Wednesday, June 29, 2005

Public good

A public good is good which can be used by all without paying a price. In most of the countries, the public goods are being produced by the respective governments by incurring high costs. For its usage an individual or a company does not pay a price. A typical example is that of a public road, where a fee is not collected for its usage. The burden of producing public goods falls on the shoulders of the government. Some costs are paid off using the government taxes such as road tax, sales tax etc.
I believe that it is the duty of the private in a developing country to offer such services owing to the already high burden on the goverment. The government can give the private entrepreneur high rates of subsidies on undertaking this kind of work as it requires a very high rate of capital investment.
Another type of good where a price is paid for the public good is known as a Merit good. Charging a small amount for building infrastructure can be justified as it accelerates development. Thus i am of the opinion of converting most public goods to merit goods.

Wednesday, June 22, 2005

Final year

I have only got a year left for my graduation. This semester we are being taught the following papers
1) Mathematical economics
2) Managerial economics
3) International economics
4) Fiscal economics
5) Monetary economics
6) Indian economics
At last i am so glad because i will have to study economics only. Lately there have been no posts owing to my lack of time to visit the web. I had been very busy as i was house hunting. I will get a house only on the first of the coming month.
I will do some economics posting only after i move into my new flat. I am planning to post on Behavioral economics and, the mobility of labour.

Sunday, June 12, 2005

Pigovian fees

I had earlier mentioned about government intervention in the case of polluting by firms. One way to intervene is by imposing a tax. So i am introducing the concept of Pigovian tax. But there are more efficient ways of regulating pollution, one of the comments i recieved state a more market friendly way of reducing pollution; which i agree to.
Early in the 20th century, the English economist Arthur C. Pigou argued for the imposotion of taxes on generators of pollution. Since the social cost of pollution is in excess of the private cost (it is a negative cost since they save money by polluting) to the pollutor, the government should intervene with a tax, making pollution more costly to the pollutor. If the pollution is more costly to produce, the pollutor will produce less pollution. This tax has come to be called a Pigovian fee or Pigovian tax. The fee is generally paid to the government. The Pigovian fee is not any emission fee; it is the marginal savings from pollution at the optimum pollution level.
This fee is not a market friendly way of controlling pollution. It is imposed on the people. Offering these firms incentives on reducing their emission levels would help more rather than imposing a tax.

Friday, June 10, 2005

Game theory

For a time, one of the most exciting new developments in economic theory was John Von Newman and Oskar Morgenstern's Theory of Games and Economic Behaviour. It represents a unique approach to the analysis of business decisions; and these decisions make up the ultimate raw material with which economic theorists must work.The general object of game theory is to determine standards of rational behaviour in situations in which outcomes depend upon the actions of interdependent players. Game theory is a multi person decision theory. The outcome is determined by those actions independently taken by multiple decision makers.
Game theory deals with taking descisions so as to maximize our payoffs(benefits). A typical example in traditional game theory is the prisoner's dilemma.They are kept in two different cells. If one confesses, he is set free but the other suffers maximum imprisonment. If both tell the truth, they suffer sometime in the prison. But if both keep quiet, they undergo minimum sentence.Hence, it is best that both keep quiet. But if the prisoners do not trust each other, it is very likely that both will confess and end up serving sometime in the prison.
I have just introduced the topic so as to make the readers get to know what game theory means. It is a very vast subject which cannot be simplified by me. In most of the microeconomics texts, game theory is mentioned. But, surely it is an interesting paper to learn. In most good graduate programs, game theory is offered as a separate paper.

Tuesday, June 07, 2005

Economics of the environment

Well, the hype at present is on the Environment and its onus on the citizens of a country. As responsibility is concerned, we all have a lot to do which unfortunately is not being done anywhere and so the need arises to impose policies. During the process of development in a nation i.e. growth of its industries and building of infrastructure, environment is totally forgotten about. There is not much being done, which regulates the amount of pollution. And people in developed countries now prefer a region which is environmentally very well off because after all their monetary needs are met, they look for a pleasant atmosphere without noise and other pollutants. It is the responsibility of the government to make sure that its citizens are environmentally safe.
I have mentioned only the ill effects of air pollution, not because it is the most important but because it is more prevalent.
Air pollution is mostly concentrated in urban areas, due to concentrations of people both as the sources and victims of pollution. It leads to health problems and also reduces human performance. It damages materials, increases maintenance costs which erode the infrastructure of an economy. It incurs great loss to the economy.
In rural and semi-urban areas it damages crops; moreover it harms the forest and aquatic ecosystems. It also leads to global warming.Chloroflurocarbons (CFC’s), one of the major nonfuel air pollutants lead to depletion of the stratospheric ozone layer. These substances are primarily used as refrigerants. One economic problem which has resulted is the growing black market in illicitly produced CFC’s.The United States has spent approximately 2% of GDP on pollution abatement and control.

Presently, a survey conducted said that Kerala is getting warmer due to high deforestation rates as compared to afforestation and increased global warming. The reasons mentioned also include climate change and increased vulnerability to natural disasters. The survey was conducted by the Kerala State Council for Science, Technology and Environment (KSCSTE) with assistance from the Ministry of Environment and Forests. It says that on an average, Kerala has become warmer by around 0.5 degree Celsius over the last 43 years. Air Pollution by the emission of greenhouse gases is mainly due to increased consumption of firewood and petroleum products. The pressure of the large number of tourists is felt on the coastal areas. Sand mining, over exploitation of mangroves and the growth of housing and industries are the other reasons mentioned. Dredging in coastal areas is also a major reason.

To conclude, I would say that if the government does not have money to protect each persons environment, the collection of an Environment Tax is justified, provided it makes progress. I don’t think the government will do that in India because, as it is the people feel that the money they pay as tax is not being utilized properly.
This calls for some intervention. It is up to the private players to take up this job. Where the Government has failed the Public can win provided they are willing to take risks. They can set up organizations to provide environmental safety to its customers by paying those companies an amount based on the work done. For example, if an individual’s pond in his premises is dirty or the air is polluted, he/she can approach the above mentioned organizations and ask them to clean the pond and also plant more trees in order to reduce the incidence of pollution after paying a specified amount. This will bring about an increase in employment, mainly for the rural people as they would only be truly willing to do such cleaning. The salaries ought to be high because environmental protection is very important and the fees charged should be accordingly high in urban areas and low in rural areas. This will also help to reduce the inequalities between a city and a village.
1.Environmental Problems and Policy Solutions, Chapter 2, Environmental Economics, Charles Kolstad, Oxford University Press
2.‘Kerala getting warmer by the day, says survey, T Nandakumar’, Pg 2, The Hindu, June 5, 2005

Monday, June 06, 2005

VAT in Kerala

First let me pen down the impact and then the reasons as it will make the reader to think as to what the shortcomings are and for the reader to get an insight into how these policies affect the common man.
It is upon the Government to ensure that the benefits of all policies should accrue to everyone without any inequality. The major problem with VAT is traders and customers are uneducated on its computation. Or a VAT department ought to be set up which takes care of imparting knowledge on VAT to all and in its subsequent computation and also to study the impact it has on the lives of the people especially those BPL (below poverty line). It should conduct surveys and make the information public and freely accessible by all.
Impact on Kerala Economy

Hike in prices of snacks like chips and other fried items-which are felt among ordinary people.
Hike in prices of writing materials (4% tax levied) like ink, eraser, paper, etc which are very commonly used goods by the students.
Hike in prices of medicines, especially life saving drugs (supposed to be exempted).
Hike in prices of medical equipment, (costs more when compared to electronic goods) as a 12.5% tax is levied so poor patients will find it difficult to pay the bills. [Recently Delhi & Karnataka Governments cut down the tax to 4%]

Processed goods: Retailers charge more than before.
Branded goods: They are under priced as traders resort to unethical business practices.
Spurious goods: They will tend to flood the market.

The traders from states where VAT is not introduced take advantage of the price differential, thereby flooding the Local Kerala markets with their goods. Moreover these products are of questionable quality.

Till date the shop owners were collecting additional tax from the customers without paying the Government.

The commodities which enter from other states are procured without bills which in turn are sold without bills to the consumers. This results in a heavy loss to the exchequer.

Quality of products manufactured in Kerala is affected as they abstain purchasing from states where VAT is introduced, and they suffice by procuring from very near areas, so as to reduce cost, but it happens with the subsequent reduction in quality too.

Food products entering from other states are relatively cheaper as they are transported into Kerala using clandestine methods which reduce their transportation costs.

An overall rise in prices in the state, mainly felt among the ordinary people. It was introduced in April 2005.

Reasons for implementation

VAT is scientific in developed nations like Europe not in developing nations like India which is characterized with a lot of Cottage industries, because it becomes unscientific.

VAT proposed lower prices, wide spread tax compliance and equitable tax collection.

VAT or value added system is a multi-stage consumption/production tax computed on the value of purchase/sales made at various stages of its business activity.

It proposed to bring maximum benefits to traders, businessmen and customers.

Impact on neighboring states

In Lakshwadeep, almost all articles are imported from Kerala (VAT state) and Karnataka (VAT state) which is going to bring about an increase in the cost of living without a consequent/subsequent increase in the standard of living.

Suggested remedies

Issue of bills should be made mandatory.
ISI should standardize the quality of consumables.
The prices prevailing on that day should be displayed in shops like groceries. (As in jewellery shops)
The Food & Civil supplies department should make a regular inspection of quality.
It is feasible to set up an institute for Food technology as in Mysore which examines different food samples so as to ensure quality standardization.

The Hindu, Saturday, June 4, 2005-Peoplespeak.kochi edition.Pg 2.