efficient market functioning government intervention
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Chapter 2 UNIT III
Government Interventions to correct Market Failure
Dr. Neelam Tandon
Efficient Market Functioning Government Intervention
Physical Infrastructure: Roads, Flyover, Bridges
Institutional Infrastructure: Legal / Regulatory
RULE OF LAW
RBI, SEBI , Company’s Act 2013 , GST , IBC 2016,
Consumer Protection Act , Motor Vehicle Act
,Competition Act 2002
Forms of Government Intervention
Market Power restricts to lower level of output and leads to dead-
weight loss.
Government imposes rules and regulations to overcome market
power inefficiencies
Competition Act 2017 Amended (2002)
Competition Act UK 1998
The Antitrust Law in the US
Other measures include
Market Liberalization to promote competition
Control mergers and acquisitions
Price capping
Profit capping on Rate of Return Regulation
Performance Target and standards
Consumer Protection
Check of collusion and predatory pricing
Control on Import
Nationalization
Market Power
Patent and Copyright leads to innovation
Natural Monopoly outcome of lowest marginal cost
Objective is to Maximize Social Returns and Minimize Social Cost to
maximize welfare of the society
Internalize social and social benefit
Or it will lead to Over production in case of negative
externalities / under production in case of positive
externalities
How Government Controls Negative Externality
Direct Control: Prohibit or Put limit to negative externalities
Pollution control devices, licensing, quota, Production /use and sale of
certain commodities is prohibited
Emission Standards, Control devices, tax on emission
Tax increases private cost
Pay Tax or reduce pollution
Negative Production Externality:
AA1 is corrective tax= Negative Production Externality
Indirect Control
Pollution Emission Cap /Tradable Permits/ Cap and Trade /
Perform Achieve and Trade (PAT)
June 2019
The Indian state of Gujarat has launched the world’s first emissions
trading system for particulate pollution, in collaboration with
researchers from Harvard Kennedy School, Yale, the Energy Policy
Institute at the University of Chicago (EPIC), and The Abdul Latif
Jameel Poverty Action Lab (J-PAL). The launch took place on World
Environment Day, June 5, at an event was hosted by the Chief
Minister of Gujarat State, Shri Vijay Rupani, and attended by over
3000 people from industry, academia, and the government.
The pilot trading program is a market-based system where the
government sets a cap on emissions and allows industries to buy and
sell permits to stay below the cap, similar to the policy that
successfully reduced the effects of acid rain in the United States in the
1990s. It is being initiated in the city of Surat, a densely populated
industrial center where textile and dye mills release a significant
amount of air pollution. As the first market-based approach to
regulating pollution emissions in India, it is expected to reduce air
pollution at a low cost to both government and industry and provide
best practices for replicating trading schemes for other emissions.
The Emissions Trading Program builds on another early innovation by
the GPCB, the use of continuous emissions monitoring systems to
track industry emissions in real time basis.
About 350 industries around Surat have installed continuous
emissions monitoring systems and now transmit real-time, high-
quality emissions data. The new scheme takes advantage of this
technology’s modern, transparent approach to monitoring.
Of the program, Nicholas Ryan, team member and Assistant Professor
of Economics at Yale, says: Gujarat’s adoption of emissions trading
shows great leadership and innovation in environmental regulation. I
expect this model of local trading to address local environmental
concerns will be widely replicated.
Emissions trading can help bring down pollution at a reasonable cost,
so this kind of environmental regulation can succeed for regulated
plants and for the public.
Globally, cap-and-trade systems have been used to reduce other
forms of pollution, such as programs that have successfully reduced
sulfur dioxide (SO2) and nitrogen oxides (NOx) in the United States.
But the Gujarat program is the first in the world to regulate
particulate air pollution, which is considered the single greatest threat
to human health globally. Its effects on life expectancy exceed that of
devastating communicable diseases such as tuberculosis and
HIV/AIDS, behavioral killers like cigarette smoking, and even war,
according to the Air Quality Life Index (AQLI). The AQLI, produced by
EPIC, converts particulate air pollution into its impact on life
expectancy, and finds that it cuts global life expectancy short by about
2 years.
The history of cap-and-trade programs also reveals that by employing
market forces, they greatly reduce the costs that industries incur
complying with regulations. Such reductions in compliance costs
would facilitate the rapid growth that is the Government of India’s
focus.
Promote Positive Externality through Subsidies
Subsidy = External Benefit
Price Intervention : Non Market Pricing
Government intervention for correcting information
failure
Advertisement for Tobacco Products
Advertisement of cigarettes and other tobacco products is prohibited
with respect to section 5 under the Cigarette and Other Tobacco
Products (Prohibition of Advertisement and Regulation of Trade and
Commerce, Production, Supply and Distribution) Act. Contravention to
provisions of section 5 of COTA Act can lead to forfeiture of
advertisement material and conviction.
Advertisement for Financial Products
a) Advertisements shall be accurate, true, fair, clear,
complete, unambiguous and concise.
(b) Advertisements shall not contain statements which are
false, misleading, biased or deceptive, based on
assumptions/projections and shall not contain any
testimonials or any ranking based on any criteria.
Equitable Distribution
Jal Shakti Abhiyan': Government launches water conservation
campaign
Beti Bachao Beti Padhao
This scheme started by the BJP-led NDA government in January 2015
aims at reducing the CSR (Child Sex Ratio), provide equal
opportunities for education. This is a joint initiative undertaken by the
Ministry of Women and Child Development, Ministry of Health and
Family Welfare and HRD Ministry. The scheme had an initial funding
of Rs 100 crore.
Sukanya Samridhhi Yojana
This scheme started by the government helps parents save for the girl
child's education and marriage from the beginning. The girl child
should be less than 10 when the account is opened. The account can
remain operational till the girl is 21. This small savings scheme can be
opened in post offices and designated private and public banks. It can
be opened as a savings account in the name of the baby girl with
parents or legal guardians as the joint account holders. The initial
investment can be as low as Rs 250 and go upto Rs 1, 50,000.
Government grants an interest rate of 8.5 per cent with a minimum
balance of Rs 1,000.
Market Power / Higher Price /Deadweight Loss/ Lower
Supply/ Cartel
Case Study of Cement Industry
Before The Competition Commission of India
Case No. 29/2010
Date of Order: 20.06.2012
Builders Association of India - through Shri O. P. Dua & Shri
Rahui Goel - Informant
Versus
1. Cement Manufacturers' Association - through Shri Askok Desai
& Others
2. Associated Cement Co. Ltd. - through Shri K. Venugai and
Ms. Pallavi Shroff
3. Gujarat Ambuja Cement Ltd. - through Shri Ramji Srinivas
& Ms. Anu Tiwari
4. Grasim Cement - through Shri Aski Chinoy & Shri
Pravin Parekh
S. Hltratech Cement Ltd. -through Shri Aski Chinoy & Shri
Pravin Parekh
6. Jaypee Cement -through Shri Parag Tripathi &
Shri G. R. Bhatia
7. The India Cements Ltd. - through Shri Harishankar
8. J.K Cements (JI< Group) - through Shri P. K. Bhalla
9. Century Textiles & Industries Ltd.(Century Cement)- Shri
Pramod Agarwala & Others
10. Madras Cement Ltd. - through Shri T. Srinivas
Murthy
11. Binani Cement Ltd. -through Shri Aditya Narain
&Shri R. Sudhinder
12.Lafarge India Pvt. Ltd. -through Shri A. Haskar &Shri
Samir Gandhi
Order under Section 27 of the Competition Act, 2002. The present
matter relates to an information filed under section 19 of the
Competition Act, 2002 (herein after referred to as the Act) on
26.07.2010 by Builders' Association of India (herein after referred to
as the informant) against the Cement Manufacturers' Association
(herein after referred to as the Opposite Party-1 or OP-1) and 11
other cement manufacturing companies (OP-2 to 12)
The OP-1 is an association of the cement manufacturers of India in
which both public and private sector cement units are members.
As per the informant, the total strength of the OP-1 as on March 31,
2009, comprising of most of the big cement manufacturer stands at 46
in number. They are the leading manufacturers, distributors and
sellers of cement in India.
They have divided the territory of India into five (5) zones so as to
enable themselves to control the supply and determine or fix
exorbitantly high price of cement by forming a cartel in contravention
of provisions of section 3 of the Act.
Due to their large market share of more than 57.3 percent in Indian
market, they are in a position to fix price and also curtail competition
by controlling the supply of cement in the market.
Despite having large capacities, the Opposite Parties with the sole
intention to control the supply, produce less cement and increase the
market price of the cement deliberately.
In addition to limiting production in order to create artificial scarcity,
the Opposite Parties through their concerted actions also resort to
the practice of restricting the supply of cement to the builders and
consumers, causing artificial increase in the price of cement,
irrespective of areas and regions and irrespective of availability of
cement or artificial scarcity thereof in the markets, the cement prices
have been increasing continuously. The acts of cement manufactures,
in the past as well as in the present, have an adverse effect on the
competition in the real estate sector and affect the interest of the
consumers at large.
The price of cement has been increased in all the five zones (North,
East, West, South and Central), in which they are operating, without
any direct link or correlation to increase in input costs in the
respective zones.
The construction and housing are the sole consumers of cement. The
growth in the construction sector decreased from 10.10% in 2007-08
to 7.25% in 2008-09 and was further projected at 6.5% for the year
2009-10. Similarly, the growth
In real estate sector came down from 8.52% in 200708 to 7.77% in
2008-09 and was projected at 8.10% in 2009-10 as per data published
by National Account of Statistics, 2009 and press reports for 2009-10.
Due to slowdown in the growth of construction and real estate
sectors, growth in cement sector witnessed a downward trend from
9.75% in 2006-07 to 8.13% in 2007-08 to 7.90% in 2008-09. As a
result of this slowdown, utilization of installed capacity also came
down to 85.55% in 2008-09 from 94% in 2006-08. The growth in
cement sector increased to 11.68% in the year 2009-10 due to revival
in housing segment of real estate sector from April 2009. In spite of
growth in production of cement, the utilization of installed capacity
got reduced to 82.46% in 2009-10.
In spite of slowdown as discussed above, the cement industry during
the year 2008 earned an Operating Profit Margin (OPM) of 26% on
turnover of Rs. 45,717 crore, the highest OPM amongst 16 major
industries save and except mining as reported by Capital Market,
dated November 2, 2009 the cement manufacturing units had
deliberately reduced their production and produced much less than
their installed capacity to create an artificial scarcity and raise the
prices to earn abnormal profits.
Despite various concessions and stimulus packages announced by the
government in the wake of financial crisis of 2008 in form of reduction
in excise duties, reduction in the price of coal, petrol and diesel,
instead of reducing the price as was anticipated and expected by the
government and consuming industries such as construction and real
estate, the cement industry through an agreement caused an
increase in the price per bag by Rs. 5/- between December, 2008 and
February, 2009. In addition, the cement manufacturers increased the
price from a minimum of Rs. 10/- to a maximum of Rs. 27/- per bag
between January-March 2009
It is clear that the cement industry despite increased demand and
increased capacity continuously utilized less of their capacity with the
intention and motive of increasing sale price of cement through prior
arrangement amongst themselves while wrongly defending the same
act of increase in price due to reduced demand.
Direct Control
New Motor Vehicle Act: Pollution Control
Number of vehicles turning up at pollution checking Centre’s across Delhi for
PUC (pollution under check) certificates has increased after the implementation
of the new Motor Vehicle Act. There has been a three-fold increase in the first
three days since the new rule came into force on September 1 2019.
Around 1.25 lakh vehicles turned up for pollution checks at around 950 centres
from September 1-3 and more than 84,000 'pollution under check' (PUC)
certificates were issued during the period.
Under the new Motor Act, the violation of PUC norm invites a penalty of Rs
10,000. Previously it was Rs 1,000 on the first violation and Rs 2,000 the second
time. The rule stated that PUC tests are mandatory in Delhi after every three
months.
It seems that the enhanced amount of penalty has instilled the fear of the law in
people. Earlier, they avoided the test even after expiry of the certificates as the
fine amount was less.
Previously, the number of vehicles turning up for PUC tests was around 10,000
to 12,000 per day, which has increased significantly to 35,000 to 40,000 vehicles
per day.
Computerized facilities for checking of pollution levels and issue of PUC
Certificates (to vehicles meeting emission standards) are available at many
petrol pumps/workshops. These authorised Pollution Checking Centres are
available across the country.
After the expiry period of one year from the date of first registration, every
motor vehicle is required to carry a valid PUC certificate and subsequently after
every six months.
By obtaining the PUC Certificate, as a law abiding citizen you are adhering to the
rules set by the Government of India through the Motor Vehicle Act, 1988. This
also avoids any possible penalties for not carrying the PUCC for your vehicle.
During the car or bike insurance renewal, the PUCC is one of the mandatory
documents to confirm and approve a renewal for your vehicle. The IRDAI has
made it compulsory for insurance companies to renew the vehicle insurance
upon producing the emission certificate.
The Commission of Air Quality Management on Tuesday stressed the
need to switching over of all industries in Delhi NCR to Piped Natural
Gas (PNG) while adding that the industrial sector is one of the major
contributors to air pollution here.
The Commission for Air Quality Management in NCR and Adjoining
Areas reviewed the progress of switching over of industries operating
in Delhi to PNG during a meeting, which was attended by
representatives of the city government, the Gas Authority of India
Limited (GAIL) and the Indraprastha Gas Limited (IGL).
According to the statement from the Ministry of Environment, Forest and
Climate Change, about 1,644 of industrial units spread across 50
industrial areas here had been identified to switch over to PNG. Though
a sizable number of industries are using PNG, the Commission stressed
the need to switch over to PNG by all identified industries in Delhi.
The IGL, Delhi Pollution Control Committee (DPCC) and the Delhi
government were also asked to work in close coordination with the
industrial units so as to target the completion of infrastructure work and
switch over to PNG by January 31, 2021.
DPCC was also directed to inspect and identify the industries using
unapproved fuels and to take stringent penal action in case of non-
compliance, the statement added.
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