Section one Policy significance and rational Section

Section one Policy: significance and rational

Section address the following fundamental questions: • • How important is policy? What is its rational? What are the assumptions on which it is based? What determines the nature of the playing field on which firms and other decision makers operate? • Who sets the rules of the games? • Why do we need rules anyway? • Can governments improve on the performance of economies that may be generated by the free market forces?

Concepts: • Policy: all aspects of governance relating to economic units (i. e. firms, industries, regions, nations, and international economy) have been referred to as “policy". • Strategic management is also referred to as “policy”; because the objectives underlying the strategic management of the firm and strategic management (policy governance) of regions, industries or nations have considerable similarity. It aim to purposefully to plan for the long term, to integrate and coordinate diverse elements, and to try to achieve a degree of control over the environment and the future

What is the significance of policy to business? • Policy sets the rules of the game by which business have to operate. • No market economy can operate without the establishment and enforcement of certain minimal rules such as relating to property, rights, quality control, consumes protection, environmental laws and regulations. • Policy makers can play a highly useful role in improving economic performance. • Not all policy is formulated and implemented by governments, other institutions include: trade unions, consumer protection associations, and clubs • - As STIGLITZ demonstrates “ if policy makers get it wrong, whole nations can be destroyed”

Chapter 3 Why do we need policy? R. Heilborner and L Thurrow

Why do we need policy? Market failure: refer to (under certain circumstances) the inability of market economies to generate economic efficiency. Main reasons for market failure. 1. Lack of information. Or information asymmetries 2. Perverse expectation 3. The existence of ‘Pure public goods. ’ which cannot be allocated efficiently by private markets. 4. Imperfect competition. 5. Externalities 6. Inability of markets to cope with very long-term and uncertain investments.

1. Lack of information • When marketers lack information or have inadequate(too little) information, the results of the market will reflect ignorance, luck or accident rather than informed behavior. Typically consumers guide themselves by advertising and casual information e. g. by advertising. Thus a certain amount of ignorance always remains in all markets, causing prices and quantities to differ from what they would be if we had complete information. • For example, in health care, we face information problems. For instance, most people do not know the best way to treat a stomach ulcer so they find it difficult to buy such treatment. We rely upon our doctor to act in our best interests, to act as our agent. The doctor is primarily motivated by the profit motive; the possibility exists for doctors to exploit patients by advising more treatment to be purchased than is necessary. The asymmetry of information between the patient and the medical profession weakens the competitiveness of the market and, creates a case for Government intervention.

2. Perverse expectations • Suppose that prices will raise more. Instead, we all rush in, with the result that prices go higher still. Meanwhile, sellers when seeing prices go up may decide not to take advantage of good times by increasing their offerings, but to hold back, waiting for tomorrow's even higher prices. Thus, demand goes up and supply goes down. Such perverse price movements can lead to very dangerous consequences. They can cause commodity prices to shoot to heights or fall to the depths. At its worst, perverse behavior threatens to make an entire economy go out of control.

3. Pure public goods. • Examples: Public education, public health, defense, weather service, lighthouses, law and order public institutions, all these services are useful for thousand as for one • PBG: are goods that cannot be allocated efficiently by private market. Here we turn to the range of problems that derive from the fact that certain kinds of output in our system do not have the characteristics of the public goods or services which intern allow them to be sold in private markets. We call such outputs pure public goods

3. Pure public goods. Cont…. 1. 2. 3. 4. • Characteristics of public goods: Consumption of a public good by any one individual does not interfere with its consumption by another. No one can exclude from the use of a public good. No way that we can, by ourselves buy defense, laws and order services or a weather service. Accordingly then is no way to set up a market for public good. Example: health care in a pure public good since those who do not pay could be excluded and there is clearly rivalness (competition) in their consumption. Therefore, government should intervene in health care to make sure that no one will be excluding from a health care.

4. Externalities • • • Examples: Smoke from local factories. Sludge pouring from a mill into a lake. Wastes, dirt, noise, and congestion. Speed limits. Externalities mean the effects of the output of private goods and services on persons other than those who are directly buying or selling or using the goods in question.

4. Externalities cont… • Externalities bring into focus a very series problem in our economic system: controlling pollution which in the production of wastes dirt, noise and congestion. • Main ways of controlling pollution: 1. Enforce laws and regulations to reduce pollution. 2. Tax firms which produce waste and dirt (after called effuse charges). 3. Subsidize polluters to stop polluting (e. g. pay households to return old cans and bottles to factories).

5. Imperfect competition • In a purely competitive market the consumer is king and the rationale for such a market is described as consumer sovereignty, which means: – In a pure competitive market the consumer determines the allocation of resources by his or her demand. – The consumer enjoys goods that are produced as abundantly and sold as cheaply as possible.

5. Imperfect competition cont… • In a monopolistic or oligopolistic markets the consumer loses much of this sovereignty. Although monopolies and oligo is may charge higher than necessary prices in the short- run, this may not really be failures in the sense that they may potentially yidd off setting benefits if the resulting large profits are organizational innovation. • However monopolies and oligopolies may not undertake such innovative activity because of lack of competitive pressure, in which case their conduct indeed leads to marked failure, which may require policy interventions.

5. Imperfect competition cont… • Example of imperfect competition in health market is that Doctors and other suppliers of health care often have this power (monopoly). The main emphasis for government intervention in this case, is to reduce market imperfections, to ensure that al participants in health care market have equal rights and treatment, to do this it should encourage competition while discourage monopolistic practices at the same time

5. Imperfect competition cont… • The existence of market failures does not automatically justify (give good reason) for policy intervention. It must assure that the benefit of such intervention exceeds the costs of making it. More government intervention is very likely to have an adverse, rather than a beneficial impact on the performance of the health care sector. • The government should not adopt regulations that negatively affect the quantity and quality of medical inputs, government policy should adopt regulation that extremely benefit the business growth and achieve wellbeing to consumers.

6. Lengthening time horizons • Examples: 1. Investment in education, infrastructure, research and development (R&D) health care for the elderly and the poor. e. g. biotechnology and telecommunication internet firms. 2. The American federal national institute of health started R&D on biotech (called biophysics) in the early 1960. 3. The internet started (25) years ago as a nuclear-bombproof communication system, thereafter as a national science foundation projects. accordingly investment in education health care R&D infrastructure have at least partly financed by governments