Lecture 10

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Published on January 21, 2008

Author: Tommaso

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Lecture 10 :  Lecture 10 Government Intervention 1. Questions and Concerns :  1. Questions and Concerns 1. Questions and Concerns (Cont’d):  1. Questions and Concerns (Cont’d) 2. The First Theory of Government Intervention: A Normative Analysis :  2. The First Theory of Government Intervention: A Normative Analysis The need for government intervention Normative analysis presupposes a set of norms that should be achieved. If not, it is the role of the government to step in and make it happen. For the media, the norms are the six criteria we have been using in assessing the performance of media industries. They include: u        Allocative efficiency; u        Productive efficiency; u        Technological progress; u        Equity; u        Cultural goals; u        Diversity Slide5:  In other words, if the market fails to deliver the above desired results, it is the duty of the government to step in the market and produce them. We should pay attention to three reasons that may bring about market failure: u     Externalities; u     Public goods; u     Monopoly power. Slide6:  (2) Externalities (a)   Assumptions for perfect competition:   l  All costs and benefits are private; l  Marginal costs = Marginal private costs = Marginal social cost; l  Marginal benefits = Marginal private benefit = Marginal social benefit.   In other words, the production and consumption of the product/service would not impose any cost or produce any effect to parties external to the transaction. There are no externalities. Slide7:  (b) External Costs An external cost is a cost arising from an economic transaction that falls on the third party and that is not taken into account by either of the parties (seller/consumer) to the transaction. Externalities may arise from the production and consumption of goods and services. If there are no externalities, and therefore marginal external cost (MEC) = 0, MSC = MPC.   If there are externalities, and therefore MEC > 0, MSC = MPC + MEC Slide8:  Graphically speaking, -- MSC > MPC because the presence of external cost (pollution) but the absence of external benefit; -- Equilibrium point will shift from Po and Qo to P1 to Q1. Slide9:  Externalities of media products   By exposing to violence in TV programmes, one may    Become hardened to violence;  Become personally violent;  Imagine society is actually more violent than it is;  Curtail their social life due to fear of violence;  the quality of social life worsen as a result of reduced interactions. Slide10:  Children are particularly vulnerable to violent content. And their exposure to violent content is an externality.   l  Originally, violent content provision is a transaction between broadcasters selling advertising time and advertisers wanting to appeal to the adult groups; l   It is not targeted at children; l   The social cost of excessive violent is not borne by the producer nor the advertisers; l   The social costs of a higher level of aggression and violent behavior will be taken up by the children and society at large. Slide11:  (c)    External Benefits   The externalities arising from economic activity may create benefits for society. However, producers may not be able to charge for the benefits by the price they receive for their products.   Examples: R&D  new knowledge  Innovation in products  Spillover to other companies; Training programmes  improved human resources  Moving to other companies. Slide12:  On the consumption side, positive externalities can be produced:   l  Taking public transport  Congestion reduced + Pollution lessened; l  Medical treatment of contagious infection  Saving others from being infected; l  Education  Recipient of a higher pay job which in turn benefits more people + more better citizens. Slide13:  For media products, they could also produce external benefits as a result of viewing:   l   News, current affairs and documentaries  promote a population in formed on political institutions, events, issues and values + A perspective on international affairs; l   Domestic drama: Provide insights into the way of life of the country and reinforce the distinctiveness of that culture; l  Children programmes: Cultivate values and promote a way of social life. Slide14:  If external benefits are taken into account, the supply and demand curves should be redrawn as follows: Slide15:  (d)    Public Policy and Externalities   I. Negative externalities: A tax can be imposed to internalize the social cost. The producers would have to pay themselves for the costs incurred. In figure 13.2, the tax (T) = vertical distance between MSC and MPC; The results: Price increases from Po to P1; Quantity reduces from Qo to P1.   T > P1 –Po  producers and consumers would share the burden of the tax. (Consumer/P1 –Po; Producer/T – (P1 –Po)) Slide16:  In reality, application to media products is difficult:   l   How to determine the amount of tax for violent program? l   How to calculate the external costs of violent programs? l   How to quantify violence involved in these programs into monetary terms? l    How to balance regulation of violence with freedom of speech which is guaranteed by the Basic Law? Slide17:  Alternative measure to regulate external costs: setting standards Standards regulating portrayal of sex and violence are measures to avoid incurring external cost; A certain quantity and percentage of program content (news, documentaries, children programmes, drama, entertainment) are required to guarantee the provision of programmes with external benefits; But private broadcasters are adept at subverting the spirit, if not the letter, of the regulatory requirements in order to enjoy the benefits of other aspects of regulation such as barriers to entry. Slide18:  II. Positive externalities: A government subsidy can be given to media products producing external benefits. Again, we have to make up our minds on the following questions:   l  What are the program-attributes that produce external benefits? l  How to quantify the benefits into monetary terms in order to determine the level of subsidy provided by the government? Slide19:  A Grey Area: Protecting intellectual roperty   While R&D will benefit the society as a whole, the diffusion of knowledge will stifle the motivation of producers to innovate and invent. The question for the government is: how to encourage invention and innovation by investing more in R&D without jeopardizing the interest of the investors? Without paying for the cost of R&D, what should the government do?   The government should grant a patent or copyright that allows its owners to use the invention or innovation of a product/service exclusively for a specified period of time. This protection, however, must weigh against the social costs incurred as a result of slowed rate of knowledge diffusion and reduced competition. Slide20:  (3) Public Goods   Two features: 1.  Non-rivalry: Some goods or services, such as Walkman or a pair of shoes, can be consumed or used by a person at a time. It is not only a matter of property right but also a matter of feasibility. Consumers may compete for goods and services. For other goods such as TV programmes and law and order establishment, however, they can be enjoyed simultaneously by all citizens of the country. Consumers are not rivals for consumption. The same programme can be viewed by 1,000 people or 4 million. Slide21:  2.  Non-excludability: Most of the goods sold at a particular price imply exclusion of some people from enjoying it. If you are unwilling to pay for the price a DVD, for instance, you are excluded from viewing it. For some goods, exclusion is impossible or impractical. Examples:   n   National defense for all citizens, lighthouse for all ships, and basic research that is published; n  Fire-fighting services (must consider potential hazard of a fire to its neighbors); broadcasting services. Slide22:  1 + 2 = Public Goods: national defense, basic research, lighthouse, broadcasting, and Internet; 1 or 2 = Mixed Goods: Movie-showing/non-rivalry between consumers but excludable due to price; Library services/non-rivalry between users in general but they may become rivals for a particular book. Slide23:  The level of production of public goods Optimal level at the point: MB = MC; MB = addition of MBs received by each citizen = b + e Slide24:  Who is to provide the public goods?   (1)   Public sector provision   I.   It is the role of the government to determine the level of service and finance it from taxation. This level will be in line with the general principle that MB is equal to MC where total benefit minus total cost attains the maximum. II.  The service could be delivered by a government department, agency or publicly owned corporation. Public broadcasting organizations (PBO), for instance, deliver services of public goods of broadcasting by providing a diversity of programmes, which commercial broadcasters fail to provide. Slide25:  BBC is a well-known example:   “The BBC exists to enrich people’s lives with great programmes and services that inform, educate, and entertain. Its vision is to be able the most creative, trusted organization in the world. It provides a wide range of distinctive programmes and services for everyone, free of commercial interests and political bias.” Slide26:  III. Sources of funding:   (1)   British Broadcasting Corporation: funding from TV license fees paid by households; (2)   Australian Broadcasting Corporation: government grants; (3) Canadian Broadcasting Corporation: 30% from commercials and 70% from government grants. Slide27:  IV.  Challenges   (1)   Increase in the number of channels provided by cable TV networks may erodes the attention time for public broadcasting programmes; (2)   Increase in provision of programmes usually provided by public broadcasters dilutes the uniqueness for PBO and its justification may be in doubt; (3) Subsidy granted by government to individual producers serves as an alternative to maintaining a PBO. When more programmes are to be supplied by contract-out producers, the scale of PBO will be much reduced. Slide28:  (2)   Private sector provision   n   Broadcast TV programmes and Internet content are for free. Computer softwares, video, audio, images, text and other digital content are available on the net. But how can private firms generate revenue from the provision of these public goods? n   Private firms usually tie the provision of these public goods to the sale of advertising (TV/30-sec. advertising spots; Internet/banner advertisements); n Programmes are advertising oriented. The advertising revenue raised depends purely on the number of viewers and takes no account of the value receives from viewing. Slide29:  (4) Monopoly marginal cost = supply curve; optimal point at MRm = MCm  Pm, Qm Less than optimal amount of resources is used on producing the product. Slide30:  How should the government react? (a)   Monopoly outlawed: Government should enact competition laws empowering the courts and/or government agencies to prevent monopolies from occurring.   n   Conspiracies or collusion between companies, for instance, to raise prices and decreases output must be prohibited. n   The government should also scrutinize proposed mergers and assess in particular its effect on competition.  Conditional approval: AOL and Time Warner (AOL to open up its cable lines to rival Internet service providers);  Disapproval: BSkyB and ManU Slide31:  (b)   Regulation of a natural monopoly   If only a monopolist enjoys economies of scale and operates at minimum total cost, the government has to accept monopoly as a means to provide productive efficiency in the industry concerned. Regulations, however, are set in to limit the discretion of the company or industry over matters such as price, output, and market entry. Slide32:  Pu/monopoly price Pmc/marginal cost price Pac/average cost price Slide33:  Pu: MR = MC   I.   Regulation I: Imposing a marginal cost price   l When MC cuts the demand curve (D), the marginal cost price is Pmc and output will be Qmc. l It is an output level that reflects allocative efficiency as MB = MC. l The company under regulation will lose money since, at output Qmc, AC > AR or AR – AC < 0  (AR – AC) x Qmc < 0 A subsidy is needed to keep the company in business. Slide34:  II.  Regulation II: Imposing an average cost   u  When AC curve cuts the demand curve (D), i.e., AC = AR, the average cost price is Pac and output will be Qac. u  The output is less than allocatively efficient. u  Zero economic profits are earned. u No subsidy is needed. Slide35:  (5) Government Failure   n  If government intervention is undertaken when the costs of intervention are greater than the benefits, then we have government failure. n  It may occur because it is too costly to set up and operate the regulation, subsidy scheme, or other forms of intervention. Or the intervention may be ineffective to correct market failure. n  Government failure may also happen due to exaggeration on the cost associated with market failure and the benefits from intervention; n  Whether a government should intervene depends not only on the presence of market failure but also on the ability to avoid government failure. Slide36:  The Problems with the multiplier effect argument   Suppose a $100 million/year subsidy scheme is launched for the film industry. It is hoped that it will not only increase the incomes of the working population in the film industry by 100 million but also give benefit to other sectors. Suppose 75% of the income, or $750,000, received by film people will be spent on goods ad services, people working in sectors supplying these goods and services will stand to benefit. And these people in turn will benefit others by spending on goods and services. The benefits of the $100 million subsidy is seen to be multiplying. Slide37:  Two Assumptions   u   The subsidized money to the film people, as well as the portion that they pass on people of other sectors through expenditure on goods and services, goes to resources that would otherwise be unemployed; u   The government money could not be used in some other way such as giving back to taxpayers to spend as they fit. 3. The Second Theory of Government Intervention: Two Positive Theories:  3. The Second Theory of Government Intervention: Two Positive Theories While the normative theory explains why the government should intervene in the market, the positive theory seeks to understand what actually happens and accounts for its occurrence. The explanation of government intervention is made by referring to the interactions among various groups of players (politicians/bureaucrats/voters) in the decision making process of public policy. It is assumed that each/each group of the players pursues his/her own interests. Slide39:  (1) Capture theory of Intervention According to the capture theory, government intervention is the means by which the economic interests of specific groups (such as producers or labour unions) are served. It is argued that government regulations are captured by the industry under regulation, serving, not constraining, its interests. It regulates in ways lobbied or demanded by the industry. Regulation is the result of interactions among various groups of players. Slide40:  Why does the regulation comply with the industry’s demand? Bureaucrats: Cooperation with the industry will lead to employment in the private sector before or after retirement; and a smooth working relationship would give them a pleasant working environment. Politicians: They expect such intervention will provide certain group(s) of voters with benefits; As a result, they could be rewarded with campaign contribution and voting support. Voters: They will organize to lobby for intervention furthering their interests. Among them, cultural industry groups are vocal and well organized. Slide41:  (2) Public Interest Theory of Regulation It is the theory that governments, bureaucrats and voters all believe it is in their interests that resources be allocated efficiently. Accordingly, wealth will be maximized. Various ways can be used to promote public interest::  Various ways can be used to promote public interest:  Imposing an excise tax to compensate for external cost;  Setting standard;  Providing subsidies for goods supply external benefits;  Determining and monitoring the optimal output of public goods;  Maintaining competition through legislation;  Regulating natural monopolies. Slide43:  Lecture 10 --- Government Intervention Questions and Concerns 2. The First Theory of Government Intervention: A Normative Analysis (1) The need for government intervention (2) Externalities (a) Assumptions for perfect competition (b) External costs (c) External benefits (d) Public policy and externalities (3) Public goods (a) Two features of public goods (b) The level f production (c) Who is to provide the public goods (4) Monopoly (a) Monopoly outlawed (b) Regulation of a natural monopoly (5) Government failure Slide44:  3. The Second Theory of Government Intervention: Two Positive Theories (1) Capture theory of intervention (2) Public interest theory of intervention

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