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Course: «State Regulation of Economy» Lecturer: Natalia Churkina Graduate School of Business Administration Moscow Course: «State Regulation of Economy» Lecturer: Natalia Churkina Graduate School of Business Administration Moscow State University Graduate School of Business Administration, MSU State Regulation of Economy

COURSE INTRODUCTION: WHAT WILL YOU STUDY? After the course you are expected to be COURSE INTRODUCTION: WHAT WILL YOU STUDY? After the course you are expected to be able to answer the following questions: § What are the functions of different public authorities? § What methods and mechanisms can government use to regulate economy? § How certain public decisions can influence business? § What are the current trends in state regulation Graduate School of Business Administration, of economy in Russia and in other countries? MSU State Regulation of Economy

COURSE INTRODUCTION: WHAT TO READ? To be ready for discussions you have to read COURSE INTRODUCTION: WHAT TO READ? To be ready for discussions you have to read the core texts provided in Uni. Web before the class! Additional materials: § Russian and international periodicals (Financial Times, Vedomosti, Kommersant, Expert) § Websites of Russian and foreign public authorities § Websites and statistical databases of the international organizations (OECD, IMF, Eurostat, Doing Business Data of the World Bank) Graduate School of Business Administration, MSU State Regulation of Economy

COURSE INTRODUCTION: WHAT WILL BE ASSESSED? Percent of the final Attendance and participation in COURSE INTRODUCTION: WHAT WILL BE ASSESSED? Percent of the final Attendance and participation in class discussions grade 20 % Home assignments (a group project and an 20 % essay) In-class tests 20 % Final written exam 40 % Graduate School of Business Administration, MSU State Regulation of Economy

COURSE INTRODUCTION: GRADING SYSTEM Excelle nt 80 - 100 % Good 65 - 79 COURSE INTRODUCTION: GRADING SYSTEM Excelle nt 80 - 100 % Good 65 - 79 % Pass 50 - 64 % Fail 0 - 49 % NB! You have to attend more than 50% of class sessions and to have at least pass mark for the final examination work to have the grade higher than fail. Graduate School of Business Administration, MSU State Regulation of Economy

Session 1: «Role of Government in Economy» Graduate School of Business Administration, MSU State Session 1: «Role of Government in Economy» Graduate School of Business Administration, MSU State Regulation of Economy

CASE: FARMER VS. AGRICULTURAL CORPORATION Issues for discussion: § Did the government participate in CASE: FARMER VS. AGRICULTURAL CORPORATION Issues for discussion: § Did the government participate in the resolution of this conflict? § In which forms did the government take part in the resolution of the conflict? § Was it possible to resolve the conflict without governmental participation? Graduate School of Business Administration, MSU State Regulation of Economy

ISSUE FOR DISCUSSION Is it possible to solve the problem of automobile emissions by ISSUE FOR DISCUSSION Is it possible to solve the problem of automobile emissions by bargaining between affected individuals? Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES: EXTERNALITIES Externality is a cost or a benefit accruing to an individual MARKET FAILURES: EXTERNALITIES Externality is a cost or a benefit accruing to an individual or group – a third party – that is external to a market transaction. Negative Externalities Free market Total costs > costs Private Negative Externalities State Regulation Total costs = Private costs + costs Graduate School of Business Administration, MSU State Regulation of Economy External

MARKET FAILURES: EXTERNALITIES Can you give examples of positive externalities? Can Government influence positive MARKET FAILURES: EXTERNALITIES Can you give examples of positive externalities? Can Government influence positive externalities? Positive Externalities Free market Total benefits > benefits Private Positive Externalities State Regulation Total benefits = Private benefits + External benefits Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURE: EXTERNALITIES The government establishes and supports natural reserves. Does it eliminate negative MARKET FAILURE: EXTERNALITIES The government establishes and supports natural reserves. Does it eliminate negative externalities or make positive externalities? Graduate School of Business Administration, MSU State Regulation of Economy

ISSUE FOR DISCUSSION Who has to build and to maintain lighthouses and why? Graduate ISSUE FOR DISCUSSION Who has to build and to maintain lighthouses and why? Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES: PUBLIC GOODS Public goods have the following characteristics: Nonrivalry in consumption Nonexcludabili MARKET FAILURES: PUBLIC GOODS Public goods have the following characteristics: Nonrivalry in consumption Nonexcludabili ty A free-rider problem ? ? ? Any other examples of public goods Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES: PUBLIC GOODS § Healthcare Are these § Fire service goods § Roads MARKET FAILURES: PUBLIC GOODS § Healthcare Are these § Fire service goods § Roads private or public? goods can have features of private Quasi public goods (rivalry in consumption and excludability) but are provided usually by government because of their social significance or other reasons. Graduate School of Business Administration, MSU State Regulation of Economy

ISSUE FOR DISCUSSION Why do pharmaceutical companies write about side effects of the medicine ISSUE FOR DISCUSSION Why do pharmaceutical companies write about side effects of the medicine in the instruction ? Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES: ASYMMETRIC INFORMATION Asymmetric information – unequal knowledge possessed by the parties to MARKET FAILURES: ASYMMETRIC INFORMATION Asymmetric information – unequal knowledge possessed by the parties to a market transaction. SELLER BUYER Knows a lot about his car Knows very little about the car Is ready to sell only a car of the lower quality Is ready to pay only a price that reflects the lower quality Only low-quality cars remain in the market Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES: ASYMMETRIC INFORMATION § What other mechanisms can Government use to help to MARKET FAILURES: ASYMMETRIC INFORMATION § What other mechanisms can Government use to help to avoid the problem of asymmetric information? § If you buy the new car will you face the problem of the asymmetric information? § Why sales of some products (for example, cars) are regulated less than sales of other products (for example, medicine)? Graduate School of Business Administration, MSU State Regulation of Economy

ISSUE FOR DISCUSSION Example. Why does In December 2008, the Big 3 auto companies ISSUE FOR DISCUSSION Example. Why does In December 2008, the Big 3 auto companies Governmen asked the US t help the Government for $34 billion to avoid companies bankruptcy. In January which face 2009, the Government problems in provided $24, 9 billion to Graduate School of Business bail out the market? Administration, two of the Big 3. MSU State Regulation of Economy

MARKET FAILURES: MACROECONOMIC INSTABILITY Economic growth Without Government With Governm ent Time Graduate School MARKET FAILURES: MACROECONOMIC INSTABILITY Economic growth Without Government With Governm ent Time Graduate School of Business Administration, MSU State Regulation of Economy

MARKET FAILURES What other roles of the government can you § Anti-trust policy and MARKET FAILURES What other roles of the government can you § Anti-trust policy and stimulating competition name? § Social support of certain population groups and providing of social services § Development of science and technologies § etc. ! Graduate School of Business Administration, MSU State Regulation of Economy

ISSUE FOR DISCUSSION In Russia in some sense air pollution standards are stricter than ISSUE FOR DISCUSSION In Russia in some sense air pollution standards are stricter than in the European Union. In Russia emissions standards are prescribed for more than 2000 pollutants compared with 12 air pollutants regulated in Europe. However, it does not mean that real emissions are lower in Russia than in the EU. WHY? In response to the question ‘What’s an example of bad regulation? ’, Ronald Coase replied, ‘I can’t remember one that’s good’. School of Business Administration, Graduate MSU State Regulation of Economy

GOVERNMENT FAILURES: SOME EXAMPLES § lack of information about market § excessive bureaucracy § GOVERNMENT FAILURES: SOME EXAMPLES § lack of information about market § excessive bureaucracy § problem of moral hazard (for ex. , unemployment benefits can stimulate higher unemployment) § problems of political cycles (possibility of populist decisions in pre-election period etc. “Does the existence of market imperfections justify government intervention? The answer would be no, if the imperfections in government behavior were greater than those in the market. ” Gary S. Backer, the 1992 Nobel economics laureate Graduate School of Business Administration, MSU State Regulation of Economy

CHANGES IN THE GOVERNMENT ROLE IN TIME Classical model Mercantilis m Neoconservatism Keynesianism 1930 CHANGES IN THE GOVERNMENT ROLE IN TIME Classical model Mercantilis m Neoconservatism Keynesianism 1930 s 1970 s 15 -17 century 18 century Graduate School of Business Administration, MSU State Regulation of Economy