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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
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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
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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