Minimising the Risk of Negative Market Distortions in Private Sector
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Imperfect Competition and Misallocations
Imperfect Competition and Misallocations Yan Liang∗ London School of Economics, CFM Latest version here This version: July 2017 Abstract Misallocation of resources across production units lowers aggregate TFP. The factors driving misallocation can be internal or external to the market structure. Variation in markups asso- ciated with imperfect competition is an internal distortion. Taxes and subsidies on input and output markets are examples of external distortions. The study of India's manufacturing data suggests that more than 80% of the observed misallocation can be attributed to internal dis- tortions. Removing external distortions alone has a modest effect on aggregate TFP. It raises TFP by 14-17%, which is less than one fifth the compound effect of removing both types of distortions. The implication is that fostering competition is more effective to improve allocation efficiency and aggregate TFP. Removing individual external distortions is less effective. JEL Codes: O11, O47, O53. Keywords: Misallocation, Markup, Distortions, Imperfect Competition. ∗First version: May 2014. Department of Economics, and Centre for Macroeconomics, London School of Economics and Political Science, Houghton Street, London WC2A 2AE (e-mail: [email protected]). I am grateful to Francesco Caselli for his invaluable guidance and support. My gratitude extends to Gianmarco Ottaviano, Michael Peters, and seminar participants at LSE, LBS TADC for helpful comments. All errors are my own. 1 1 Introduction A growing literature has pointed out the important role of resource allocation in shaping aggregate productivity. For the allocation to be efficient, it is required that marginal products be equalized across different production units.1 Deviations from this represent misallocation and lead to a low aggregate productivity. -
Affordable Housing: of Inefficiency, Market Distortion, and Government Failure
Georgetown University Law Center Scholarship @ GEORGETOWN LAW 2019 Affordable Housing: Of Inefficiency, Market Distortion, and Government Failure Michael R. Diamond Georgetown University Law Center, [email protected] This paper can be downloaded free of charge from: https://scholarship.law.georgetown.edu/facpub/2159 https://ssrn.com/abstract=3381084 53 University of Richmond Law Review 979 This open-access article is brought to you by the Georgetown Law Library. Posted with permission of the author. Follow this and additional works at: https://scholarship.law.georgetown.edu/facpub Part of the Housing Law Commons, Law and Society Commons, and the Property Law and Real Estate Commons DIAMOND 533 TP (DO NOT DELETE) 2/28/2019 5:30 PM AFFORDABLE HOUSING: OF INEFFICIENCY, MARKET DISTORTION, AND GOVERNMENT FAILURE Michael Diamond * ABSTRACT In this essay, I examine the types of costs that are imposed on society as a whole due to the absence of a sufficient number of decent housing units that are affordable to the low-income population. These costs present themselves in relation to health care, education, employment, productivity, homelessness, and incarceration. Some of the costs are direct expenditures while others are the result of lost opportunities. My hypothesis is that these costs are significant and offer, at the very least, a substantial offset to the cost of creating and subsidizing the operation of the necessary number of affordable housing units that are currently missing. I suggest a series of reasons why, in the face of this potentially inefficient outcome, the market/society does not produce the required units. The essay is conceptual in nature, not empirical. -
Distortions in Factor Markets and Structural Adjustments in the Economy
IMES DISCUSSION PAPER SERIES Distortions in Factor Markets and Structural Adjustments in the Economy Masayuki Nakakuki, Akira Otani, and Shigenori Shiratsuka Discussion Paper No. 2004-E-4 INSTITUTE FOR MONETARY AND ECONOMIC STUDIES BANK OF JAPAN C.P.O BOX 203 TOKYO 100-8630 JAPAN You can download this and other papers at the IMES Web site: http://www.imes.boj.or.jp Do not reprint or reproduce without permission. NOTE: IMES Discussion Paper Series is circulated in order to stimulate discussion and comments. Views expressed in Discussion Paper Series are those of authors and do not necessarily reflect those of the Bank of Japan or the Institute for Monetary and Economic Studies. IMES Discussion Paper Series 2004-E-4 March 2004 Distortions in Factor Markets and Structural Adjustments in the Economy Masayuki NAKAKUKI*, Akira OTANI**, Shigenori SHIRATSUKA*** Abstract In this paper, we carry out qualitative and quantitative analyses of impacts of factor market distortions on Japan’s economic stagnation in the 1990s, thereby showing that resolution of structural impediments is essential for sustained economic growth to be restored in the future. Distortions in factor markets lead the economy to exhibit inefficient resource allocations, resulting in an inward shift of the nation’s production possibility frontier and decline in its attainable output. Our estimation results reveal that the deterioration of distortions in factor markets is attributable to 0.5% of the decline in real GDP growth (−3.6%) after the bursting of the asset price bubble. This confirms that the exacerbation of structural impediments in factor markets is one of the major causes of the prolonged economic stagnation after the bursting of the asset price bubble. -
Market Distortion and the Tuition Pricing Mechanism of Higher Education in China
International Education Studies November, 2008 Market Distortion and the Tuition Pricing Mechanism of Higher Education in China Wei Huang School of Economics and Management Changsha University of Science and Technology 45 Chiling Road, Changsha 410076, China Tel: 86-731-261-8127 E-mail: [email protected] Haiquan Wu School of Economics and Management Changsha University of Science and Technology 45 Chiling Road, Changsha 410076, China Tel: 86-731-261-8127 E-mail: [email protected] The research is financed by National Education Science Plan of China No. EFA080317 and Ford Foundation of USA. No. 1075-0792 Abstract Higher education in the market economy is inevitable affected by the higher education market. The tuition of higher education in china had become the personal price performance of higher education in certain degrees and exerts some certain functions of price mechanism. Because the higher education market distortion that tuition pricing cannot completely become market behaviour.Tuition pricing had been affected by some factors such as the externality of higher education, the monopoly of higher education resources, the demand of higher education had lack elasticity, the information among the market main part are asymmetric and the price regulation of government. Therefore it is a practical choose for the tuition pricing at present stage that government should effectively intervene the higher education market and supervise the tuition of higher education. Keywords: Higher education, Tuition, Market distortion, Public sector pricing 1. Introduction Higher education is a kind of typical to-be public product. And tuition, the cost compensation to the private benefit from higher education, plays the role of price mechanism to allotment of higher education resource under market economy. -
Transmission Charging and Market Distortion
Background Purpose of charges NZ proposals Transmission charging SPD Charge Charges on Rentals and Cournot setting SFE duopoly model Perfect Competition market distortion Charges on Benefits Transmission benefits Illustrative example Conclusions Conclusion Andy Philpott Tony Downward Keith Ruddell Electric Power Optimization Centre University of Auckland www.epoc.org.nz IPAM workshop, UCLA January 13, 2016 1/56 Outline Background Purpose of charges • Background of transmission pricing: NZ proposals Merchant transmission. SPD Charge • Charges on Rentals Volume versus peak charges. • Cournot setting Beneficiaries-pay SPD charge method. SFE duopoly model • Perfect Competition • Equilibrium models with charges on Ricardian rents. Charges on Benefits Transmission benefits A Cournot model. Illustrative example • Supply function equilibrium. Conclusions • Conclusion Price-taking agents. • • Supply function equilibria with beneficiaries-pay transmission pricing. Definition of \benefits”. • Example with uniform demand shock. • Welfare analysis. • • Conclusions. 2/56 What is the value/cost of a transmission grid? Background Purpose of charges The transmission grid provides a number of different benefits: NZ proposals SPD Charge Charges on Rentals • reliability; Cournot setting SFE duopoly model • competition benefits; Perfect Competition • Charges on Benefits short-run efficiency; Transmission benefits • the ability to access electricity when needed. Illustrative example Conclusions Conclusion The cost of a transmission line is mainly in its construction, and there are large economies of scale. The cost of using the line is near $0 / MWh. 3/56 Merchant transmission investment? Background Purpose of charges Typically, the transmission grid is operated as a regulated NZ proposals monopoly, where investments in the grid are made to improve SPD Charge Charges on Rentals the overall social welfare of the system. -
Market Transformation and Multiple Equilibria
Market Transformation and Multiple Equilibria James Woods Adrienne Vayssières Kandel, California Energy Commission* ABSTRACT Current thinking on market transformation is that there is a market equilibrium where consumers make optimal choices with respect to energy efficiency technologies. The reason consumers don’t make these optimal choices is because there are market barriers. The policy remedy is to remove these barriers. We suggest instead, that the market is at one of several possible equilibria. Economic theory is rife with multiple equilibria; having a single equilibrium is a comparatively rare phenomena in theory and practice. Some of these equilibria will be stable equilibria that the market “falls into”. Viewed from a multiple equilibrium perspective, a good market transformation policy will move the market far enough away from the current equilibrium so that it moves to a different, preferred, equilibrium of it own volition. Policy recommendations under this framework are significantly different and warrant additional consideration. Introduction After considerable discussion and debate, the definition of Market Transformation has coalesced somewhere around the classic introductory microeconomic view of markets, with a downward-sloping demand curve, an upward-sloping presumably short-run supply curve, and one stable equilibrium not attained because of a “market barrier”. Programs remove quantity constraints or price constraints, or they lower the transaction and uncertainty costs that are faced by buyers and sellers of relatively energy-efficient equipment. While it is possible to think about many of the things going on in markets and the function of programs with these tools, it does make it difficult if not impossible to describe some problems and programs. -
Market Mechanisms in Conventional Economics and Islamic Economics
Munich Personal RePEc Archive Market mechanisms in conventional economics and Islamic Economics Nashihah, Faidatun Magister Program in Islamic Economics, Postgraduate of IAIN Syeikh Nurjati Cirebon 20 March 2019 Online at https://mpra.ub.uni-muenchen.de/93190/ MPRA Paper No. 93190, posted 09 Apr 2019 12:29 UTC Market Mechanisms in Conventional Economics and Islamic Economics Faidatun Nashihah Magister Program in Islamic Economics, Postgraduate of IAIN Syeikh Nurjati Cirebon Email: [email protected] Abstract This article describes the market as a meeting place between demand and supply for the type of goods or services. In a capitalist economic system, buyers and sellers bargain with each other to determine prices that give freedom to the market and the government must not intervene which can disrupt the market balance. While the socialist economic system has a view by eliminating the role of markets and the government plays an active role in resolving and regulating all economic problems. In Islamic economics, the market is left freely or the government distorts the existence of a market mechanism. Using a comparative approach to the existing economic system in the world, this article concludes that the Islamic economic system combines market freedom and the role of government that emphasizes the principle of maslahah (goodness), which is a condition of market justice that emphasizes the fulfillment of people's needs in achieving welfare (falah). Keywords: market mechanism, capitalism, socialism, Islamic economics, falah JEL -
External Economies and International Trade Redux"
External Economies and International Trade Redux Gene M. Grossman Esteban Rossi-Hansberg Princeton University Princeton University July 2009 Abstract We study a world with national external economies of scale at the industry level. In contrast to the standard treatment with perfect competition and two industries, we assume Bertrand competition in a continuum of industries. In this setting, many of the “pathologies” of the standard treatment disappear. There typically exists a unique equilibrium with trade guided by “natural”comparative advantage. And, when a country has CES preferences and any …nite elasticity of substitution between goods, gains from trade are assured. We thank Robert Barro, Arnaud Costinot, Angus Deaton, Elhanan Helpman, Giovanni Maggi, Marc Melitz and four anonymous referees for helpful comments and discussions and the National Science Foundation (under grant SES 0451712) and Sloan Foundation for research support. Any opinions, …ndings, and conclusions or recommendations expressed in this paper are those of the authors and do not necessarily re‡ect the views of the National Science Foundation or any other organization. 1 Introduction External economies hold a central— albeit somewhat uncomfortable— place in the theory of in- ternational trade. Since Marshall (1879, 1890) at least, economists have known that increasing returns can be an independent cause of trade and that the advantages that derive from large scale production need not be con…ned within the boundaries of a …rm. Marshallian externalities arise when knowledge -
The Usual Excess-Burden Formula
I. Introduction By driving a wedge between marginal benefit and marginal cost, taxes tend to generate distortionary costs or excess burden. Assessing this burden is a key aspect of evaluating any proposed new tax. To gauge the excess burden, economists frequently invoke the excess-burden (or “Harberger”) triangle. The area of this triangle (and thus the implied excess burden) is 1/2 t Dq , where t is the rate of the newly imposed tax in a given market and Dq is the change in equilibrium quantity in that market. The area of the triangle can be expressed in terms of slopes of supply and demand curves. In the case where the taxed good is supplied perfectly elastically, the area is simply 1/2 (1/b) t2, where b is the negative of the slope of the demand curve in the relevant range and t is the tax rate (Figure 1a). When the elasticity of supply is less than infinite, the area is 1/2 [1/(b+c)] t2, where c is the slope of the supply curve over the relevant range (Figure 1b). These simple expressions offer important insights, such as the idea that the excess burden in the taxed market rises more than in proportion with the tax rate, or the notion that the excess burden tends to be larger, the more elastic is supply or demand.1 Despite its intuitive appeal, the excess-burden triangle often yields a very poor approximation of excess burden. For important types of taxes – namely, taxes on intermediate inputs such as fuels or raw materials, and taxes on consumer goods such as gasoline, tobacco, or jewelry – this usual excess-burden approximation may seriously miss the mark, even by orders of magnitude. -
The Misallocation in the Chinese Land Market
BOFIT Discussion Papers 23 • 2020 Xuan Fei The misallocation in the Chinese land market BOFIT Discussion Papers Editor-in-Chief Zuzana Fungáčová BOFIT Discussion Papers 23/2020 20.10.2020 Xuan Fei: The misallocation in the Chinese land market ISBN 978-952-323-351-5, online ISSN 1456-5889, online The views expressed in this paper are those of the authors and do not necessarily represent the views of the Bank of Finland. Suomen Pankki Helsinki 2020 The Misallocation in the Chinese Land Market∗ Xuan Fei State Administration of Foreign Exchange Investment Center October 2020 Abstract This paper proposes a spatial equilibrium model to quantify welfare losses from land mar- ket distortions in China. In the model, heterogeneous firms in a variety of sectors choose their locations across regions with costly trade, frictional labor migration, and land market distortions. We match land transaction and firm-level survey data to estimate land market distortions for firms. Misallocation arises when similar firms are faced with land prices that effectively prevent productive firms from establishing in large cities where they can benefit from agglomeration forces and access to higher productivity. Our framework incorporat- ing land market distortions also helps clarify the mystery of China’s undersized cities, a phenomenon noted by Au and Henderson(2006) and Chauvin et al.(2017). Our estimates suggest large negative effects of land policies on the economic welfare in China. We end with a counterfactual exercise that suggests that a coordinated land and labor migration reform would generate welfare gains and reduce regional inequality. Keywords: Misallocation, agglomeration, firm behaviors, land, productivity, city, China JEL Classification: F16, L22, L51, O47, R14, R30 ∗I am extremely grateful to my advisers, Robert C. -
Using Supply and Demand to Analyze Markets Introduction 3
3 Using Supply and Demand to Analyze Markets Introduction 3 Chapter Outline 3.1 Consumer and Producer Surplus: Who Benefits in a Market 3.2 Price Regulation 3.3 Quantity Regulations 3.4 Taxes 3.5 Subsidies 3.6 Conclusion Introduction 3 In this chapter, we use the supply and demand model to answer the following questions • How do we measure the benefits that accrue to producers and consumers in a market? • How do government interventions (e.g., taxes) affect markets and the benefits associated with market exchange? Consumer and Producer Surplus: Who Benefits in a Market 3.1 Consumers benefit from market exchange, otherwise they would not participate • Consumer surplus: the difference between the amount consumers would be willing to pay for a good or service and the amount they actually pay (the market price) In many cases, this difference is positive, and consumers experience net benefits from market exchange Consumer and Producer Surplus: Who Benefits in a Market 3.1 Figure 3.1 Defining Consumer Surplus Price ($/pound) Demand choke price $5.50 A Total consumer 5 surplus (CS ) Person A’s B 4.50 consumer C surplus = $1.50 4 D 3.50 Market price 3 E D 2 The consumer at point E will not buy any apples because the 1 market price is too high 0 1 2 3 4 5 Quantity of apples (pounds) Consumer and Producer Surplus: Who Benefits in a Market 3.1 Producers benefit from market exchange, otherwise they would not participate • Producer surplus: the difference between the price producers actually receive (market price) for their goods and the price at which they are willing to sell them. -
Factor Market Distortion and the Current Account Surplus in China*
Factor Market Distortion and the Current Account Surplus in China Factor Market Distortion and the Current Account Surplus in China* Yiping Huang Abstract China Center for Economic China’s large current account surpluses not only destabilize its Research Peking University own macroeconomic conditions, but are also a focal point for Yiheyuan Road No. 5, Beijing, global rebalancing discussions. Existing explanations by the litera- China 100871 [email protected] ture fail either to account for the recent surge or to offer action- able policy responses. In this study, we propose an alternative hy- Kunyu Tao pothesis: asymmetric market liberalization and associated cost China Center for Economic Research distortions. These distortions are producer subsidy equivalents, Peking University which contributed to both extraordinary growth performance Yiheyuan Road No. 5, Beijing, and the growing structural imbalances. Our rough estimates of China 100871 [email protected] such factor cost distortions offer some explanations for recent movements of the current account. We argue that China needs to adopt a comprehensive reform package to rebalance its economy. 1. Introduction China’s current account surplus has been the subject of a contentious international economic policy debate for the * This paper is part of the output of the joint research project on “Trans-Paciªc Rebalancing” by the Asian Development Bank Institute and the Brookings Institution and was presented at a project workshop in Tokyo on 3–4 March 2010. A revised ver- sion of the paper was also discussed at the Asian Economic Panel meeting in Incheon on 22–23 March 2010. We wish to thank our discussants Shin-ichi Fukada, Liqing Zhang, Bhanu- pong Nidhiprabha, and Yonghyup Oh for detailed comments on the paper.