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Price and quantity regulation

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					Price and quantity regulation


    Overview:
           The egg police and the wool mountain
           Taxi regulation
           The professions
Price regulation

   Maximum price regulations (eg. Rent control,
    telecommunications, proposals for petrol,
    PSA controls)
   Minimum price regulations (eg. Agricultural
    price support schemes)
       These differ depending on the government’s
        buying policy
           Either ignore any surplus or buy and store (or destroy)
            the surplus
Statutory marketing authorities

   Examples:
            Banana industry committee, Dried fruit board, State
             dairy authorities (or milk and egg boards), Rice
             marketing board, Tomato industry development
             committee, Queensland sugar corporation, Chicken
             meat committees.

   Practices:
            Control production, compulsory acquisition, fix prices,
             monopoly marketing.
            Queensland sugar corporation
            Victorian eggs
 Price floor – the chicken police
    Price                                      Supply
                                                                   The government sets
                                                                   the price floor but does
                                                                   not buy excess
            A                                                      Notes:
                                                                   Q potentially supplied –
Price
floor           25%              G                                 Q demanded = excess
                      B
                             E                                     supply
   Peq                                    H                        Need to control
                 C           F                                     quantity – chicken
                                                      Demand       police
                                 I
                                                                   Consumers lose B + E
                                                               Q
                      Q              Q potentially supplied        Producers gain B – F
                      demanded
                                                                   DWL = E + F
                                                                   B about $23m 1987-88
Price floor - the wool stockpile

   The ‘price support’ for wool began in 1973
   It was initially conservative and intended to stabilise
    prices
   From mid-1980s on the price paid by the wool
    corporation rose while world demand fell
   Abolished in 1991 owing federal government $3b
   Stockpile of 4.75m bales (about one year’s
    production)
   Price dropped from about $9 per kg in 1991 under
    support to about $4 per kg in 1993
   Production fell from 1100m kg in 1990-91 to 700 m
    kg in 2000
 Price floor – the wool stockpile
    Price                                       Supply
                                                                   The government buys
                                                                   the excess and stores
            A                                                      it or wastes it
Price
floor
                                                                   Notes:
                                    G
                B                                                  Consumers lose B + E
                           E
   Peq                                     H                       Producers gain B + E
                                                                   +G
                C          F
                                                      Demand       Government pays E +
                                      I                            F+G+H+I
                                                               Q   DWL = (E + F )
                    Q                          Q supplied
                    demanded   G’ment                              + (H + I )
                               purchases
   The hangover – selling the surplus wool
            Price
                                        Supply
                                                                 Stockpile sold
                                                                 until 2001

   Original
                                                     Supply
                                                     plus        Harms wool
   Price                                             stockpile   growers by
   floor                                             sales
                                                                 lowering price
                    Lost                                         and ‘crowding
Free market
price               profits                                      out’ production
                                                                 Overall growers
                                                                 lose because the
Actual
                                                 Demand
                                                                 scheme leads to
price                                                            high cost
with
stockpile
                                                          Q      production in
sales                          Qs       Qsold                    1980s then
                                                                 reduces low cost
                              Stockpile sales                    production in
                                                                 1990s
Lessons from price regulation

   Helps profits in short-term
   If government does not buy, need licenses or
    production quotas (if do not get these, you
    lose out so need to be an ‘insider’)
   If government does buy – get out before the
    scheme collapses!
Taxi regulation - background

   Origins
       1848 the Melbourne City Council first began to regulate
        coaches and cabs - copying earlier English laws
       Regulations dealt with quality, insurance, drivers, ranks and
        maximum fares
       1911 applied same price regulations to motorised cabs
        Yellow cabs successful start up in 1924
       1932 – licensing
       1937 – minimum price laws ‘to protect public’
State-of-play

   Still have both entry and price regulation
   Limited ‘peak’ and ‘off-peak’ pricing
   Plate values - $259,100 in 1997
   Plates have been an excellent investment in late
    1990s
   Most current plate owners bought them – not ‘issued
    them’
   Most drivers do not own plates (and get very low
    pay)
   Some small increase in plate numbers – usually for
    modified vehicles
   NCP reviews
    The simple economics of taxis
       Price                                   Industry            Notes:
                                               marginal cost
                                                                   License price = B + C –
                                                                   any fixed costs
               A
                                       G
                                                                   DWL approximately (I +
Regulated                                                          H) + (G + E + F)
price

                   B            E      I                           Small changes to
     Peq                                                           regulated price do not
                                                                   alter DWL
                   C            F      H
                                                     Demand        What if remove license
                                                                   restrictions but keep
                                                                   price regulation?
                                                               Q
                   Q licensed       Q                              If full reform and allow
                                    demanded
                                                                   free entry then value of
                            Shortage                               license goes to zero
Why regulate taxis?

   Uncertain quality of car and driver
   Price gouging of captive customers
   Competition does not work – consumers
    cannot respond to higher or lower prices
    (importance of search costs)
How to deregulate?

   Have licensed companies and drivers, but allow any
    company with minimum number of taxis to enter.
   Companies set and register rates. Have advertised
    prices on taxis and company ranks.
   Mobile phones have reduced problems – rise in
    called taxis relative to rank and hail taxis.
   Benefits of reduced price and differentiated product,
    reduced waiting times at peak periods for customers
    and flexible supply
   But – drivers and compensation
    The NT scheme – buy back licenses and
    tax taxis to pay for the buy back
       Price                            Industry            Notes:
                                        marginal cost
                                                            B = total present
                                                            value of licenses
               A
Regulated                                                   So if put tax on to
price
                                                            raise B, need to have
                                                            price pushed up to
                   B              E                         the original regulated
     Peq
                                                            price, so no gain!
                                  F                         Where is gain –
               C = fixed
                                              Demand
               costs                                        discount rate and
                                                            uncertainty,
                                                        Q   innovation and
                           Q licensed                       product differentiation
The professions

   Arguments for regulation
       Guarantee quality
       Protect consumers from shoddy or ‘fly by night’
        operators
       Prevents abuse of asymmetric information due to
        professional ethics
   Real effect is to create a barrier that usually
    effects new but not existing entrants.
 The economics of professions
                                                         Notes:
                                                         Restriction raises
           Price                          Supply
                                                         producers’ surplus
                                                         by B - F

                   A                                     But if any qualified
Market
clearing                                                 individual can
price                                                    practice, total ‘cost’
                                                         of qualification will
                       B
                                      E                  be B + C in long
      Peq
                                                         run
                                      F                  So DWL is (E + F)
                       C
                                            Demand       and unnecessary
                                                         training costs (up
                                                         to B + C)
                                                     Q
                           Licensed                      Training is a sunk
                           Q                             cost, so licensed
                                                         practitioners want
                                                         to retain barrier
Lessons

   Introducing restrictions to markets is easy –
    getting rid of them is hard.
   Restrictions may help incumbents in the
    short-term. But in the long term, the gains
    either become fees or part of deadweight loss
   In Australia, the Hilmer reforms have
    changed the rules for many associations and
    for cooperative arrangements that were
    previously exempt from the Trade Practices
    Act

				
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