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pa1_lec9 - PADP 8670 POLICY ANALYSIS I Market-based...

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Unformatted text preview: PADP 8670 POLICY ANALYSIS I Market-based Solu0ons Angela Fer7g, Ph.D. Overview Freeing Markets: Deregulate Priva6ze (USPS example) Facilita6ng Markets: Allocate through property rights Create new marketable goods Simula6ng Markets: Auc6ons 1 Deregula6on Possible ra6onales: Government failure (legislators responding to lobbyists, lack of compe66on, etc.) Efficiency ra6onale for regula6on is no longer relevant due to some change in the industry; so deregula6on increases efficiency E.g. airline industry: Prior to 1978, airlines were heavily price regulated because had route monopolies Huge growth in airline demand and technological advances made regula6on difficult to manage Deregula6on led to huge increase in surplus; airlines figured out efficient models (hub and spoke model, complex pricing models) because they have an incen6ve reduce costs now; these innova6ons led to fare reduc6ons Priva6za6on Several meanings: Contrac6ng out of the provision of a good that was previously produced by a government bureau Selling of state-owned enterprises to the private sector (dena6onaliza6on) Relaxing/elimina6ng restric6ons that prevent private firms from compe6ng with government agencies or state-owned enterprises (demonopoliza6on) Government failures Changes over 6me eliminate the market failure ra6onale for public provision Ra6onales (same as deregula6on): 2 US Postal Service The USPS is created as a government agency under Title 39, Sec6on 101.1 of the US Code which states, in part: (a) The United States Postal Service shall be operated as a basic and fundamental service provided to the people by the Government of the United States, authorized by the Constitution, created by Act of Congress, and supported by the people. The Postal Service shall have as its basic function the obligation to provide postal services to bind the Nation together through the personal, educational, literary, and business correspondence of the people. It shall provide prompt, reliable, and efficient services to patrons in all areas and shall render postal services to all communities. The costs of establishing and maintaining the Postal Service shall not be apportioned to impair the overall value of such service to the people. Ra6onales for government interven6on: Posi7ve externality: ensure communica6on across the country (war6me, news, business, etc.) Natural monopoly: could be less costly for one firm to do it (economies of scale) Equity: rural residents would be unable to afford to get mail if they had to pay the true cost of delivery USPS rules Monopoly over the delivery of anything defined as a le[er Monopoly over the use of your mailbox Receives no cash subsidy, but: Exempt from taxa6on Can borrow from the Treasury at low rates Exempt from an6trust laws Doesn't need to earn a profit 3 Changing Times Email/internet subs6tutes (bills, adver6sing, le[ers, etc.) Private company compe66on (UPS, FedEx) Source: WSJ 10/19/2011 Is there s6ll a need for the monopoly? Evidence indicates that rural route are as profitable as urban routes b/c roadside delivery (rural) is more efficient than park-and-loop (urban) no equity need Private firms would take over if USPS stopped, may charge different prices for different routes, but everyone would get mail at least most days efficient quan6ty provided by private companies Evidence indicates that many aspects of postal service do not exhibit economies of scale no natural monopoly 4 Policy Op6ons Corpora6ze: turn into private company Reduce monopoly Regulate to ensure universal service 2006 Postal Accountability and Enhancement Act (described in ar6cle) passed Current proposal: allow USPS to branch out (sell adver6sing on vehicles, sell fishing and hun6ng licenses, etc.) clarified & reduced delivery monopoly slightly Concern is crowd-out (unfair since USPS is tax-exempt, etc.) Allocate property rights Ra6onale is to increase efficiency through Coase's theorem Tragedy of the Commons Developing country issues: if people don't have property rights to land, they have no incen6ve to improve their homes Water: if no one owns water, then no one has the incen6ve to protect and conserve it 5 Create new market goods Example: Tradable permits (Cap-and-trade) The government auc6ons off pollu6on rights to producers In effect the government creates the missing market for the good (or bad) causing the externality The number of permits will be capped at the socially op6mal quan6ty of the pollu6ng good Firms bid for the right to own the pollu6on permits, and the permits go to the firms with the highest bids The price paid for permission to pollute is called an effluent fee Firms maximize profit by restric6ng pollu6on to the point where the price of an addi6onal permit equal the MC of abatement. Low abatement costs buy no permits, produce no pollu6on High abatement costs buy a lot of permits, pay high price to con6nue to pollute As a result, abatement achieved at minimum cost (compare to requiring every firm to hit same quota) Auc6ons When the government wants to allocate something to the public, auc6ons are a good way to ensure that the alloca6on is distributed efficiently. Examples: Natural monopoly public provision rights (cable, u6li6es): have bidders submit lowest retail price at which they will supply customers (should approach ATC), however winner could make profit by reducing quality Natural resources exploita6on rights: bidders submit price bids, highest bidder wins; or government sets price and buyers decide to buy or not; however must es6mate value well, problems if few bidders 6 Types of auc6ons Dutch or English auc6on: prices are called out in ascending order (English) or descending order (Dutch) and bidders openly call out when they hear a price they are willing to pay First-price sealed bid auc6on: allocate good to highest bid, make pay their bid, but do not release the bid price Second-price (Vickrey) auc6on: allocate good to the buyer who submits the highest bid, but make her pay the bid of the second highest bidder (to induce truth-telling) Spectrum Auc6on Goals Govt goals: Efficient alloca6on of licenses (those with highest value receive license) Promo6ng minority-owned businesses Preven6ng monopoliza6on No poli6cal embarrassment Firms want several licenses to spread fixed costs Firms want licenses across adjacent geographic areas Firms want licenses to cover large geographic areas Different firms want different license combina6ons Firms may change strategy if they lose one license (flexibility needed) Market a[ributes 7 Spectrum Auc6on Design Open auc6on: Be[er to prevent "winner's curse" avoidance (winner's regret if overes6mated value, so everyone underes6mates value to avoid winner's curve) Mul6ple rounds: Lower revenue if bidders are very risk averse Worse at deterring bidders collusion Each round sealed, announcing bids (not bidders) aoer each round, minimum bid increment between rounds Simultaneous auc6on (backup sequen6al): Reduces collusion because government can control informa6on (keep bidders from knowing their compe66on) Combina6onal Bids not permi[ed in simultaneous auc6on Too complex Informa6on and flexibility facilitate aggrega6ons across spectrum bands, but administra6vely very complicated Sequen6al auc6on used when licenses have li[le interdependence Spectrum Auc6on Design, cont. To encourage minority owned firms: of spectrum set aside for bidding by designated firms only Price preferences (discounts) Installment payments Monitor resale of licenses (so no arbitrage) Up-front payment required for license (not royal6es based on value in use) Shios some risk to government, but raises bids Reserve (minimum) prices used when few bidders 8 ...
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