Market Intervention

Learning outcomes By studying this section students will be able to: By studying this section students will be able to: evaluate the benefits of the free market evaluate the benefits of the free market evaluate the problems of the free market evaluate the problems of the free market understand the methods of market intervention understand the methods of market intervention justify market intervention justify market intervention understand recent developments in public sector provision understand recent developments in public sector provision

The free market The benefits of free markets The benefits of free markets “the market knows best.”“the market knows best.” economic efficiency economic efficiency Having maximum output for minimum input. Profit maximization. Having maximum output for minimum input. Profit maximization. allocative efficiency allocative efficiency Trade-off between producing one product, instead of another  what product is best for firms? Trade-off between producing one product, instead of another  what product is best for firms?

The free market The benefits of free markets The benefits of free markets consumer sovereigntyconsumer sovereignty Demand of consumers leads more production in some products. Demand of consumers leads more production in some products. economic growth economic growth Firms compete  productivity  better use of resources  economic growth Firms compete  productivity  better use of resources  economic growth

The free market Criticisms of the market solution Criticisms of the market solution the inappropriateness of the perfect market assumption the inappropriateness of the perfect market assumption externalities*externalities* Overproduced  Pollutions Overproduced  Pollutions Violent Games  crime Violent Games  crime public goods* public goods* Traffic lights//signposts for tourists Traffic lights//signposts for tourists realities of economic growth realities of economic growth Ups and downs are normal in economic life cycle// Ups and downs are normal in economic life cycle// No sustainability No sustainability equity equity Having gap between the rich and the poor Having gap between the rich and the poor Those can access to resources( $; education) and those who can’t Those can access to resources( $; education) and those who can’t

Market intervention central planning central planning Production decisions by government (China/Singapore)Production decisions by government (China/Singapore) control of monopolies and mergers control of monopolies and mergers Control mergers,Control mergers, because mergers  more monopoly because mergers  more monopoly

List of airline mergers and acquisitions Air West Air West Air West Air West Pacific Air Lines (originally Southwest Airways), Bonanza Air Lines, and West Coast Airlines merged to form Air West Pacific Air Lines (originally Southwest Airways), Bonanza Air Lines, and West Coast Airlines merged to form Air West Howard Hughes purchased Air West and renamed it Hughes Airwest Howard Hughes purchased Air West and renamed it Hughes Airwest American Airlines American Airlines American Airlines American Airlines American Airlines purchased Air California American Airlines purchased Air California American Airlines purchased TWA American Airlines purchased TWA

List of airline mergers and acquisitions Delta Air Lines Delta Air Lines Delta Air Lines Delta Air Lines Started as Huff Daland Dusters Started as Huff Daland Dusters Huff Daland Dusters was purchased by C.E. Woolman and renamed Delta Air Service after the Mississippi Delta Huff Daland Dusters was purchased by C.E. Woolman and renamed Delta Air Service after the Mississippi Delta Purchased the Chicago and Southern Air Lines, and flew under the name Delta C&S for the next two years Purchased the Chicago and Southern Air Lines, and flew under the name Delta C&S for the next two years Purchased Northeast Airlines Purchased Northeast Airlines Merged with Western Airlines Merged with Western Airlines Purchase of Pan Am's European routes, and acquired Pan Am's shuttle, forming what is today Delta Shuttle Purchase of Pan Am's European routes, and acquired Pan Am's shuttle, forming what is today Delta Shuttle Purchased Eastern Airlines Purchased Eastern Airlines Delta Express began service, ended November Delta Express began service, ended November Song began service, ended May Song began service, ended May Completed merger with Northwest Airlines. Became the world's largest carrier by passenger traffic (to keep Delta name) Completed merger with Northwest Airlines. Became the world's largest carrier by passenger traffic (to keep Delta name)

List of airline mergers and acquisitions Northwest Airlines Northwest Airlines Northwest Airlines Northwest Airlines Founded by Col. Lewis Patenaude, under the name Northwest Airways Founded by Col. Lewis Patenaude, under the name Northwest Airways Began flying passengers Began flying passengers With its new routes to the far east, re-branded itself as Northwest Orient Airlines With its new routes to the far east, re-branded itself as Northwest Orient Airlines Purchased Republic Airlines, and dropped the word Orient from its brand name Purchased Republic Airlines, and dropped the word Orient from its brand name Merged with Delta to form the world's largest carrier. Currently a subsidiary of Delta Air Lines, Inc. Combined carrier will use the Delta name Merged with Delta to form the world's largest carrier. Currently a subsidiary of Delta Air Lines, Inc. Combined carrier will use the Delta name.

Market intervention laws, planning controls and permits laws, planning controls and permits Some goods and services may be banned.Some goods and services may be banned. Additive drugs// prostitutions Additive drugs// prostitutions taxes and subsidies taxes and subsidies Taxes on luxurious productsTaxes on luxurious products Subsidies on price of riceSubsidies on price of rice public provision public provision Public ownerships of corporationsPublic ownerships of corporations Electricity Generating Authority of Thailand Electricity Generating Authority of Thailand Metropolitan Waterworks Authority Metropolitan Waterworks Authority

Monopolies Are these passengers being ripped off? Are these passengers being ripped off? Probably Why? Why? Many ferries operate in near-monopoly conditions. So they may pay high prices for tickets and certainly will for on- board catering

Problems of market intervention Resource allocation in disequilibrium Resource allocation in disequilibrium Ineffective resource allocation by governmentsIneffective resource allocation by governments Can be heavily allocated in some areas (e.g. More in big cities)Can be heavily allocated in some areas (e.g. More in big cities) Public ownership: efficiency and culture Public ownership: efficiency and culture Leading to waste and poor quality of service (mostly no competition)Leading to waste and poor quality of service (mostly no competition) Side-effects of subsidies and taxes Side-effects of subsidies and taxes Higher taxes  reducing incentives in economyHigher taxes  reducing incentives in economy

Problems of market intervention Loss of consumer sovereignty Loss of consumer sovereignty Power of consumers in spending is reduced by income taxes.Power of consumers in spending is reduced by income taxes. Measurement of external (or social)costs and benefits Measurement of external (or social)costs and benefits Difficult to measure social costDifficult to measure social cost Government interference and changing objectives Government interference and changing objectives Inconsistence in government policy.Inconsistence in government policy. No more “Kitchen of the world policy”No more “Kitchen of the world policy”

Public or Private? What are the pros and cons of public ownership of railways? What are the pros and cons of public ownership of railways?

Trends in public sector provision Less central planning Less central planning Even government needs to be more flexible and competitive.Even government needs to be more flexible and competitive. More privatization More privatization Should we privatize energy organizations?Should we privatize energy organizations? Performance targets and indicators Performance targets and indicators Need to have clear and measurable targets and indicators.Need to have clear and measurable targets and indicators.

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