What Are the Different Types of Microeconomic Policy?

Microeconomic policies refer to economic policies that affect the micro variables of the economy in order to achieve a certain economic goal. The objectives of microeconomic policies are to achieve equalization of income and efficient allocation of resources. Microeconomic policies mainly include income policies, that is, wagesprice policies, welfare and education policies such as public expenditure structure, interest rate structure policies, manpower policies, tax structure policies, credit policies, and so on. These policies can affect residents' income and economic efficiency. Different applications of each policy can sometimes increase the degree of income parity, but they must lose a certain degree of economic efficiency, and sometimes they can improve economic efficiency, but at the expense of a certain degree of income parity, or unilaterally increase or decrease the degree of income parity effectiveness. ^[1]

Microeconomic policy

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The analysis of general equilibrium theory and welfare economics show that under the conditions of perfect competition, society uses established resources to achieve Pareto optimality. However, if conditions for perfect competition are undermined, the market may fail. The main causes of market failure are monopolies, public goods, external economic effects, and incomplete information.

I. Monopoly

(1) Social costs of monopoly

Monopoly causes loss of social welfare

From the previous analysis, we can see that compared with the completely competitive market, in the monopolistic market, manufacturers produce less output and demand higher prices, and consumers are harmed. From a social perspective, if monopolistic manufacturers produce more output and demand lower prices, the situation of consumers will be improved, and social welfare will increase as a result. The problem is that monopoly enterprises generally do not do so. Damage to social welfare.

Other social costs of monopoly

In addition, monopoly may have other damages. For example, monopoly lacks the incentive to reduce costs and carry out technological innovation, so that it costs more for society to produce a given output.

Because monopolies can enable manufacturers to obtain more profits, in order to maintain this excess profit, monopolies often take various forms of measures to maintain monopoly. This includes lobbying governments to formulate policies that are better for themselves. This kind of activity for seeking extra profits is called rent-seeking behavior. Rent-seeking not only costs money, but also breeds government corruption.

As a result, economists have asserted that monopolies are inefficient and suggest that the government adopt anti-monopoly policies.

(2) Antitrust Policy and Law

For different monopoly governments, measures such as industry reorganization and punishment can be adopted separately or simultaneously, and these measures are often formulated according to antitrust laws.

Reorganization of the industry

If a monopoly industry is reorganized into an industry that contains many manufacturers, then competition between manufacturers can bring down the market price. The higher the degree of competition in the reorganized industry, the closer the market price is to competitive prices. The government's approach is to break down the original monopoly manufacturers or remove the barriers to entering the monopoly industry and provide preferential conditions for entering the manufacturers.

If an industry monopoly is formed by mergers of manufacturers in the industry or a company relies on a larger scale to set barriers to entry, then government power can be used to break down the monopoly manufacturers in the industry into several or fewer Manufacturers, for example, the recent Microsoft dismemberment case that swept the world, there were similar examples before. For example, before 1983, the United States Telephone and Telegraph Company was a monopoly manufacturer. It provided more than 95% of long-distance services and 85 In order to strengthen competition in this sector, the U.S. government forced American Telegraph and Telephone Company to sell the local telegraph and telephone company, reducing its size by 80%, thereby reducing the telecommunications market. The degree of monopoly has increased competition.

Generally speaking, the reorganization of monopoly industries does not immediately form a completely competitive market structure. Even small manufacturers formed after the big manufacturers are decomposed have a certain degree of market power. In order to cooperate with the introduction of competitive factors into the monopoly industry, so that newly joined companies operating in a monopoly industry can compete with the original manufacturers, the government must Manufacturers offer certain benefits to reduce barriers to entry.

Prevent and prevent monopoly behavior. First, if an industry does not have barriers to entry, then the average manufacturer will not obtain excess profits in the long run. Therefore, manufacturers that have achieved a monopoly position always try to set barriers to entry, or use unfair competition methods to crowd out competitors to maintain their market power. To this end, the government can use various punishment methods to stop.

The key to curbing monopoly behavior is to remove barriers to entry and encourage more manufacturers to compete.

The government can impose economic sanctions on manufacturers or individuals who do not implement antitrust regulations, including payment of compensation and fines to victims of monopoly acts.

Antitrust law

Antitrust law, also known as antitrust law, is an important legal means for the government to oppose monopoly and monopoly behavior. Many developed countries have antitrust laws.

(3) Regulation of the industry

Another alternative corrective measure adopted for monopolies is the regulation of monopolistic manufacturers. The control measures mainly include price control or dual control of prices and output, taxes or subsidies, and direct state operations.

The meaning of price controls

Assume that the government only implements price control on monopoly industries, that is, a regulated price or a ceiling price that is lower than the monopoly market price. The monopoly enterprise will obtain a certain amount of excess profit, but this profit amount is lower than the price determined by the monopolistic manufacturer. Excess profits are set by the government to be lower than the maximum price set by the manufacturer. An appropriate option is to determine the regulated price based on the principle that market demand is equal to the manufacturer's marginal cost.

Regulation of Natural Monopoly Industries

The so-called natural monopoly means that in the industry, economies of scale exist in a large output range, so that, relative to the range determined by market demand, as the output increases, the average cost of the manufacturer gradually decreases. This type of industry usually requires large capital equipment and a large number of fixed elements, such as city water companies, public telephone offices, etc. In such an industry, any production cost that is lower than the market demand is higher, which means that it is unrealistic to try to eliminate monopoly through competition, because when the production scale is smaller than the existing manufacturers, the manufacturers entering the industry are not It may compete with the original manufacturers. Conversely, if it competes, it will spend a larger amount of fixed inputs, which will cause excess production capacity.

The government's regulation of natural monopoly industries cannot be just price control. The alternative regulatory policy measures are to control both prices and the output of manufacturers. In theory, any combination of price and output on the market demand curve can be used as Government regulation of monopolistic manufacturers. But in practice, the government often sets prices at average cost, and manufacturers only get normal profits.

The reason for limiting output is because at this price, if manufacturers are allowed to make decisions on their own, it will determine output based on the principle that price equals marginal cost, so that output does not equal market demand.

The above analysis is also applicable to general monopoly industries.

Other regulatory measures on monopoly industries

In practice, the principle followed by government regulation is "give a fair reward for fair value." To achieve this principle, in conjunction with price and price and quantity controls, the government often adopts subsidies or taxation methods. Suffered losses due to price control or double price and quantity control, the government should give appropriate subsidies in order to allow the monopoly manufacturers to obtain normal profits. If the manufacturers can still obtain excess profits after government control, the government should collect certain special taxes To facilitate fair distribution.

For monopoly industries, the government can also adopt a direct operation to resolve market failures caused by monopoly. Since the purpose of government operation is not to maximize profits, the price can be determined according to marginal cost or average marginal cost in order to partially solve the problem due to monopoly. The resulting inefficiencies such as low output and high prices.

Public Goods

(I) Characteristics of public goods

Meaning of public goods

Public goods, as opposed to private goods, are goods for collective consumption.

Characteristics of public goods

1. Non-exclusive.

Non-competitive

Non-exclusive meaning

Exclusiveness means that after a consumer purchases and obtains the consumption right of a commodity, he can exclude other consumers from obtaining the benefits of the commodity. Private products are exclusive in use, such as: A purchases a piece of chocolate , He has the right to consume this piece of chocolate, and other people cannot consume the same piece of chocolate. Unlike chocolate, national defense protects us from aggression by foreign enemies. Obviously, we all enjoy the protection provided by national defense. We have not reduced your protection because I enjoy protection. Police beacon lights also have the same characteristics. They are all public goods.

The non-excludability of public goods makes the consumption power mechanism of public goods through market exchanges fail. For manufacturers, those who do not pay must be excluded from consumer goods; otherwise, it will be difficult for him to make up for production costs. For a consumer, the buying behavior in the market shows his preference for goods. Due to the non-exclusiveness of public goods, once public goods are produced, every consumer can obtain consumption rights without paying, and every consumer can "hitchhiker". This behavior of consumers means that manufacturers producing public goods are likely to not be able to offset the benefits of production costs. In the long term, manufacturers will not provide such goods, which shows that public goods are difficult to ask the market to provide.

Non-competitive meaning

Competitiveness refers to the increase in the production cost of goods caused by an increase in consumers or consumption. Most private products are competitive. For example, if one person eats one more chocolate, the producer must produce one more, and the production of one chocolate requires the manufacturer. A certain amount of cost, thereby reducing the resources used to produce other commodities, that is, forming competition for other production, but public goods are not competitive in consumption, such as radio, television, and beacon lights. They have the same characteristics The increase in the number of consumers does not have an impact on production costs. For example, adding some people to the radio and watching TV will affect the transmission cost of radio stations. As long as cars pass through bridges, they are not competitive as long as they are not crowded. Because the depreciation caused by a car to the bridge is small and close to zero.

The non-competitive characteristics of public goods indicate that although the exclusivity of some public goods can be easily discovered, such as setting up a toll booth at Qiaotou, this is not necessarily efficient. According to efficient conditions, manufacturers' pricing principles should be Is the price equal to the marginal cost. If the bridge is provided by the private sector, they will ask for a cost equal to the marginal cost. Since the marginal cost of each vehicle used by the manufacturer is close to zero, the price of the manufacturer should also be equal to zero. As a result, it is impossible for the private to supply these products .

(B) the optimal supply of public goods

All societies are facing the supply of public goods, and the supply of public goods is usually the responsibility of the government.

We already know that the optimal supply of private products is determined by the equilibrium of market demand and market supply. Similarly, the optimal supply of public products is determined by the demand and supply of the item. From the perspective of supply, manufacturing an A tank is not much different from a car, so the key to determining the optimal supply of public goods is demand.

The market demand for private products can be seen as the sum of the individual needs of all consumers, but the market demand for public goods cannot be summed up for all consumers at each price. For example, assuming that TV charges 0.1 yuan per hour Consumer A is willing to watch 8 hours a day, B is willing to watch 9 hours, and C is willing to watch 10 hours. Then, when the price is 0.1, the market demand is 27 hours a day, which has exceeded the total number of hours per day. It makes no sense to add up horizontally. The reason for this problem is that consumers consume the same amount of public goods at the same time at the same time. The non-exclusiveness and non-competitiveness of public goods make the horizontal sum up from a single consumer meaningless. The solution is to vertically add the prices that all consumers are willing to pay at this price level to get the price that the society is willing to pay for this given amount of public goods. This price constitutes the person who provides the public goods. Total revenue.

The supply curve of public goods is determined by the marginal cost of producing public goods. Compared with the benefits and costs, the optimal supply of public goods can be determined.

(Three) market failure

The characteristics of public goods make the above analysis conceptual at best, because since every consumer is economically rational and public goods are non-exclusive, every consumer will take advantage of this, as in rural areas. With cable TV installation, many farmers use closed-circuit televisions installed by neighbors to avoid prices by themselves, which will inevitably lead to free-riding behavior. This means that even a single consumer can accurately understand his preference for public goods and determine himself. The demand curve is also meaningless to the supplier, because the consumer will not reveal the relevant information. As a result, public goods fail the market.

External economic impact

(I) External economic impact

Meaning of external economic influence or externality

Externality refers to the non-market influence exerted by the economic activities of one economic unit on other economic units. Non-marketness refers to the fact that the costs or benefits generated by an activity are not reflected in market prices, but are imposed unconsciously on For others, externalities have positive externalities, and some are called external economies, which means that one economic entity has a positive influence on other economic entities and brings benefits to others for free. On the contrary, economic activities that generate negative external influences. (External diseconomy) negatively affects other economic units and imposes costs on others.

There are many examples of externalities. For example, a beekeeper and a farmer who planted fruit trees exerted a positive influence on each other. Their behavior is typical of the external economy. The farmer provides a bee source for the bees and improves bee production. Of the producer. At the same time, during the peak honey picking process, the pollination of fruit trees is accelerated, and the fruit yield is increased. Both parties unconsciously bring benefits to each other. An example of a company emitting pollution sources is a typical external diseconomy.

(B) the impact of external economic influences on efficiency

The effect of externality on economic efficiency is that it makes private behavior different from the quantity required by society, which can be explained by private costs and social costs.

Implications of private and social costs

Private cost refers to the cost that an economic unit needs to pay for an economic activity. The social cost of an economic activity refers to the cost that the entire society needs to pay for this activity, including the private cost of engaging in that economic activity plus The cost of an activity to other economic units. If an economic activity generates external diseconomy, the social cost is greater than the private cost. If an economic activity generates external economy, the social cost is less than the private cost.

The same analysis can be used for private and social benefits (benefits from the external economy)

Impact of external economic influence on the efficiency of resource allocation

In the presence of external diseconomy, the optimal output of private firms is greater than the socially optimal output. In the presence of external economies, the optimal output of private firms is less than the socially optimal output.

Therefore, no matter whether the influence of one economic unit on other economic units is positive or negative, the optimal output determined by private independent decision-making is inefficient.

(3) Policies to correct external economic impacts

The reason for the inefficiency of resource allocation due to externalities is due to the deviation between the costs used by the private sector for decision-making and the costs actually paid by society. Therefore, the guiding ideology for correcting externalities is to internalize external economic effects and provide policymakers with Motivation for measuring the externalities of its decisions. The main measures are taxation, subsidies, business mergers, and clear property rights.

Taxes and subsidies

One of the means for forcing manufacturers to consider external costs or external benefits is that the government adopts tax and subsidy policies, that is, to levy taxes that are exactly equal to the external marginal cost on the manufacturers that impose external diseconomy, and to give manufacturers that provide the external economy equal to external margins for revenue In order to make the private marginal cost of the manufacturer equal to the social marginal cost, it will induce the manufacturer to provide the optimal output.

However, the biggest problem encountered by this method is how to accurately measure the cost benefits of externalities in the form of currency, such as how much the social costs caused by environmental pollution, so sometimes the government only approximates these costs.

Business combination

Merging economic units that impose and accept external costs or benefits is the second means to resolve externalities. If the externalities are small in scope, such as a small restaurant polluting a laundry, the government will come forward, The washing machine was sold to this restaurant at a suitable price, and the external cost was internalized through the merger.

Clear property rights

The theory of property rights popular in the West puts forward the idea of marketization to solve the impact of externalities.

The contents of Coase's Theorem: As long as the property right is clear, the final effect is efficient no matter who the original property right is assigned to under the condition that the transaction cost is zero.

Example: Zhang San and Li Si live in the same dormitory. Zhang San likes to be quiet, but Li Si likes to listen to music. Although, Li Si's behavior causes Zhang San to be uneconomical. Option 1: Assumption that Zhang San endures, or Li Four do not listen to music, they are all intolerable, assuming a loss of 100 yuan. Option 2: Li Si buys headphones for 10 yuan. According to Coase's theorem, if the school stipulates that Zhang San has the right to enjoy quietness, he can report to the relevant school department and ask Li Si not to interfere with him. At this time, Li Si wants to be able to Continue to listen to music and had to buy headphones for 10 yuan.

Further, the initial rights provision is not critical to the final result. If the school stipulates that Li Si has the right to listen to music, then Zhang San will either endure or negotiate with Li Si if he cannot bear the noise, if Zhang San It is rational. He will choose to spend 10 yuan to buy a headset for Li Si.

The policy implication of Coase Theorem in solving external economic impact issues is that the government does not need to directly adjust external economic impacts. As long as the external costs or benefits of the parties are explicitly imposed and accepted, market negotiations can solve the problem.

The limitation is that the implicit conditions of Coase Theorem limit the application of Coase Theorem in practice. First, negotiation must be fair and cost-free (transaction cost = 0). Second, externalities can only affect a few parties involved. personal.