Transcript How? When? What? The economics of competitive advantage Why?

100
80
Where?
How? When?
What?
Why?
2015
60
East
West
North
40
20
0
1st Qtr
2nd Qtr 3rd Qtr 4th Qtr
Who?
Managerial Economics
Stefan Markowski
Public sector perspective
The economics of competitive advantage
Detailed course schedule
Day no
Topic
Textbook ch.
1 (24 Nov;
3 hrs)
1. Introduction. Decision making process and its elements. The scope of
economic decision making. Application of marginal analysis
Chs. 1-2
2
3
3
3
2. Demand analysis and demand elasticities
Ch. 3
3. Buyer product valuation and choices. Consumer surplus. Buyer pricing
decisions
Ch. 4
4 (27 Nov;
2 hrs)
4. Production/transformation process. Production technologies and input-output
structure
Ch. 5
5 (28 Nov;
2 hrs)
5. Cost structure and cost drivers of producer pricing strategies. Production
scale and scope.
Chs. 5 and 7
6 (1 Dec; 3
hrs)
6. Structure-conduct-performance. Market structures: competition and
contestability. Pricing strategies of buyers and sellers
Ch. 8
7 (2 Dec; 3
hrs)
7. Market structures: monopoly/monopsony, monopolistic competition and
oligopoly. Pricing strategies and strategic behaviour
Chs. 9-10
8 (3 Dec; 3
hrs)
8. Input sourcing and investment. Pricing and market power
Chs. 6 and 11
9 (4 Dec; 2
hrs)
9. Decision making under conditions of uncertainty. Informational asymmetries
and risk management
Ch. 12
10 (5 Dec;
2 hrs)
10. Market research and market analysis. Auction and rings. Strategic
behaviour
Ch. 13
11 (8 Dec;
2 hrs )
12 (9 Dec;
2 hrs)
11. Public sector perspective
Ch. 14
13 (11
Dec; 2 hrs)
Examination
(25 Nov;
hrs)
(26 Nov;
hrs)
12. Revision
13. Examination
Topic 11 Public sector perspective
Market limitations and the role
of government
Topic Contents
11.1
Managerial
perspective
11.6
Knowledge
and information
11.2
Market failure
11.7
11.3
Natural monopoly
Other limitations
of market exchange
11.8
11.4
Public and merit
goods
Consumption of
public goods and
services
11.9
Production of public
goods and services
11.5
Positive and
negative
externalities
11.10 Taxation and
regulation
11.11 Further reading
11.1 Managerial perspective
• The concept of the “mixed economy”
• The “state” defined as the totality of legislative and
executive public bodies, statutory undertakings, public
agencies and enterprises
• State intervention in the economy takes the form of:
– facilitation of private economic activity
– regulation of private markets and economic entities
– direct production and consumption
• Case for ‘smaller government’
– excessive state production (too much and wrong
structure)
– excessive and poorly balanced state consumption
– too much taxation (also wrong tax structure)
– excessive regulation (too much interference)
11.2 Market failure
• Market failure refers to the private sector’s inability to
realise the full potential of the economy (an obvious
misnomer)
• It arises because of:
– the intrinsic nature of certain goods/services and thus
problems for their consumption/use
– the technology applied in the production of some other
goods/services
• Reasons for market failure:
– natural monopolies
– public goods/bads
– merit goods/bads
– positive and negative externalities
11.3 Natural monopoly
• Some activities show an inherent tendency to
decreasing average costs over the entire range
falling within the market to be supplied
(pervasive economies of scale)
• Such activities may be undertaken by a single
provider - the natural monopolist
• Competition in such a case is said to be
destructive, traditional example utilities. For
competition to be destructive there must be
large fixed and sunk costs and recurrent
periods of excess capacity
11.3 Natural monopoly
• That is, the entry of firms into a natural monopoly market
is likely to reduce the overall benefits generated fore
society by raising the total cost of production
• Most monopolies are not natural monopolies
• Natural monopoly case for public intervention
to:
– protect buyers from the monopolist
– protect market standards from the monopolist
– protect a natural monopolist from destructive
competition
– promote stability in an unstable market (eg. prevent
price wars)
11.3 Natural monopoly
Costs, Revenues
Demand
Monopoly profit
Competitive loss
Average Cost
Marginal Cost
Qm
MR
Qc
Quantity
Economics for Managers
11.4 Public and merit goods
• Public goods exhibit non-rivalry in consumption and nonexcludability
• They cannot normally be supplied through the market cost recovery is the difficult as consumers free ride
• Small degree of publicness - club goods, which could be
provided through clubs with costs recovered through a
“two-part tariff” (membership fee plus pay-as-you-go)
• Public goods may have different catchment areas multilevel government
• Merit goods/bads deemed by governments to be
intrinsically desirable/undesirable, i.e., consumer
sovereignty is denied
11.4 Public and merit goods
• Merit goods have no particular economic
characteristic other than government
designation
• State intervention may take the form of:
– direct provision of public and merit goods and services
– regulation of providers of public goods and services
– regulation of acquisition and consumption of merit
bads
11.5 Positive and negative
externalities
• Externalities are uncompensated costs an benefits which
arise as a result of interdependencies in production
and/or consumption
• Known as external effects, external economies or
diseconomies. They arise because markets do not exist
for certain goods, eg. clean air, that is, property rights
may not be defined or are not enforceable
• State intervention may take the form of:
– provision of free information on externalities
– regulation of producers or recipients of external
effects
– direct production in areas where externalities are
widespread (public safety, education, health)
11.5 Positive and negative
externalities
Negative Externality
Prices, Costs
Demand
Social Marginal Cost Supply
Psocial
PPrivate
Qsocial QPrivate
Quantity
11.6 Knowledge and information
• Perfect knowledge in economics
• Knowledge vs information
• Scarcity of knowledge and information
• Invention and innovation
• Asymmetry of knowledge (re: previous Topics)
• Quality issues and economic “lemons”
• “Hold up” problems (ditto)
11.7 Other limitations of market
exchange
• Insurance markets
• Warranties
• Moral hazards
11.8 Consumption of public
goods and services
• Definition of public goods too broad
• Provision of merit goods tends to be arbitrary
(influence of special interest groups and
politics)
• Packages of goods and services (‘education’,
‘health’, ‘defence’) tend to be poorly targeted
11.8 Consumption of public
goods and services
Example - Over- and Underprovision
Demand for and Cost of Provision
Demand
Underprovision
Cost of provision
Overprovision
Q*
Qfree
Good A
11.9 Production of public goods
and services
• Managerial control
– Collective property rights break the nexus between
the owner (taxpayer) and the manager of public assets
– Political control very indirect
• information costly to obtain
• incentives to free-ride
• voting on packages of policies
– Fusion of productive and regulatory interests
• Public monopolies hard to challenge
– natural monopoly arguments
– legal protection
– lack of contestability and competition
– rent seeking
11.9 Production of public goods
and services
Producer Subsidy (re: Topic 6)
Price
Home supply before subsidy
Home Market Demand
Home supply
with subsidy
Costhome
Subsidy
Pworld
World Supply
Imports DW loss
Qa
Qb
Quantity
World price paid at home by consumers but subsidized producers produce
more and replace imports of more efficiently produced world products. Net
loss of national resources
11.10 Taxation and regulation
• Excessive taxation follows from excessive
government spending
• Poor tax base
– Wrong structure of incentives - middle-income
employees bear the burden of income taxation
– Value-added taxation preferred (e.g., VAT)
– Poll tax - least distortion
– Many taxes too costly to collect
• Excessive regulation
– Too much bureaucracy
– Too much focus on special interest groups (subsidies, tariffs)
– Poor targeting (slow to respond and inflexible)
• More facilitation less regulation
11.10 Taxation and regulation
Tariff (re: Topic 6)
Price
Home Market Demand
Home Supply
Welfare Loss
Phome
Tariff
Pworld
World Supply
Imports
Qa
Qb
Qc
Quantity
11.11 Further reading
Baye (2010): ch. 14