IIM A - Day to day economics Ch.1 - Interrelationship between Public and Private sectors

To understand why some goods and services are offered by privatized firms and some are provided by the Govt. itself we have to understand the concept of market failures and the causation of the same due to the presence of:
1. Natural monopoly
2. The presence of exclusivity and rivalry- the concept of public goods
3. The presence of externality

• Natural Monopoly: If, for example, a private enterprise tries to provide the nationwide railway service for a country then initially it'll encounter with an extremely high capital cost for setting up the whole system: starting from the manufacturing of the trains, the rails, the signalling system, platforms and what not, then the huge amount of maintenance cost will be there, this itself is an impossible task for a single private firm to carry out; and with the presence of many private firms, the market will get divided and afterwards, to recover these extremely high costs, these private firms will increase the per unit price of such services provided. Due to the collective contribution of two factors. i.e. high costs incurred to provide the service and segmented market due to the presence of multiple firms this market system becomes impossible. Thus, this whole venture can be profitable if and only if there is only one firm present in the market, so that it can recover its costs and generate profit by utilizing the volume of sales generated from services provided to the whole of the country. Thus, this becomes a natural monopoly, i.e. the presence of more than one firm results in an increase of the per unit price of the goods and services provided and only a single firm can function profitably in such a set up. But, a private firm in all possible cases can not operate in such a market as it'll seek to increase its profit margins due to its profit maximizing mindset and also, with the absence of any competition it'll dictate the price of goods and service as it wishes, thus it will operate as a 'monopolist'. This result in market failure and to curb this the Govt. should intervene and provide such goods and services to its countrymen at a price near to the competitive price. That's why we see in most of the countries the Govt. is in charge of services like the railways, providing drinking water etc.
  
• Public goods: Goods which have the two characteristics of non-rivalry and non-exclusivity are called public goods. To explain further, if I buy a car then that same car can't be bought by any other buyer, thus there's a rivalry seen in case of purchasing of such goods. Also, the availability of some goods and services becomes exclusive due to the relative buying power of that particular set of people. For an example, if I buy a ticket for a movie then that particular seat won't be available to anyone else and also the movie can only be watched by the people who had bought the ticket and no one else won't be able to watch it. But in case of the National Defense, Police services etc. these things are characterized by non-rivalry and non-exclusivity. i.e National Defense services are provided to all the citizens of the nation and the availability of the service to one person doesn't render it unavailable to the other, the availability of such goods and services doesn't depend of the relative buying power of people also, everyone can enjoy the benefits of these. These type of goods which are non-rivalrous and non-exclusive in nature are termed as Public goods and only the Govt. can provide such goods and services.
  
• Externality: If the production of a good or service affects a bystander who isn't directly involved in producing the same then the phenomenon of externality occurs. Market failures occurred due to externality are tackled by Govt. intervention. In case of positive externality the goods or services maybe subsidized. For example, the production of e-vehicle Reva was subsidized by the Indian Govt. as the car didn't cause any air pollution and thus affected the life and health of the society in a positive way. However, in case of negative externality, taxes are levied. For example, to curb the consumption of liquor and cigarettes, taxes are imposed on them; also, to curb pollution, the firms who produce pollutants beyond a certain limit have to pay penalties and taxes; incidentally, these are called 'sin tax' and 'green tax' respectively.

Thus, due to the present of the economic phenomenon of market failure, the Govt. intervention is required and there are some goods and services (like the railways service, supply of drinking water, National defense etc.), which only the Govt. can provide.

Disruption of Globalization - The U.S view

Once the advocate of free trade and globalization - U.S have taken certain policies under the Trump administration that are acutely targeted to disrupt the same. Disruption of the 'North American Trade Agreement' with Canada and Mexico, and the ongoing Trade War with China right now, portray U.S as a protectionist economy rather than the torchbearer of globalization and free trade which it was once.

U.S import $540 billion worth of goods from China, and it's subjected to 25% tariff, which was 10% earlier, and to retaliate this, China had also imposed a 25% tariff on goods imported from the U.S which is worth $120 billion. The U.S had also put 'sanctions on' and 'shut off' policies with Chinese firms such as Huawei by showing concerns about the national security, which prevents these firms to sell their products in U.S or their allies.

However, the concern that "The U.S has a $420 billion trade deficit with China is malignant to the U.S economy" isn't entirely true, as a chunk of the import coming from China is made directly by the U.S-owned-capital functioning in China, i.e. a result of the offshore policy of these firms. An official statistics from the U.S indicate that the U.S multinationals have increased their sales figures to $222 billion in 2015 by such policies. This underlining effect of globalization and free trade involved in the trade deficit is not even considered while showing concerns for these trade deficit figures and the increased affection for protectionism. And interestingly, for the U.S farmers who have a $6 billion worth of market in China and 60% of whose soybean exports are targeted towards China, have still remained a loyal supporter of Mr. Trump. A survey showed 78% of these farmers believe that Mr. Trumps policies will be beneficial for the economy. Irony, isn't it?

The benefits of free trade and globalization which had been reaped by the U.S for so many years, and the sudden withdrawal from the same with the advent of the Trump administration is nothing but a sign of the typical US opportunism and will kindle the far right and their protectionist movements worldwide, the signs are already being seen in Europe and various parts of the world. The U.S may again become a torchbearer of the same globalization and free trade in their own time when they realize that the excessive protectionism is leading to a downfall of their own economy and again show their opportunistic face to the world, but it won't come as a surprise. 

 

What am I doing here?

Hey there, this is Prithwiraj. I'm currently pursuing my MBA from IISWBM, Kolkata and just wanted to try out my hands on some rudimentary blogging. The main objective of creating such a page (or a blog) at the start of 2019 is mainly to keep a log of the books that I've been reading and right short-notes or reviews on them.

So if you are also interested in reading books or have some recommendations to give, feel free to go through my posts and connect with me.

Thanks!

The Three Books I would recommend everyone to read (3 must read books - fiction)

Your life as a fiction-reader would be incomplete if you do not read some seminal books/ book-series in your lifetime. The Harry Potter series, the Lord of The Rings or A song of Ice and Fire Series are to name a few. There is a plethora of such books available in the world today and the Lists featuring 'must read books before you die' vary with taste and people. Some great books are coming still ('Less' by Andrew Sean Greer is one such book fiction-readers should give a try).

In the following post, I will be concentrating on three stand-alone novels (fiction) which according to me you have GOT TO read before you die:

1. Gone With The Wind (by Margaret Mitchell):

Margaret Mitchell wrote only one book in her life and it was the Gone With The Wind. Now, I request you to not judge this book by its cover as you may form an impression that this book is also about a damsel in distress and her saviour knight in shining armor: a clichéd love story you badly want to avoid (hopefully), but (un)fortunately, Gone With The Wind stays as far from the typical Romeo-Julietesque love story as possible; Set against the backdrop of the American Civil War, Gone With The Wind tells you a story of the intricacies of human lives, interpersonal relationships, the moral values and character of common people like you and I, all of which are put to test at the time of mortal danger and desperation. The book also tells a compelling story about the sacrifices people can make for their homeland. Having leading female characters in the history of English Literature such as Scarlett O'Hara, Melanie Hamilton, Scarlett's mammy, Gone With The Wind shows the immense mental strength women have at their disposal and how women actively act as the spine of any functional, healthy society. The book won the Pulitzer Prize in 1937 and the 1939 movie adaptation starring Clark Gable and Vivien Leigh won the Best Picture award at The Oscars (12th Academy Awards), all of these only indicate the immensity of Margaret Mitchell's work. Published in the year 1936, Gone With The Wind is a once in a lifetime 'experience' and if you are not familiar with Scarlett O'Hara's flare, Rhett Butler's charm or Melanie Hamilton's kindness I request you to buy or borrow a copy of this cult-classic right now and start your journey!

2. The Murder of Roger Ackroyd (by Agatha Christie): 

A must read if you love reading detective novels and murder-mysteries (I'm guessing most of us do). Its a well-known fact that with her 85 books and 2 billion+ sales worldwide, Agatha Christie is the best-selling author of all time (outsold only by the Bible and Shakespeare) and Murder of Roger Ackroyd is one of her finest works. Truth be told, Murder of Roger Ackroyd is one of the most 'intelligent' books I had ever read. I can guarantee that you won't be able to predict the identity of the murderer until the last chapter; at the very last pages of the book the whole plot becomes crystal clear, everything falls in its place and every page of the book starts making sense. I can also guarantee that after you finish reading the book for the very first time, you'd be in an absolute state of shock, awe and disbelief (same thing happened with me). The Murder of Roger Ackroyd is an exceptional book from the Queen of Crime which you can't afford to miss out on.

3. The Godfather (by Mario Puzo):

The Godfather by Mario Puzo is my third and final recommendation of a fiction you should read before you knock on heaven's door. You probably have watched the movies already, so you already know what its about (in case you haven’t watched the movies, let me tell you that it mostly tells a story about the organised crimes during the Mafia era in the United States and the fierce rivalry between the Mafia families). Do read the book if you haven't still as there's so much more to it than the movies. Grab a copy of The Godfather right now and don't miss out on the opportunity to put on the shoes of Don Corleone and experience the once-in-a-lifetime journey through the infamous Mafia era.

Have you read any of these books? What's your pick on the top 3 books one must read? Please leave a comment and let me know!