the intention of reducing competition in the market Government bodies: – Australian Competition and Consumer Commission (ACCC) – National Competition Council (NCC) Overcoming market power

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-14 Vertical agreements: – Take place between firms at various stages of the production process Horizontal agreements: – Take place between firms at the same level in the production process Cartels: – Firms which enter into collusive agreements on price, output, market share etc. Price discrimination: – When a given product is sold at more than one price and differences are not justified by cost differences Restrictive Trade Practices (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-15 Exclusive dealing: – Firms enter agreements with retailers or wholesalers to supply only their distribution outlets Price fixing: – Horizontal arrangement that arises when firms in an industry agree on a recommended price for the goods Primary boycotts: – Agreements between two or more competitors to refuse to deal, or limit their dealings, with another supplier Secondary boycotts: – Actions to hinder supplies to or from a firm where it is intended to damage the firm substantially or bring about a lessening of competition in the market Restrictive Trade Practices (cont.)

Copyright  2005 McGraw-Hill Australia Pty Ltd PPT Slides t/a Economics for Business 3e by Fraser, Gionea and Fraser 7-16 The government intervenes by regulating this anti- competitive behaviour. For example, Trade Practices Act 1974 (Cwlth) outlaws: – Price fixing on a collusive basis – Abuses of monopoly power – Price discrimination with the intent of lessening competition – Anti-competitive mergers Penalties Government intervention