ito lng nman ang pnagpuyatan nmin ng ilang gabi… weeeh…. bsahin nyo:
Lumbang, Camille B.
BSBA – ECON III-2 October 8, 2005
1. To answer the question regarding market failure, let me define and discuss first the important terminologies that will be used in this paper. First is market failure. Market Failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers. It is in a situation where efficiency is dramatic or when it is suggested that non-market institutions would provide a more desirable result. It can also be defined as the inability of market to bring about the allocation of resources that best satisfies the wants of society; in particular, the overallocation or underallocation of resources to the production of a particular good or service because of spillovers or informational problems or because markets do not provide desired public goods. Second term is imperfect markets. Imperfect markets are markets wherein perfect competition is not satisfied. The third term is public good. Public Good is a good that is hard or even impossible to produce for private profit, because market fails to account for its large beneficial externalities. Public good possesses two properties: non-rivalry and nonexcludability. The fourth term is externality. Externality is a consequence of an economic activity that is experienced by unrelated third parties. It can be positive or negative. It occurs in economics when a decision cost or benefits to individuals or groups other than the person making the decision. The fifth term is asymmetric information. Asymmetric information is a situation where one party to a market transaction has much more information about a product or service than the other. The result may be an under- or over- allocation of resources.
Imperfect markets, public goods, externalities and the imperfect information or asymmetric information are the four sources of market failure. These sources are grouped into two: the inadequate expression of cost or benefits in prices and thus into microeconomic decision-making in markets and the sub-optimal market structures. The former include: externality, public goods and asymmetrical information. The sub-optimal markets include the imperfect markets.
Externality, as discussed earlier, is a consequence of an economic activity that is experienced by unrelated third parties. It is also called spillover cost. An example is when a firm avoids costs by polluting, its supply curve lies farther to the right than it does when the firm bear the full costs of production. As a result, the price of the product is too low and the output of the product is too large to achieve allocative efficiency. A market failure occurs in the form of an overallocation of resources to the production of the good. The third party here are the individuals affected by the pollution created by the firm. The individuals may get sick and disturbed by such action by the firm that is considered as a bad externality because of the cost it created. These means that the third party will have their cost such as their medicines and hospitalization while the firm has lesser cost because they didn’t provide their right disposal or maintenance.
Money
Consumer Voluntary Firm
Exchange
A product
Consumption cost imposed on others production external
external cost involuntary or benefits cost or benefit
or benefit received for free
Public goods, as mentioned earlier, is the goods that are hard or even impossible to produce for private profit because market fails to account for its large beneficial externalities. A problem with the public goods is the free riders. Free-rider problem is the inability of potential providers of an economically desirable good or service to obtain payment from those who benefit, because of nonexcludability. For an example, since public goods are provided from the government by the taxes paid by the citizens, it will be unfair for the citizens who are paying taxes that the ones who are not paying taxes are also availing such public goods and services. This will make the other taxpayers to decide not to pay tax anymore since they can still get the benefit whether they pay the tax or not. Because of free riders, the demand for a public good does not get expressed in the market and therefore does not get produced since the government is the producers of such goods. There will be inequality; costs will be greater than benefits.
Information failures or asymmetric information is the situation where one party to a market transaction has much more information about a product or service than the other. Typically it is the seller that knows more about the product than the buyer, however, it is possible for the reverse to be true — for the buyer to know more than the seller. Examples of situations where the seller usually has better information than the buyer are numerous but include used-car salespeople, stockbrokers, real estate agents, and life insurance transactions. Examples of situations where the buyer usually has better information than the seller include estate sales as specified in a last will and testament. It can be classified into two: moral hazard problem and adverse selection problem. Moral hazard problem is the tendency of one party to a contract or agreement to alter his behavior, after the contract is signed, in ways that it could be costly to the other party. For example, when a salesperson is paid a flat salary with no commissions for his or her sales, there is a danger that the salesperson may not try very hard to sell the business owner’s goods because the wage stays the same regardless of how much or how little the owner benefits from the salesperson’s work. Adverse selection problem it arises when information known by the first party to a contract or agreement is not known by the second and, as a result, the second party incurs major costs. Example of how market fails by information failures: A firm can provide safe workplace for its laborer. A safe workplace reduces the problems in disruptions in the production such as job accidents, recruiting and training new workers. It also reduces other costs that may incur such as insurance for the workers. But a safe workplace is expensive. The protective clothing, gears and safe equipment are costly. Since the firm wants to lessen its costs, it will provide unsafe workplaces. If the workers are not aware of this, they will still work at the said firm not knowing the risks they can get. The market will fail because its profit maximizing level of workplace safety is less than economically desirable.
Imperfect markets are the markets perfect competition is not satisfied. Imperfect markets include monopoly, oligopoly and monopolistic competition. Monopoly is a market structure in which number of sellers is so small that each seller is able to influence the total supply and the price of the good or service. The characteristics are: single seller, no close substitutes, price maker, blocked entry and nonprice competition. It can change the product’s price by changing the quantity of the product it supplies. Oligopoly is a market structure in which a few firms sell either a standardized or differentiated product, into which entry is difficult, in which the firm has limited control over product price, and in which there is typically nonprice competition. It has homogenous or differentiated products and has the control over the price but mutual interdependence. Monopolistic competition is a market structure in which many firms sell a differentiated product, into which entry is relatively easy, in which the firm has some control over its product price, and in which there is considerable nonprice competition. It involves small market shares, no collusion an independent action. Imperfect markets results to market failures because P = MC rule (when producing is preferable to shutting down, the firm that wants to maximize its profit or minimized loss should produce at that point where equals marginal cost) is not applicable. It is because marginal revenue of this markets are downward sloping.
2. To answer the question about the privatization and deregulation matter on telecommunication and oil industry, let me first discuss the two important terminologies. First is deregulation. Deregulation is the reduction or elimination of government power in a particular industry, usually enacted to create more competition within the industry. It is the process by which governments remove selected regulations or business in order to encourage efficient operation of markets. The theory is that fewer regulations will lead to a raised level of competitiveness, therefore higher productivity, more efficiency and lower prices overall. Second is privatization. Privatization is process of transferring property, from public ownership to private ownership and/or transferring the management of a service or activity from the government to the private sector. In theory, privatization helps establish a “free market” as well as fostering capitalist competition, which its supporters argue will give the public a greater choice at a competitive price. Conversely, socialist view privatization negatively, saying that entrusting private businesses with control of essential services reducers the public control over them and leads to excessive cost cutting in order to achieve profit and a resulting poor quality service.
From the definition given above, we can therefore say that privatization should also be accompanied by deregulation. Why is that so? As mentioned earlier, privatization is the transferring of property from public ownership to private ownership while deregulation is the removal of government power in an industry. This means that this two should go together because it would be ironic if an industry was privatized while being regulated. It is simply because these two are synonymous to each in terms of the government’s power and/or ownership.
Privatization and deregulation of the telecommunication industry was a success while in the oil industry was a big disappointment. Why is that so? Before, Philippines Telecommunication industry was once a monopoly by PLDT. Because of the Public Telecommunication Policy Act of 1195(RA 7925), making the telecommunication industry privatized and deregulated, it opened the market to various competing telecommunication companies. As of today, the telecommunication industry is an oligopoly form of market structure. The different telecommunication companies are PLDT, Digitel, BayanTel, Globe Telecom, Sun Telecom and Smart Telecom. Since the market structure is oligopoly in form, the different companies can be characterized in their strategic behavior and mutual interdependence. It results to an advancement of technology that made an improvement in products and services. It provides a more effective communication in the country, rural and urban areas. They lower their prices and provide enhanced services. Because of this, the demand for such telecommunication’s products and services such as cellular phones increased and led to an increased of supply because of the big profit that the telecommunications could get. With that, the consumers chooses the company that can provide the services that can reach their marginal utility, whether it is the unlimited text, free text and free call, discounted call rates and others services that the companies can offer. Since there is an increase in demand for a product and service, there will also be an increase in the demand for a resource (such as labor) used in a production. The goods and services of the telecommunication company can also be considered either final goods and services or non-final goods and services. It is considered final goods and services, for an instance, individuals who just use the goods and services just for their consumptions such as for the purpose of communication. On the other hand, it is non-final goods and services when individuals use this for the purpose of earning a profit such as selling of prepaid cards and electronic loading. With all of these, it paves the way to economic growth.
Oil industry’s privatization and deregulation is a big disappointment in the Philippines. Why is that so? Since the government control over the oil industry is beyond their power, the government cannot control sudden increase in the oil products. When there is inflation in the oil products, inflation in the other products and commodities occur. It is because oil is a complementary good. It affects almost every other goods. Oil is an inelastic good, meaning, the demand for oil will not necessary change even if there is an increase in prices. The consumers are the ones who suffer in such inflation. There will be fare hike and increase in prices of general commodities. Because of that, since the income of the majority of the people is not increasing, the purchasing power of the income of the people will decrease.
The telecommunication industry concentrates on the Philippine setting while the oil industry concentrates on Philippine and international aspects. How is that so? The telecommunication industry merely concentrates on how they are going to provide service as well as to maximize their profit in the Philippines. There may be influences and factors outside the countries but their main consumers where they get their profit are the residents in the Philippines. On the other hand, even though the consumers of the oil are also residents of the Philippines, we all know for the mere fact that our oil is imported. Since it is imported, we must consider the importing countries of oil and other international aspects. Terrorism and calamities in other countries affect the supply of our petroleum products. These mean that the price of oil is dictated by the world market unlike in the telecommunications, it is dictated domestically.
Sources:
Wikipedia.com
Investopedia.com
Economics Principles, Problems, and Policies by Campbell R. McConnell
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