Market InterventionMarket Intervention

Learning outcomesLearning outcomes By studying this section students will By studying this section students will

be able to:be able to:• evaluate the benefits of the free marketevaluate the benefits of the free market• evaluate the problems of the free marketevaluate the problems of the free market• understand the methods of market understand the methods of market

interventionintervention• justify market interventionjustify market intervention• understand recent developments in understand recent developments in

public sector provisionpublic sector provision

The free marketThe free market

The benefits of free marketsThe benefits of free markets• ““the market knows best.”the market knows best.”• economic efficiencyeconomic efficiency

Having maximum output for minimum input. Having maximum output for minimum input. Profit maximization. Profit maximization.

• allocative efficiencyallocative efficiency Trade-off between producing one product, Trade-off between producing one product,

instead of anotherinstead of another what product is best for what product is best for firms?firms?

•

The free marketThe free market

The benefits of free marketsThe benefits of free markets• consumer sovereigntyconsumer sovereignty

Demand of consumers leads more Demand of consumers leads more production in some products. production in some products.

• economic growtheconomic growth Firms competeFirms competeproductivityproductivitybetter use of better use of

resourcesresourceseconomic growtheconomic growth

The free marketThe free market Criticisms of the market solutionCriticisms of the market solution

• the inappropriateness of the perfect market assumptionthe inappropriateness of the perfect market assumption• externalities*externalities*

OverproducedOverproduced Pollutions Pollutions Violent GamesViolent Games crime crime

• public goods*public goods* Traffic lights//signposts for touristsTraffic lights//signposts for tourists

• realities of economic growthrealities of economic growth Ups and downs are normal in economic life cycle// Ups and downs are normal in economic life cycle// No sustainabilityNo sustainability

• equityequity Having gap between the rich and the poorHaving gap between the rich and the poor Those can access to resources( $; education) and those who can’tThose can access to resources( $; education) and those who can’t

Market interventionMarket intervention

central planningcentral planning• Production decisions by government Production decisions by government

(China/Singapore)(China/Singapore) control of monopolies and mergerscontrol of monopolies and mergers

• Control mergers, Control mergers, because mergers because mergers more monopoly more monopoly

List of airline mergers and List of airline mergers and acquisitionsacquisitions

Air West • 1968 - Pacific Air Lines (originally Southwest 1968 - Pacific Air Lines (originally Southwest

Airways), Bonanza Air Lines, and West Coast Airways), Bonanza Air Lines, and West Coast Airlines merged to form Air WestAirlines merged to form Air West

• 1970 - Howard Hughes purchased Air West and 1970 - Howard Hughes purchased Air West and renamed it Hughes Airwestrenamed it Hughes Airwest

American Airlines • 1987 - American Airlines purchased Air 1987 - American Airlines purchased Air

CaliforniaCalifornia• 2001 - American Airlines purchased TWA2001 - American Airlines purchased TWA

List of airline mergers and List of airline mergers and acquisitionsacquisitions

Delta Air Lines • 1924 - Started as Huff Daland Dusters1924 - Started as Huff Daland Dusters• 1928 - Huff Daland Dusters was purchased by C.E. Woolman and 1928 - Huff Daland Dusters was purchased by C.E. Woolman and

renamed Delta Air Service after the Mississippi Deltarenamed Delta Air Service after the Mississippi Delta• 1953 - Purchased the Chicago and Southern Air Lines, and flew 1953 - Purchased the Chicago and Southern Air Lines, and flew

under the name Delta C&S for the next two yearsunder the name Delta C&S for the next two years• 1972 - Purchased Northeast Airlines1972 - Purchased Northeast Airlines• 1987 - Merged with Western Airlines1987 - Merged with Western Airlines• 1991 - Purchase of Pan Am's European routes, and acquired Pan 1991 - Purchase of Pan Am's European routes, and acquired Pan

Am's shuttle, forming what is today Delta ShuttleAm's shuttle, forming what is today Delta Shuttle• 1991 - Purchased Eastern Airlines1991 - Purchased Eastern Airlines• 1996 - Delta Express began service, ended November 20031996 - Delta Express began service, ended November 2003• 2003 - Song began service, ended May 20062003 - Song began service, ended May 2006• 2008 - Completed merger with Northwest Airlines. Became the 2008 - Completed merger with Northwest Airlines. Became the

world's largest carrier by passenger traffic (to keep Delta name)world's largest carrier by passenger traffic (to keep Delta name)

List of airline mergers and List of airline mergers and acquisitionsacquisitions

Northwest Airlines • 1916 - Founded by Col. Lewis Patenaude, under the name 1916 - Founded by Col. Lewis Patenaude, under the name

Northwest AirwaysNorthwest Airways

• 1927 - Began flying passengers1927 - Began flying passengers• 1949 - With its new routes to the far east, re-branded itself as 1949 - With its new routes to the far east, re-branded itself as

Northwest Orient AirlinesNorthwest Orient Airlines• 1986 - Purchased Republic Airlines, and dropped the word 1986 - Purchased Republic Airlines, and dropped the word

Orient from its brand nameOrient from its brand name• 2008 - Merged with Delta to form the world's largest carrier. 2008 - Merged with Delta to form the world's largest carrier.

Currently a subsidiary of Delta Air Lines, Inc. Combined carrier Currently a subsidiary of Delta Air Lines, Inc. Combined carrier will use the Delta name.will use the Delta name.

Market interventionMarket intervention

laws, planning controls and permitslaws, planning controls and permits• Some goods and services may be banned.Some goods and services may be banned.

Additive drugs// prostitutionsAdditive drugs// prostitutions taxes and subsidiestaxes and subsidies

• Taxes on luxurious productsTaxes on luxurious products• Subsidies on price of riceSubsidies on price of rice

public provisionpublic provision• Public ownerships of corporationsPublic ownerships of corporations

Electricity Generating Authority of ThailandElectricity Generating Authority of Thailand Metropolitan Waterworks AuthorityMetropolitan Waterworks Authority

MonopoliesMonopolies Are these passengers Are these passengers

being ripped off?being ripped off?• ProbablyProbably

Why?Why?• Many ferries operate Many ferries operate

in near-monopoly in near-monopoly conditions. So they conditions. So they may pay high prices may pay high prices for tickets and for tickets and certainly will for on-certainly will for on-board cateringboard catering

Problems of market interventionProblems of market intervention Resource allocation in disequilibriumResource allocation in disequilibrium

• Ineffective resource allocation by governmentsIneffective resource allocation by governments• Can be heavily allocated in some areas (e.g. Can be heavily allocated in some areas (e.g.

More in big cities)More in big cities) Public ownership: efficiency and culturePublic ownership: efficiency and culture

• Leading to waste and poor quality of service Leading to waste and poor quality of service (mostly no competition)(mostly no competition)

Side-effects of subsidies and taxesSide-effects of subsidies and taxes• Higher taxesHigher taxes reducing incentives in economy reducing incentives in economy

Problems of market interventionProblems of market intervention Loss of consumer sovereigntyLoss of consumer sovereignty

• Power of consumers in spending is reduced by Power of consumers in spending is reduced by income taxes.income taxes.

Measurement of external (or social)costs Measurement of external (or social)costs and benefitsand benefits• Difficult to measure social costDifficult to measure social cost

Government interference and changing Government interference and changing objectivesobjectives• 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?Public or Private?

What are the pros What are the pros and cons of public and cons of public ownership of ownership of railways?railways?

Trends in public sector provisionTrends in public sector provision

Less central planningLess central planning• Even government needs to be more Even government needs to be more

flexible and competitive. flexible and competitive. More privatizationMore privatization

• Should we privatize energy Should we privatize energy organizations?organizations?

Performance targets and indicatorsPerformance targets and indicators• Need to have clear and measurable Need to have clear and measurable

targets and indicators.targets and indicators.

The EndThe End