Day to day economics satish deodhar epub download

 

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    Day To Day Economics Satish Deodhar Epub Download

    The economy isn't just for the economists to debate on. All of us are affected by its ups and downs—global recession, rise in interest rates, or hike in food prices. Read "IIMA-Day To Day Economics Day to Day Economics" by Satish Y Deodhar available from Rakuten Kobo. Sign up today and get RS. off your first. Day to Day Economics (IIM Ahmedabad Business Books) by Satish Y Deodhar English | | ISBN: | pages | EPUB,PDF | 1.

    Medley of Government and Private Sector 2. Budget, Deficits, and Taxation 3. Money, Banking, and the Stock Market 4. Freer Trade and World Trade Organization 5. Anatomy of Inflation 6. The Boom and Bust Phenomena 7.

    The following discussion should shed light on the matter. Some of you may have personally watched the spectacle at the Wagah border that separates India and Pakistan in the state of Punjab. The macho, competitive Beating Retreat ceremony, enacted daily by soldiers on either side of the border is orchestrated by the armies of the two governments. Why are defence services provided only by governments? Is it that soldiers demonstrate patriotism and bravery only when they work for the government?

    Or are the reasons more fundamental? When we see a postage stamp, we wonder what the picture and the wording represent. There is a tremendous diversity in stamps in terms of images, colours, language, currency, denominations, and the countries that issue them.

    But there is one thing common to all postage stampsthey are issued by governments. Stamps represent the price paid by a customer for a postal service that is rendered by the government.

    While private courier services are gaining ground, the service of delivering ordinary postcards, inland letters, aerograms, and money orders, to and from every nook and corner of India, is still provided by the government.

    Why has the private sector not entered this market? Or, does the government not permit it to enter? We will try to find answers to such and similar questions by drawing attention to market failures that arise due to various factors such as non-rivalry in consumption, non-excludability, natural monopoly, and externalities.

    Once you understand these concepts, you will have a touchstone: a touchstone to help you judge whether or not certain economic activities undertaken by the government are justifiable or not.

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    On a lazy Saturday afternoon, to refresh yourself from the boring homework, you stand in the balcony of your apartment seeking inspiration. Suddenly, you hear the beating of drums on the street below: a street performer and his wife are inviting you to watch their acrobatic show. You, along with neighbours in other balconies, and a few others on the streetpassive spectators, one and allstand watching the performance.

    Once the show is over, the spectators disperse. The husband-and-wife team now looks up at each balcony, silently pleading for a few rupees. At that instant, you get a reality check. You run inside and sheepishly ask your parents whether or not you should give something to the couple. It is safe to assume that the performing couple barely makes two ends meet. No wonder, then, that street- performing is vanishing as a profession!

    The performing couple is working hard to operate a private enterprise but, somehow, market forces fail to deliver even a bare minimum profit to the couple. Why do you think this happens?

    If you closely study this incident, you may identify the two factors that lead to market failure. One is the non- rivalry in consumptionyou watched the street performance, but you did not prevent others from viewing it, too. Thus, there was no rivalry in the consumption of the service among different consumers. That is not so with other goods, say, a car or a toothpaste. If you buy a car, that same car is not available to anyone else.

    In other words, there is rivalry and competition among consumers which forces them to pay a price to secure possession of a car. The second factor is this: at a given market price, the relative buying power of different consumers might exclude some of them from buying the car or the toothpaste. In the case of the street-performing couple, this excludability feature is missing, because they cannot prevent individualseither physically or by charging an appropriate pricefrom viewing the performance.

    Thus, due to the non-rivalry and the non- excludability of the service which they provide, the problem of free riding occurs, and the market fails to deliverergo, the street performers cannot run a profitable business.

    There are several instances of services that are non-rival in consumption and non-excludable. Such services are termed pure public goods. The above examples will, perhaps, make clear to you why national defence is a pure public good.

    A private firm just cannot provide national defence profitably, for the consumption of this service is non-rival and non-excludable. On the individual level, why would anyone express how much they value their security, and why would anyone pay for it, when they can have a free ride at the expense of other consumers?

    It follows, then, that the market will fail to deliver, making it necessary for the central government of the country to provide national defence. The same idea can be extended to various activities, such as, the police force, low-traffic rural roads, lighthouses, street lights, among others. Private firms will not offer these services, because the free market cannot provide the required environment for making a profit. In this sense, the market fails to deliver these services, and the institution of government has to undertake these economic activities.

    Even in hardcore capitalist economies, these services are provided by the government. Can you think of other such services? The next time you are waiting at a traffic signal, take a moment to look around youhave you ever seen a private operator deliver traffic signal service to commuters?

    But, of course, now you are in the drivers seatyou know that traffic signals are a pure public good! They are typically characterized as public goods, for the service they provide is non-rival and non-excludable.

    Therefore, most lighthouses are owned by governments. One economist, Ronald Coase, has pointed out that some lighthouses in England used to be privately owned. These privately-owned lighthouses would charge the ships at nearby ports a fee for providing them with docking facilities at the port. It was possible for lighthouses situated near the ports to create excludability, that is, refrain from providing a service if a consumer refused to pay.

    Having obviously used the lighthouse for navigation, a ship would risk denial of docking facility if it declined to pay for lighthouse service. Thus, we see that, when excludability is brought in, it is possible for a private enterprise to provide a public good profitably. Such goods are called club goods. As the name suggests, many social clubs which cater to high society restrict membership and charge high fees.

    This creates excludability and retains non-rivalry in the use of facilities such as swimming pools and gymnasiums. Is it possible for the street-performing couple discussed earlier take a cue from club goods? An enterprising trapeze artist who starts his own circus does exactly thatcreates excludability. Now, can you think of other possibilities an economic activity that involves non-excludability as well as rivalry in consumption?

    While the private sector produces most goods and services efficiently, economic activities which are in the nature of pure public good are delivered by the government. But governments also deliver other goods and services even if they are not pure public goods.

    For more than a decade now, private firms have been selling bottled potable water. Consumers have quickly accepted this offering from the private sector. Perhaps, this reflects the failure of local governments to supply safe, potable water through the network of municipal pipes and taps that runs through all households. But then, why dont private entities undertake the supply of potable water to the cities by setting up their own extensive network of pipes, taps, and water purification plants?

    Imagine several private firms establishing huge water purification plants and an extensive network of water pipes and taps all over the city! Not only would the capital cost of such networks be too high, there would also be a duplication of such networks with different private firms competing to offer this service. This duplication of networks is impractical. Even if some firms were willing to undertake it, they would incur high costs and the customer base would get divided among the competing firms.

    As a result, the per-unit cost of delivering water would be extremely high. The per-unit cost of delivering potable tap water would come down only if a single firm were to offer this service. That way, there would be no duplication of capital costs, and the capital cost for a single operator would get distributed over the large volume of water delivered.

    This implies that there is room only for a single firmthat is, a monopoly.

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    However, if only a single private firm were allowed to offer this service, it would turn into a monopolist! In the absence of competition from other players, a profit-maximizing monopolist would charge a high price for water delivery, and the quantity supplied would also be quite low compared to what it would have been under competitive conditions.

    Goods and services that fall into this category are called natural monopolies. Governments avoid the dilemma of such natural monopolies by undertaking these activities themselves and charging a low average price which would be close to the competitive price. The same logic can be extended to the nationwide governmental postal service.

    Establishing an extensive network of post offices throughout the length and breadth of a country of continental proportions is an apt example of a natural monopoly. As in the case of potable bottled water, taking advantage of improvements in communications technology, courier services are now competing with the government postal service.

    However, the delivery of ordinary postcards, inland letters, and money orders to-and-from every nook and corner of the country still remains a natural monopoly. Government post offices and private couriers can exist simultaneously, at least until further improvements in communication technology reach the masses.

    Something to Ponder In its effort to correct market failures, the Indian government created many public sector undertakings PSUs and nationalized quite a few privately owned firms. It has had a foothold in diverse sectors, such as, bakery, watches, machine tools, civil aviation, and hotels, to name a few.

    Many of these PSUs, if not all, are making heavy losses. Based on the arguments made earlier regarding market failures, do you think the government of India made the right decisions in establishing or nationalizing firms in the sectors mentioned above? The proof of the pudding is in the eating. The government of India began the process of disinvestment of PSUs from In fact, disinvestment, through strategic sale, commenced in , when twelve PSUs and several hotel properties were disinvested.

    This disinvestment process is expected to continue. The cumulative losses of Air India, as of the financial year , were more than Rs 20, crore and government has decided to help Air India with an additional equity of Rs.

    As a consumer, would you prefer HMT watches and Air India flights to other watches and other airlines simply because they are government-owned? Do they address the market failure concerns at all? It is this same feature of natural monopoly that enables governments to own and run other activities, such as, the generation and supply of electricity, and the provision of landline telephone services. These natural monopolies are referred to in common parlance as public utilities or, simply, utilities.

    Unfortunately, the track record of state electricity boards, state-owned telephone companies, and other state-owned natural monopolies is very poor. This condition emanates from the lack of incentives to the employees to offer better services, and the absence of a profit motive to judge the performance of the enterprise. It is for this reason that Lee Iacocca, former head of the Chrysler Corporation, once said, One of the things the government cant do is run anything.

    The only things our government runs are the post office and the railroads, and both of them are bankrupt. While this statement may be too uncharitable, governments are not blind to such concerns.

    Therefore, governments often allow private monopolies to run utilities as long as their pricing and output levels are regulated by the government.

    Some firms, such as, Tata Power Mumbai and Torrent Power Ahmedabad , are examples of private firms running electric utilities very efficiently, but their pricing and output decisions are regulated by the state electricity regulatory commissions.

    However, there is one more reason why the government may interfere in the free market, if not undertake the economic activity itself. This happens when economic activities are characterized by what is known in economics as externality.

    Externality occurs when a specific economic activityproduction, consumption, or tradeaffects a bystander who is not party to the specific economic activity. For example, late-night playing of loud music at festival pandals disturbs the peace in the neighbourhood.

    This form of celebration creates a negative externality on bystanders, namely, the residents of the neighbourhood. In the presence of a negative externality, the social cost of playing music is much higher than the private cost of playing music and renting equipment. Therefore, a city commissioner may intervene and put a limit on the decibel levels of the music, and ban music in public places after a certain time in the late evening. Recently, the central government announced a subsidy of 20 percent on the production of the latest version of the electric car Reva.

    Why would a government give a subsidy to the manufacturing of electric cars? When consumers buy Reva, some private benefit accrues to them through its usage.

    Moreover, since this car is electric, it does not pollute the atmosphereas do other cars. Besides, it avoids the use of petroleumone of the earths non-renewable resources. Therefore, the social benefit of manufacturing Reva includes the benefit to the consumer, along with the value attached to lower pollution and to resource conservation. The social benefit of the electric car far exceeds the private benefit to the consumer. This means that there is a positive externality enjoyed by society when an individual buys a Reva.

    The government would certainly want to encourage more production of Reva and, hence, it offers a subsidy so that more such cars and fewer petrol-driven cars are manufactured and bought. If the government does not help, the market will fail to increase the number of environment-friendly cars, the pollution will be high, and a non-renewable resource will get depleted.

    For a similar reason, the government has engaged itself in subsidizing primary education. The benefits of education go far beyond the private benefit accruing to a child. Education creates mature and responsible individuals who can effectively participate in the socio-economic development of society. Hence, by subsidizing education, citizens are incentivized to send their children to school, and educational trusts are encouraged to establish such schools.

    This, too, is an example of market failure, for, in the absence of government incentives, a free market will not provide adequate and socially beneficial primary education. Similarly, when a firm that manufactures chemicals pollutes the environment by releasing industrial waste, the social cost of producing the chemicals is higher than the private cost to the firm.

    That is, the private production activity of the firm creates a negative externality on society in terms of increased pollution. Stamps represent the price paid by a customer for a postal service that is rendered by the government. While private courier services are gaining ground, the service of delivering ordinary postcards, inland letters, aerograms, and money orders, to and from every nook and corner of India, is still provided by the government.

    Why has the private sector not entered this market? Or, does the government not permit it to enter? We will try to find answers to such and similar questions by drawing attention to market failures that arise due to various factors such as non-rivalry in consumption, non-excludability, natural monopoly, and externalities.

    Once you understand these concepts, you will have a touchstone: a touchstone to help you judge whether or not certain economic activities undertaken by the government are justifiable or not. On a lazy Saturday afternoon, to refresh yourself from the boring homework, you stand in the balcony of your apartment seeking inspiration. Suddenly, you hear the beating of drums on the street below: a street performer and his wife are inviting you to watch their acrobatic show.

    You, along with neighbours in other balconies, and a few others on the streetpassive spectators, one and allstand watching the performance. Once the show is over, the spectators disperse. The husband-and-wife team now looks up at each balcony, silently pleading for a few rupees.

    At that instant, you get a reality check. You run inside and sheepishly ask your parents whether or not you should give something to the couple. It is safe to assume that the performing couple barely makes two ends meet. No wonder, then, that street- performing is vanishing as a profession! The performing couple is working hard to operate a private enterprise but, somehow, market forces fail to deliver even a bare minimum profit to the couple.

    Why do you think this happens? If you closely study this incident, you may identify the two factors that lead to market failure.

    One is the non- rivalry in consumptionyou watched the street performance, but you did not prevent others from viewing it, too.

    Thus, there was no rivalry in the consumption of the service among different consumers. That is not so with other goods, say, a car or a toothpaste.

    If you buy a car, that same car is not available to anyone else. In other words, there is rivalry and competition among consumers which forces them to pay a price to secure possession of a car. The second factor is this: at a given market price, the relative buying power of different consumers might exclude some of them from buying the car or the toothpaste. In the case of the street-performing couple, this excludability feature is missing, because they cannot prevent individualseither physically or by charging an appropriate pricefrom viewing the performance.

    Thus, due to the non-rivalry and the non- excludability of the service which they provide, the problem of free riding occurs, and the market fails to deliverergo, the street performers cannot run a profitable business.

    There are several instances of services that are non-rival in consumption and non-excludable. Such services are termed pure public goods. The above examples will, perhaps, make clear to you why national defence is a pure public good. A private firm just cannot provide national defence profitably, for the consumption of this service is non-rival and non-excludable. On the individual level, why would anyone express how much they value their security, and why would anyone pay for it, when they can have a free ride at the expense of other consumers?

    It follows, then, that the market will fail to deliver, making it necessary for the central government of the country to provide national defence. The same idea can be extended to various activities, such as, the police force, low-traffic rural roads, lighthouses, street lights, among others.

    Private firms will not offer these services, because the free market cannot provide the required environment for making a profit. In this sense, the market fails to deliver these services, and the institution of government has to undertake these economic activities. Even in hardcore capitalist economies, these services are provided by the government. Can you think of other such services? The next time you are waiting at a traffic signal, take a moment to look around youhave you ever seen a private operator deliver traffic signal service to commuters?

    But, of course, now you are in the drivers seatyou know that traffic signals are a pure public good!

    They are typically characterized as public goods, for the service they provide is non-rival and non-excludable. Therefore, most lighthouses are owned by governments. One economist, Ronald Coase, has pointed out that some lighthouses in England used to be privately owned. These privately-owned lighthouses would charge the ships at nearby ports a fee for providing them with docking facilities at the port. It was possible for lighthouses situated near the ports to create excludability, that is, refrain from providing a service if a consumer refused to pay.

    Having obviously used the lighthouse for navigation, a ship would risk denial of docking facility if it declined to pay for lighthouse service.

    Thus, we see that, when excludability is brought in, it is possible for a private enterprise to provide a public good profitably. Such goods are called club goods. As the name suggests, many social clubs which cater to high society restrict membership and charge high fees.

    This creates excludability and retains non-rivalry in the use of facilities such as swimming pools and gymnasiums. Is it possible for the street-performing couple discussed earlier take a cue from club goods? An enterprising trapeze artist who starts his own circus does exactly thatcreates excludability.

    Now, can you think of other possibilities an economic activity that involves non-excludability as well as rivalry in consumption? While the private sector produces most goods and services efficiently, economic activities which are in the nature of pure public good are delivered by the government. But governments also deliver other goods and services even if they are not pure public goods.

    For more than a decade now, private firms have been selling bottled potable water. Consumers have quickly accepted this offering from the private sector. Perhaps, this reflects the failure of local governments to supply safe, potable water through the network of municipal pipes and taps that runs through all households. But then, why dont private entities undertake the supply of potable water to the cities by setting up their own extensive network of pipes, taps, and water purification plants?

    Imagine several private firms establishing huge water purification plants and an extensive network of water pipes and taps all over the city! Not only would the capital cost of such networks be too high, there would also be a duplication of such networks with different private firms competing to offer this service. This duplication of networks is impractical. Even if some firms were willing to undertake it, they would incur high costs and the customer base would get divided among the competing firms.

    As a result, the per-unit cost of delivering water would be extremely high.

    The per-unit cost of delivering potable tap water would come down only if a single firm were to offer this service. That way, there would be no duplication of capital costs, and the capital cost for a single operator would get distributed over the large volume of water delivered.

    This implies that there is room only for a single firmthat is, a monopoly. However, if only a single private firm were allowed to offer this service, it would turn into a monopolist! In the absence of competition from other players, a profit-maximizing monopolist would charge a high price for water delivery, and the quantity supplied would also be quite low compared to what it would have been under competitive conditions.

    Goods and services that fall into this category are called natural monopolies. Governments avoid the dilemma of such natural monopolies by undertaking these activities themselves and charging a low average price which would be close to the competitive price. The same logic can be extended to the nationwide governmental postal service. Establishing an extensive network of post offices throughout the length and breadth of a country of continental proportions is an apt example of a natural monopoly.

    As in the case of potable bottled water, taking advantage of improvements in communications technology, courier services are now competing with the government postal service. However, the delivery of ordinary postcards, inland letters, and money orders to-and-from every nook and corner of the country still remains a natural monopoly. Government post offices and private couriers can exist simultaneously, at least until further improvements in communication technology reach the masses.

    Something to Ponder In its effort to correct market failures, the Indian government created many public sector undertakings PSUs and nationalized quite a few privately owned firms. It has had a foothold in diverse sectors, such as, bakery, watches, machine tools, civil aviation, and hotels, to name a few. Many of these PSUs, if not all, are making heavy losses. Based on the arguments made earlier regarding market failures, do you think the government of India made the right decisions in establishing or nationalizing firms in the sectors mentioned above?

    The proof of the pudding is in the eating. The government of India began the process of disinvestment of PSUs from In fact, disinvestment, through strategic sale, commenced in , when twelve PSUs and several hotel properties were disinvested.

    This disinvestment process is expected to continue. The cumulative losses of Air India, as of the financial year , were more than Rs 20, crore and government has decided to help Air India with an additional equity of Rs. As a consumer, would you prefer HMT watches and Air India flights to other watches and other airlines simply because they are government-owned?

    Do they address the market failure concerns at all? It is this same feature of natural monopoly that enables governments to own and run other activities, such as, the generation and supply of electricity, and the provision of landline telephone services. These natural monopolies are referred to in common parlance as public utilities or, simply, utilities.

    Unfortunately, the track record of state electricity boards, state-owned telephone companies, and other state-owned natural monopolies is very poor. This condition emanates from the lack of incentives to the employees to offer better services, and the absence of a profit motive to judge the performance of the enterprise.

    It is for this reason that Lee Iacocca, former head of the Chrysler Corporation, once said, One of the things the government cant do is run anything. The only things our government runs are the post office and the railroads, and both of them are bankrupt.

    While this statement may be too uncharitable, governments are not blind to such concerns. Therefore, governments often allow private monopolies to run utilities as long as their pricing and output levels are regulated by the government.

    Some firms, such as, Tata Power Mumbai and Torrent Power Ahmedabad , are examples of private firms running electric utilities very efficiently, but their pricing and output decisions are regulated by the state electricity regulatory commissions. However, there is one more reason why the government may interfere in the free market, if not undertake the economic activity itself. This happens when economic activities are characterized by what is known in economics as externality. Externality occurs when a specific economic activityproduction, consumption, or tradeaffects a bystander who is not party to the specific economic activity.

    For example, late-night playing of loud music at festival pandals disturbs the peace in the neighbourhood. This form of celebration creates a negative externality on bystanders, namely, the residents of the neighbourhood. In the presence of a negative externality, the social cost of playing music is much higher than the private cost of playing music and renting equipment.

    Therefore, a city commissioner may intervene and put a limit on the decibel levels of the music, and ban music in public places after a certain time in the late evening. Recently, the central government announced a subsidy of 20 percent on the production of the latest version of the electric car Reva.

    Why would a government give a subsidy to the manufacturing of electric cars? When consumers buy Reva, some private benefit accrues to them through its usage. Moreover, since this car is electric, it does not pollute the atmosphereas do other cars. Besides, it avoids the use of petroleumone of the earths non-renewable resources. Therefore, the social benefit of manufacturing Reva includes the benefit to the consumer, along with the value attached to lower pollution and to resource conservation.

    The social benefit of the electric car far exceeds the private benefit to the consumer. This means that there is a positive externality enjoyed by society when an individual buys a Reva.

    The government would certainly want to encourage more production of Reva and, hence, it offers a subsidy so that more such cars and fewer petrol-driven cars are manufactured and bought. If the government does not help, the market will fail to increase the number of environment-friendly cars, the pollution will be high, and a non-renewable resource will get depleted. For a similar reason, the government has engaged itself in subsidizing primary education.

    The benefits of education go far beyond the private benefit accruing to a child. Education creates mature and responsible individuals who can effectively participate in the socio-economic development of society. Hence, by subsidizing education, citizens are incentivized to send their children to school, and educational trusts are encouraged to establish such schools.

    IIMA Day To Day Economics | Satish Deodhar | download

    This, too, is an example of market failure, for, in the absence of government incentives, a free market will not provide adequate and socially beneficial primary education. Similarly, when a firm that manufactures chemicals pollutes the environment by releasing industrial waste, the social cost of producing the chemicals is higher than the private cost to the firm. That is, the private production activity of the firm creates a negative externality on society in terms of increased pollution.

    Therefore, to reduce the pollution, the government may impose a tax on the production of chemicals. With taxes in place, the firm will produce a socially optimal lower quantity of chemicals, or employ environment-friendly production processes, and thereby, lower the level of pollution.

    High taxes on liquor and tobacco also demonstrate the governments efforts to curtail consumption as it perceives a significant negative externality on society. The government taxes mentioned abovefor protecting the environment and for curtailing the consumption of liquor and the use of tobaccoare popularly termed green taxes and sin taxes, respectively!

    We mentioned in the beginning that the government undertakes policies to control inflation and unemployment. In a broader sense, these policies can also be interpreted as measures for reducing negative externalities: inflation and unemployment lead to lower real incomes for households and make fewer goods and services available to them. The distribution of income can become more unequal.

    Moreover, a lower standard of living and joblessness have the potential to create social unrest and increase the crime rate! Therefore, government must intervene.