INTERNATIONAL INSTITUTE OF PLANNING AND

MANAGEMENT

AHMEDABAD

Assignment

SUBMISSIONON

Welfare Economics

Submitted To:

Proff Mrs. Usha Venkatesh

Submitted By:

By

Pratik K S Negi

SS/09-11/ISBE/HR

Market Economy and Social welfare (chapter -4)

Market regulations and working of regulations

Regulation in India and real situation

Reduction in welfare compromising policies, process, and institution

Govt and welfare enhancement schemes

What is market economy?

market economy is economy based on the power of division of labor in which the prices of goods and services are determined in a free price system set by supply and demandThis is often contrasted with a planned economy, in which a central government determines the price of goods and services using a fixed price system. Market economies are also contrasted with mixed economy where the price system is not entirely free but under some government control or heavily regulated, which is sometimes combined with state-led economic planning that is not extensive enough to constitute a planned economy.

In the real world Market economies do not exist in pure form, as societies and governments regulate them to varying degrees rather than allow self-regulation by market forces. The term free-market economy is sometimes used synonymously with market economy, but, as Ludwig Erhard once pointed out, this does not preclude an economy from having socialist attributes opposed to a laissez-faire system. Economist Ludwig von Mises also pointed out that a market economy is still a market economy even if the government intervenes in pricing.

Different perspectives exist as to how strong a role the government should have in both guiding the market economy and addressing the inequalities the market produces. For example, there is no universal agreement on issues such as central banking, and welfare. However, most economists oppose protectionist tariffs.

The term market economy is not identical to capitalism where a corporation hires workers as a labour commodity to produce material wealth and boost shareholder profits. Market mechanisms have been utilized in a handful of socialist states, such as China, Yugoslavia and even Cuba to a very limited extent.

It is also possible to envision an economic system based on independent producers, cooperative, democratic worker ownership and market allocation of final goods and services; the labour-managed market economy is one of several proposed forms of market socialism.

Welfare Consists of actions or procedures — especially on the part of governments and institutions — striving to promote the basic well-being of individuals in need. These efforts usually strive to improve the financial situation of people in need but may also strive to improve their employment chances and many other aspects of their lives including sometimes their mental health. In many countries, most such aid is provided by family members, relatives, and the local community and is only theoretically available from government sources.

Welfare may be provided directly by governments or their agencies, by private organizations, or by a combination of both in a mixed economy model. The term welfare state is used to describe a state in which the government provides the majority of welfare services, or to describe those services collectively.

Welfare may be funded by governments out of general revenue, typically by way of redistributive taxation. Social insurance type welfare schemes are funded on a contributory basis by the members of the scheme. Contributions may be pooled to fund the scheme as a whole, or reserved for the benefit of the particular member. Participation in such schemes is either compulsory or the program is subsidized sufficiently heavily that most eligible individuals choose to participate.

WELFARE schemes in india can be categorized as under

Backward Classes Schemes Child Schemes Disabled Scheme Foreign Contribution Labour and Employment Schemes Minorities Scheme Rural Schemes Social Schemes Tribal Schemes

Urban Schemes

Voluntary Schemes

Women Schemes

Chapter 1Market Regulation & Working

The current framework

Types of market

Perfectly Competitive Market

Goods/services offered are all same Numerous buyers and sellers and no single buyer or seller can influence the market

price - price takers Oligopoly

Few sellers Each participant is aware of the actions of the others Monopolistic

Goods/services are slightly differentiated Numerous sellers – each seller has some ability to influence the price

Monopoly

No substitute available for the goods/services offered Only one seller and this seller sets the price – price maker

Free MarketCompetitive Forces

Market Efficiency

Market Failure

Regulation

Why market fails?

Market failure occurs when freely functioning markets, operating without government intervention, fail to deliver an efficient or optimal allocation of resourcesTherefore economic and social welfare may not be maximizedThis leads to a loss of economic efficiency

Market Regulations

The free market automatically solves all the issues that we might have. It brings prices down, quality and productivity up through the Invisible hand and competition

Drawbacks of Free Market Economy are:-

Free Markets might have worked in the past, when companies were small and there was always enough competition going on, but that is no longer the case now in our economy.

If you work in a system where maximizing your profit is the goal you do not want competition & thus it is not a free market economy.

Competition forces you to keep prices at lower scales thereby reducing profit. We do not have the small businesses anymore that were the base upon which free

market ideas were born. We have international corporations that have absolutely no interests in the free market's survival.

Government Intervention to Correct Market Failure

The economic rationale for Government interventionCorrection for market failure/loss of economic efficiencyDesire for greater degree of equity in the distribution of income and wealthSeveral forms of government intervention are possible to correct for perceived market failureTo employ the diagnostic approach, analysts attempt to identify both the precise type of problem that gives rise to the market failurePolicy analysts argue that existence of a market failure provides a necessary, not a sufficient justification for public policy interventions. A double market failure test is required. (Weimer & Vining, 1992). Sufficiency is established when the gains from government intervention outwieghs the dangers of government intervention

Other interventions

(1) Command and Control technique (including regulation)

(2) Government subsidy and other forms of financial assistance (including research grants and tax allowances/tax exemptions)(3) Taxation (including indirect taxes designed to control pollution)(4) Policies to increase competition and reduce the immobility of factors of production(5) Provision and finance of public and merit goods(6) Introduction/expansion of market based incentives to change both consumer and producer behaviour

Monetary & Fiscal policies (government intervention)

Monetary policy is that policy of the government which pertains to the regulation, availability, and cost of credit. Fiscal policy deals with government expenditures, taxes, and debt. Government spends on public work programs such as roads construction, dams, on education & public welfare, defense etc. Through management of these areas, the Ministry of Finance regulated the allocation of resources in the economy, affected the distribution of income and wealth among the citizenry, stabilized the level of economic activities, and promoted economic growth and welfare

Political Philosophy of redistributing income

Utilitarianism Liberalism Libertarianism

Policies to reduce poverty

o Minimum Wage Lawso Welfareo Negative Income Taxo In-kind transferso Antipoverty programs and work incentives

Regulation – Summary

The possibility of market failure underpins the economic rationale for state regulation of market economies.

Regulations can take different forms with different roles

Regulation Equitable Distribution

Health, safety regulations and environmental regulations can be rationalized on the basis of imperfect information and externalities

Economic regulation of public utilities can be explained by economies of scale and scope and need to protect the consumers from monopoly exploitation

Aspects of fiscal policy can be rationalized on the basis in terms of wealth and income redistribution

Regulatory intervention for universal service obligations etc. Regulation cannot be limited to economic issues – means to ultimately achieve non-

economic ends Intentions and outcomes are therefore defined by a combination of economic, social,

political and bureaucratic factors and cannot be attributed to one set of factors alone Involvement of disciplines other than economics (law, political science, sociology etc.) Broad definition – “ the use of public authority to set and apply rules and standards”

(Hood et al, 1999)

Some regulating act in India

Type of Market Failure

Regulator Type of Regulation Relevant Statutes

Utilities Natural Monopoly, Externalities, Public Good,

CERC, SERCs Licensing, Tariff fixation, QoS standards, Dispute Resolution

Electricity Act 2003

Oil & Gas Natural Monopoly, Externalities

Petroleum and Natural Gas Regulatory Board

Licensing, Tariff fixation, QoS standards, Dispute Resolution

Petroleum and Natural Gas Regulatory Board Act 2006Petroleum Act 1934Petroleum and Minerals Pipelines Act, 1962

Tele Communications Monopolistic, TRAI Licensing, Tariff TRAI Act

Oligopoly fixation, QoS standards, Interconnection, Spectrum Management (Advisory)

1997

Banking Information Asymmetry,

RBI Monetary policySupervision & Regulation

Banking Act 1959

CHAPTER -2 (Regulation in India and real situation)

The need for regulating futures market

The need for regulation arises on account of the fact that the benefits of futures markets accrue in competitive conditions. The regulation is needed to create competitive conditions. In the absence of regulation, unscrupulous participants could use these leveraged contracts for manipulating prices. This could have undesirable influence on the spot prices, thereby affecting interests of society at large. Regulation is also needed to ensure that the market has appropriate risk management system. In the absence of such a system, a major default could create a chain reaction. The resultant financial crisis in a futures market could create systematic risk. Regulation is also needed to ensure fairness and transparency in trading, clearing, settlement and management of the exchange so as to protect and promote the interest of various stakeholders, particularly non-member users of the market.

The real situation of regulation in commodity forward/future trading in India

At present, there are three tiers of regulations of forward/futures trading system exists in India, namely, Government of India, Forward Markets Commission and Commodity Exchanges

Role of Market Commission:- It makes recommendations for improving the organization and working of forward markets

It undertakes inspection of books of accounts and other documents of recognized/registered associations

Advises Central Government in respect of grant of recognition or withdrawal of recognition of any association

It collects and publishes information relating to trading conditions in respect of goods including information relating to demand, supply and prices and submit to the Government

Government Regulations

Problem Intervention Evaluation

Zero provision of public goods

Direct provision of public goods

Negative externalities

Financial intervention: taxes (equal to the

Advantages Leaves space for market forces to interact Provision of revenue for the government

monetary value of the MEC) are imposed on individuals or a firm, internalizing ECs

Disadvantages Difficulty in valuating EC Overvaluation means output is below social optimum, as with undervaluation means that output is not sufficiently lowered (ie, society’s welfare is not always maximized) Effectiveness of tax dependent on PED

Legislation: laws and administrative rules are passed to prohibit or regulate behaviour that imposes an EC, e.g. pollution permits

Enforcement is difficult and expensive

Education, campaigns and advertisements solve the problem of imperfect information by allowing the external costs to be made known to the consumer, discouraging demand

Benefits must outweigh the costs of implementation. A lot of time may be needed for effects to be felt

Positive Externalities

Financial intervention: subsidies made to the producer or consumer

Advantages Considered the most effective way of solving underconsumption as it is easily implemented Disadvantages Like taxes, the valuation of EB is difficult High government expenditure is required Okun’s leaky bucket: each dollar transferred from a richer to a poorer individual, results in less than a dollar increase in income for the recipient. Leaks arise as a result of administrative costs, changes in work effort, attitudes etc. arising from the redistribution

Legislation include regulation seatbelt usage, compulsory education etc.

Enforcement requires constant checking which may translate to high costs.

Non provision of merit goods

There is a need to produce merit goods (which are naturally underconsumed) at low prices or for free due to four reasons

1. Social justice: they should be provided according to need and not ability to pay

2. Large positive externalities, for example in the provision of free health services helps to contain and combat the spread of disease

3. Dependants are subject to their guardians decision which are not necessarily the best, therefore the provision of services like free education and dental treatment is needed to protect dependants from uninformed or bad decisions

4. Ignorance: The problem of imperfect information makes consumers unaware of the positive externalities and benefits that arise from consumption

Imperfect

markets

Imposition of a lump-sum tax on a monopolist (shifts AC upwards), and supernormal profits are taken as tax. Governments may also regulate MC/AC pricing for monopolies.

Government may impose regulations to control a monopolies

1. Forbidding the formation of monopolies (e.g., antitrust laws)

2. Forbidding monopolistic behaviour (like predatory pricing)

3. Ensuring standards of provision.

4. Ensuring competition exists (e.g., deregulation)

Natural Monopolies

In the case of Natural Monopoly the essence of regulation is the explicit replacement of competition with governmental orders with principal institutional device for assuring good performance.

In the case of natural monopoly the primary guarantor of acceptable performance is conceived to be not competition or self restraint but direct governmental prescription of major aspects of their structure and economic

There are four principal components of this regulation that in combination distinguish the public utility from other sectors of the economy: control of entry, price fixing, prescription of quality and conditions of service, and an imposition of an obligation to serve all applicants under reasonable conditions.

(The principles of economic regulation, A.E.Kahn)

Chapter--3

Reduction in welfare compromising policies, process, and institution

Government

We do understand that education and health care services create both private and social benefits and this is the reason for the existence of both private and public institutions, expenditure on education and health make substantial long term impact and cannot be easily reversed. Moreover individual consumers of these services do not have complete information about the quality of services and their cost.

With a large population living below the poverty line many cannot afford to access basic education and health and education facilities. A substantial group of people cannot afford to reach super specialty health care and education. Furthermore when basic education and health care is considered as a right of citizens then it is necessary for the government to provide it free of cost to the socially oppressed caste.

Though literacy rates for adults as well as youth have increased, still the absolute number of illiterates is as much as there was population at the time of independence. Females are still not allowed to study in many parts of the country and their freedom is not secured the society still us gender-biased Health care facilities are not sufficient to be provided to a country with such a large population there still exists a dearth of doctors, engineers and architects.

Political framework and its impact on welfare

The cleavage-based political framework of post-Independence India has, hence, produced a unique political setting in which social policy making was made a great deal more lengthy and thorny, than in most countries of the developed Western world. Functional theories that explain the relative absence of welfare state institutions in “Third World” countries with their comparative socio-economic backwardness cannot explain the striking differences of welfare state development in e.g.

Mainland China and India, from the late 1940s onwards. The author here found that conflict theories, especially the state-centered/institutional school, that are based on numerous political and socio-political parameters are, indeed, capable of explaining the striking gap between policy efforts and policy outcomes in the case of India, as well as in any other countries, wherever they may occur.

Chapter -4

Social welfare schemes by the Government Schemes : 1. Stipend to physically handicapped student

The handicapped student reading : from class I to V class @ Rs. 20/- p.m. from class VI to X class @ Rs. 40/- p.m from class College to to University s @ Rs. 60/- p.m from student reading outside the State @ Rs. 75/- p.m.

All the 8 Blocks in four sub-division of Angul district are cover under ICDS to provide six package of services to the pre-school children, pregnant women and Nurshing mother. Viz :- 1. Pre-School education 2. Health education. 3. Refresheral services 4. Health check up 5. Immunization 6. Spl. Nutrition Programme 2. OAP/ W.P.

The scheme is meant for destitute who are above 65 years, widow, Leprosy patient provide with Rs. 100/- pension per month.

3. STATE OLD AGE PENSION SCHEME

Eligibility : i) AGE : AT LEAST 60 YEARS ii) FINANCIAL CONDITION : LITTLE OR NO MEANS OF SUBSISTENCE RATE OF PENSION /ASSISTANCE : Rs. 100/- per month per person. DISTRICT TARGET : 17664 ACHIEVEMENT : 17664 MODE OF PAYMENT : Cash on a fixed date of the month 3. O.D.P.

The scheme is meant for destitute persons who are totally blind or orthopedically handicapped and has visible signs of differ wanting of loss of blind due to Leprosy incapable from the age of 5 years and above are eligible to get Rs. 100/- as pension per month. Eligibility : Age at least five years and should be disabled. Rate of Pension : Rs.100/- per person per month.

4. NOAP A destitute of 65 years of age and unable to earn bread from his/ her own source of income is provide with pension @ Rs. 75/- p.m. by the Govt. of India and Rs. 25/- p.m. by the State Government. The Details are as follows.

NATIONAL SOCIAL ASSISTANCE PROGRAMME

Introduced on : 15th August 1995. Components : National Old Age Pension Scheme (NOAPS) National Family Benefit Scheme (NFBS) National Maternity Benefit Scheme (NMBS)

NATIONAL OLD AGE PENSION : Criteria :

i) Age - At least 65 years. ii) Financial condition - With little or no regular means of subsistence

5. NEBS

Under this unit of NSAP Central assistance is made available for a lump sum Family benefit of Rs. 10,000/- to the family house holder below poverty line on the death of the primary bread owner of the family.

6. Child Welfare The aim of the scheme is to to provide care, protection, education and vocational training orphanage children to bring them to the level of normal citizen of the country.

The following orphanages are in existence in Angul district with the strength noted against each.

1. Baji Rout Chhatrabas, Angul --- 100 nos 2. Athamallik Balashram --- 25 nos.

How is the department is helping to common publi c

The Govt. provide to the people by way of giving pension, nutrition food to the pre-school children, school children, pregnant & nursing mothers, aids to physically handicapped persons, to old and infant people.

SGSY:

The Swarnjayanti Gram Swarozgar Yojana, which has been launched with effect from April 1, 1999, is a holistic programme covering various aspects of self employment, such as organization of the poor into self-help groups, training, credit, technology, infrastructure and marketing. It is envisaged that 50 percent of the Groups formed in each Block should be exclusively for women who will account for at least 40 percent of the Swarozgaris. Under this Scheme, women are encouraged in the practice of thrift and credit which enables them to become self-reliant. Through assistance in the form of Revolving Fund, Bank Credit and Subsidy, the Yojana seeks to integrate women in the economy by providing increasing opportunities of self employment.

GSY:

The Jawahar Gram Samridhi Yojana (JGSY) has been launched with effect from April 1, 1999, with the twin objectives of creation of demand-driven community village infrastructure and the generation of supplementary employment (for the unemployed poor) in the rural areas. Wage-employment under the JGSY is extended to below poverty line families. It is stipulated that 30 percent of the employment opportunities should be reserved for women.

IAY :

The Indira Awas Yojana (IAY) aims at providing assistance for the construction of houses for people 'Below the Poverty Line' in rural areas. Under the Scheme, priority is extended to widows and

unmarried women. It has been laid down that IAY houses are to be allotted in the name of women members of the household or, in the joint names of husband and wife.

NSAP:

The National Social Assistance Programme (NSAP), which came into effect five years back represents a significant step towards introducing a National Policy for Social Assistance benefits to households 'Below the Poverty Line', with a major focus on women. The NSAP has three components, namely, the National Old Age Pension Scheme, the National Family Benefit Scheme and the National Maternity Benefit Scheme. The National Maternity Benefit Scheme is exclusively aimed at assisting expectant mothers by providing them Rs.500 each for the first two live births. Under the National Old Age Pension Scheme, Central Assistance of Rs.75 per month is provided to women and men who are 65 years of age and above and have little or no regular means of subsistence from their own sources or through financial support from the family members. Under the National Family Benefit Scheme, Central Assistance of Rs.10,000 is extended to the bereaved family in the case of death of the primary breadwinner due to natural or accidental causes. Women are also beneficiaries under this Scheme.

Thanking youPratik K.S NegiISBE ---(SS/09-11=-- HR)