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  • 8/14/2019 Contact for All Other Solved Assignments of MB0022 to MB0035

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    Contact for all other solved assignments of MB0022 to MB0035 set 1

    and 2 to [email protected]

    Name G M Firoz Khan

    Roll No. 520931217

    Program MBA

    SubjectManagerial Economics

    [Set 2]

    Code MB 0026

    Learning

    Centre

    Systems Domain Indira Nagar,

    Bangalore [2779]

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    1.What is pricing policy? What are the internal and external factors ofthe policy?

    A detailed study of the market structure gives us information about the way inwhich prices are determined under different market conditions. However, inreality, a firm adopts different policies and methods to fix the price of its

    products. Pricing Policy refers to the policy of setting the price of theproduct or products and services by the management after taking intoaccount of various internal and external factors, forces and its ownbusiness objectives.

    Pricing policy basically depends on the price theory that is the corner stone ofeconomic theory. Pricing is considered as one of the basis and central problemsof economic theory in a modern economy. Fixing prices are the most importantaspects of managerial decision making because market price charged by thecompany affects the present and future production plans, pattern of

    distribution, nature of marketing etc. Above all the sales revenue and the profitration of the producer directly depend on the prices. Hence, a firm has tocharge the most appropriate price, which is neither too high not too low, woulddepend on a number of factors and focuses. There are no standard formulas orequations in economics to fix the best possible price for a product. The dynamicnature of the economy forces a firm to raise and reduce the pricescontinuously. Hence prices fluctuate over a period of time.

    Generally speaking, in economic theory, we take into account of only twoparties. i.e. Buyers and sellers while fixing the prices. However, in practice,there are many parties associated with pricing of a product. They are rivalcompetitors, potential rivals, middlemen, wholesalers, retailers, commissionagents and above all the government. Hence we should give due considerationto the influence exerted by these parties in the process of price determination.

    The various factors and forces that affect the price are divided into twocategories. They are as follows:

    a. External Factors(Outside factors):i. Demand, supply and their determinants.ii. Elasticity of demand and supply.iii. Degree of competition in the market.iv. Size of the market.v. Good will, name, fame and reputation of a firm in the market.vi. Trends in the market.vii. Purchasing power of the buyers.viii. Bargaining power of customers.ix. Buyer behavior in respect of particular product.x. Availability of substitutes and compliments.xi. Governments policy relating to various kinds of incentives,

    disincentives, controls and restrictions.xii. Regulations, licensing, taxation, export and import, foreign aid and

    foreign capital.

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    xiii. Foreign technology, MNCs etc.xiv. Competitors pricing policy.xv. Social considerationxvi. Bargaining power of consumers.

    b. Internal Factors(Inside Factors):i. Objectives of the firm.ii. Production costs.iii. Quality of the product and its characteristics.iv. Scale of production.v. Efficient management of resources.vi. Policy towards percentage of profits and dividend distribution.vii. Advertising and sales promotion policies.viii. Wage policy and sales turnover policy.ix. Stage of the product on the product life cycle.x.

    Use pattern of the product.xi. Extent of the distinctiveness of the product.

    xii. Extent of the product differentiation practices by the firm.xiii. Composition of the product and life of the firm.

    Thus, multiple factors and forces affect the pricing policy of a firm.

    2.Mention three crucial objectives of price policiesFirms have multiple objectives today. In spite of several objectives, the

    ultimate aim of every business is to maximise its profits. This is possible whenthe returns exceed costs. In this context, setting an ideal price for a productassumes greater importance. Pricing objectives has to be established by topmanagement to ensure not only that the companys profitability is adequate butalso that the pricing is complementary to the strategy of organisation. Whileformulating the pricing policy, a firm has to consider various economic, social,political and other factors.The following objectives are to be considered while fixing the prices of theproducts.a. Profit maximization in the short term:The primary objective of the firm is to maximise its profits. Pricing policy as aninstrument to achieve this objective should be formulated in such a way as tomaximise the sales revenue and profit. Maximum Profit refers to thehighest possible profit.In the short run, a firm, not only should be able torecover its total costs, but also should get excess revenue over costs. This willbuild the morale of the firm and instil the spirit of confidence in its operations.It may follow skimming price policy, i.e., charging a very high price when theproduct is launched to cater the needs of a few sections of people. It mayexploit wide opportunities in the beginning. But it may provide fatal in the longrun. It may lose its customers and business in the market. Alternatively, it mayadopt penetration pricing policy. i.e., charging a relatively lower price in thelatter stages in the long run so as to attract more customers and capture themarket.

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    b. Profit maximization in the long run:The traditional profit maximisation hypothesis may not prove beneficial in thelong run. With the sole motive of profit maximisation a firm may resort toseveral kinds of unethical practices like charging exorbitant prices, followMonopoly Trade Policy [MTP], Restrictive Trade Practices [RTP], Unfair Trade

    Practices [UTP] etc. This may lead to opposition from the people. In order toovercome these evils, a firm instead of profit maximisation, aims at profitoptimisation. Optimum Profit refers to the most ideal and desirableprofit. Hence, earning the most reasonable or optimum profit has become apart and parcel of a sound pricing policy.

    c. Price Stabilization:Price stabilization over a period of time is another objective. The prices as faras possible should not fluctuate too often. Price instability creates uncertainatmosphere in the business circles. Sales plan becomes difficult under such

    conditions. Hence, price stability is one of the important prerequisite conditionsfor steady and persistent growth of a firm. A stable price policy only can winthe confidence of customers and may add good will of the concern. It builds upthe reputation and image of the firm.

    3.Mention the bases of price discrimination.

    Price discrimination refers to the practices of a seller to charge different pricesfor different customers for the same commodity, produced under a singlecontrol without corresponding difference in cost. When a monopoly firms adoptsthis policy, it will become a discriminatory monopoly.The following are the bases of price discrimination: to charge different pricesfor different customers for the same commodity, produced under a singlecontrol without corresponding difference in cost. When a monopoly firms adoptsthis policy, it will become a discriminatory monopoly.The following are the bases of price discrimination:a. Personnel differences:

    This is nothing but charging different prices for the same commoditybecause of personnel differences arising out of ignorance and irrationality of

    consumers, preferences, prejudices and needs.b. Place:

    Markets may divide on the basis of entry barriers, for eg. Price of goods willbe high in the place where taxes are imposed and low where there are no orlow taxes.

    c. Different uses of the same commodity:When a particular commodity or service is meant for different purposesdifferent rates may be charged depending upon the nature of theconsumption. For example, different rates may be charged for theconsumption of electricity for lightning, heating and production purposes in

    industry and agriculture.d. Time:

    Special concessions or rebates may be given during festival seasons or

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    important occasions.e. Distance:

    Railway companies and other transporters, charge lower rates per kilometerif the distance is long and higher rates if the distance is short.

    f. Special orders:When the goods are made to order it is easy to charge different rates to

    different customers. In this case, particular consumer will not know the pricecharged by the firm for other customers.g. Nature of the product:

    Prices charged also depend on the nature of the products. For example,railways charge, higher for transporting coal, luxury items and less fortransporting, rice, wheat, and other life saving necessities.

    h. Quantity of purchase:When customers buy large quantities, discount will be allowed by the sellers.When small quantities are purchased, discount may not be offered.

    i. Geographical area:Business enterprise may charge different prices at the national andinternational markets. For example, dumping- charging lower pricein thecompetitive foreign market and higher price in the secure home market.

    j. Discrimination on the basis of income and wealth:A doctor may charge higher fees for rich patients and lower fees for poorpatients.

    k. Special classification of consumers:Transportation authority such as railway and road ways; show concessionsto students and daily travelers. Different charges for I class and II classtravelling, ordinary coach, air conditioned coaches, special rooms andordinary rooms in hotels etc.

    l. Age:Cinema houses in rural areas and transport authorities charge different ratesfor adults and children.

    m.Preference of brands:Certain goods will be sold under different brand names or trademarks inorder to attract customers. Different brands will be sold at different priceseven though there is not much difference in terms of costs.

    n. Social or professional status of buyer:A seller may charge more for those who occupy higher positions and havehigher social status; and less price for the common man on the street.

    o. Convenience of the buyer:If a customer is in hurry, higher price would be charged. Otherwise normalprice would be charged.

    p. Discrimination on the basis of sex:In selling certain goods producers ma discriminate between male and femalebuyers by charging low price for females.

    q. If price differences are minor, customer do not bother about suchdiscrimination.

    r. Peak season and off peak season service:Hotel and transport authorities charge different rates during peak season

    and off peak seasons.

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    4.What do you mean by fiscal policy? What are the instruments offiscal policy? Briefly comment on Indias fiscal policy.

    Fiscal policy is an important part of the overall economic policy of a nation. It isbeing increasingly used in modern times to achieve economic stability andgrowth throughout the world. Lord Keynes for the first time emphasised the

    significance of fiscal policy as an instrument of economic control. It exerts deepimpact on the level of economic activity of a nation.Meaning:The term fisc in English language means treasury and as such, policy relatedto treasury or government exchequer is known as fiscal policy. Fiscal policy is apackage of economic measures of the government regarding its publicexpenditure, public revenue, public debt or public borrowings. It concerns itselfwith the aggregate effects of government expenditure and taxation on income,production and employment. In short it refers to the budgetary policy of thegovernment.

    Instruments of fiscal policy:Public Revenue:It refers to the income or receipts of public authorities. It is classified into twoparts Tax-revenue and non-tax revenue. Taxes are the main source ofrevenue to a government. There are two types of taxes. They are direct taxeslike personal and corporate income tax, property tax and expenditure tax etcand indirect taxes like customs duties, excise duties, sales tax now called VATetc. Administrative revenues are the bi-products of administrate functions ofthe government. They include Fees, license fees, price of public goods andservices, fines, escheats, special assessment etc.Public expenditure policy:It refers to the expenditure incurred by the public authorities like central, stateand local governments. It is of two kinds, development or plan expenditure andnon-development or non-plan expenditure. Plan expenditure include income-generating projects like development of basic industries, generation ofelectricity, development of transport and communications, construction of damsetc Non-plan expenditure include defence expenditure, subsidies, interestpayments and debt servicing changes etc.

    Public debt or public borrowing policy:

    All loans taken by the government constitutes public debt. It refers to theborrowings made by the government to meet the ever-rising expenditure. It isof two types, internal borrowings and external borrowings.

    Deficit financing:It is an extraordinary technique of financing the deficits in the budgets. Itimplies printing of fresh and new currency notes by the government by runningdown the cash balances with the central bank. The amount of new moneyprinted by the government depends on the absorption capacity of the economy.Built in stabilizers or automatic stabilizers: [BIS]

    The automatic or built in stabilizers imply automatic changes in tax collectionsand transfer payments or public expenditure programmes so that it may reducedestabilizing effect on aggregate effective demand. When income expands,

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    automatic increase in taxes or reduction in transfer payments or governmentexpenditures will tend to moderate the rise in income. On the contrary, whenthe income declines, tax falls automatically and transfers and governmentexpenditure will rise and thus built in stabilisers cushions the fall in income.

    Fiscal tools:Subsidies, development rebates, tax reliefs, tax concessions, tax exemptions,and tax holidays, freight concessions, relief expenditures, debt reliefs, transferpayments, public works programmes etc. are some of the main tools of thefiscal policy.

    Keynes insisted that public finance should be adjusted to the changingconditions of the economy, to fight inflationary pressures and deflationarytendencies. The role of fiscal policy can be compared to the driving of a car.While driving up a gradient (i.e., stepping up production and productivity), what

    is needed is an increase in power (promotion of higher savings and investmentthrough fiscal measures).On the other hand, when it moves against thenational interest, it is necessary to control the supply of power (to combatinflationary and foreign exchange crisis through higher taxation) and also toapply brakes judiciously to ensure that the vehicle does not slip out of controlbut keeps on moving all the same. The national exchequer should see that thebrakes are not pressed so much as to bring the vehicle to a stop.

    In short, it is the function of public finance to make economy grow; maintain itin good health and to protect it from internal and external dangers.

    Indian Fiscal Policy:

    India faced a severe macroeconomic crisis in 1991. A series of economicreforms, implemented in response, have, arguably, supported higher growthand a more secure external payments situation. At times, structural reformsseem to have stalled, and little progress has been made in areas such as labormarket and bankruptcy reforms. Perhaps the most striking aspect of reform isthe lack of progress in restoring fiscal balance. A high fiscal deficit of around9.5% of GDP, widely perceived as unsustainable, contributed to the crisis of1991.

    Indias current fiscal situation is potentially grave, and could lead to aneconomic crisis (fiscal, monetary and/or external) with severe short-term lossesof output and even political turmoil, or, alternatively and more subtly, manyyears of continued underperformance of the economy.The prima facie solutionto the looming problem is obvious: control fiscal deficits. One complicatingfactor is the existence of off-budget items that are not accurately measured ormonitored. The uncertainty associated with these items makes formulatingbudgetary policies more challenging. Besides, fiscal policy obviously cannot beanalyzed in isolation. Monetary and exchange rate policies have to be

    considered in conjunction with it. Beyond projecting aggregate outcomes of(e.g., revenue, expenditure) Indias fiscal policy adjustment, there are issues ofdistributional impacts and hence of politics.

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    Table 1 summarizes the trends in Central and State fiscal deficits since 1990. Itshows that fiscal deficits began to rise in 1997-98 at both levels of government,though the rise was much greater at the State government level.

    Crisis resolution is almost always contentious as well as painful. For example,crises in Argentina and Indonesia have had very high economic and socialcosts. India, at least for the moment, does not appear to face an imminentcrisis, especially on the external front. Since crises very often arise fromadverse shifts in expectations or confidence than from deterioration in

    fundamentals, this favorable situation could change rapidly if there is anegative shock that affects confidence. Comparing the 2001-02 actual figureswith the Tenth Plan average targets (the first andlast rows in the below table) indicates that the goal is reduction of the Centraland State gross deficits by 1.2 and 1.3 percentage points respectively. The Planenvisages substantial cuts in revenue deficits as the avenue for achieving therequired fiscal deficit reductions. The Centers revenue deficit is supposed to bereduced from 4.2% of GDP in 2001-02 to an average of 2.9% the Plan period,while the corresponding figures for the States are 2.5%, and 1.3%(Government of India, 2003, Table 2.22).

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    Recently, various income transfer and social insurance schemes that reach intorural areas and the informal sector of the economy have been announced.While the objectives of such policies are laudable, they introduce yet additionaldemands on the budget, which will be difficult to reverse, as they become

    viewed as entitlements. Srinivasan (2002) and Rajaraman (2004) emphasizethat the Pay Commission award was not an exogenous shock, but one that waspredictable in the context of institutional and political economy considerations.Thus, one can argue that pay, pensions and social insurance are all areas inwhich there is virtually no uncertainty about their future costs so that thegovernment will have to do long term planning. While we have suggested thatthe broad outlines of technical solutions to Indias short run fiscal problems arewell understood, leaving only the political difficulties of implementation, in thecase of long-term budgetary commitments, there seems to be a need for anintegrated analysis of the various possibilities. For example, the last Pay

    Commission award was followed by increases in the pensions of those who hadalready retired while such ex post adjustments may again have laudablemotives, they represent a contingency that must be allowed for in projectingthe future liabilities of the government. The announcement in the interimbudget for 2004-05 of the merger of 50% of dearness allowance of civilservants into their basic salary is not a good signal.Even more broadly, Indias federal system needs to develop revenueassignments and authorities that match expenditure responsibilities moreclosely. This, in general, can be a positive step in controlling fiscal laxity. Wemay note here that in addition to altering the pattern of existing assignments,some long-run progress may also be made by redrawing the boundaries of thelarger States.In general, therefore, looking at the longer term and at broaderpublic welfare concerns can have three benefits. First, it allows for better intertemporal planning of public expenditures within and across categories. Second,it improves the pattern of near-term public expenditures toward spending thatreduces the chances of larger expenditures in the future. Third, it emphasizesthe need for a fiscal cushion or self-insurance to meet unavoidable expendituresshould they occur in the future.

    Indias fiscal situation requires immediate attention: high growth and lowinterest rates will not take care of the problem of long run sustainability of the

    debt, nor the risks of a crisis in the short or medium run. However, highreserves and a conservative monetary policy may not be sufficient insuranceagainst a crisis of confidence. There are theoretical reasons and previousempirical evidence of high domestic debt and deficits being associated withsuch a crisis. Furthermore, there are numerous potential sources of risk,including interest rate volatility, as well as exogenous shocks.One can simply state that there needs to be some short run fiscal adjustment,otherwise the probability of a crisis or collapse may soon increase dramatically.Furthermore, there are some obvious expenditure adjustments that can bemade, such as cutting or overhauling poorly designed subsidies, and at least

    improving the efficiency of government expenditures. There are also somesteps that can be taken to enhance revenues while simultaneously cutting

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    distortions in the tax system, including improving the efficiency of taxcollection.

    5.Comment on the consequences of environmentaldegradation on the economy of a community.

    Rapid industrialization has become one of the main objectives in recent years.Industrial development and economic development are used as synonymouswords today. Industrialization has brought several benefits to the man kind andaccelerated the process of economic development. At the same time, it hasposed several challenges to the entire world. Sustainable economicdevelopment has become the major goal in many countries of the world. Itdemands higher rates of economic growth with environmental preservation.Environmental degradation in the process of rapid growth has become the mainconcern in recent times. Global warming and damage to the ozone layer are thetalk of the day. There is great need for taking extra care to maintain ecological

    balance in the entire world. A healthy globe can emerge only with a healthyenvironment. Business has close relationships with natural environment andbusiness units have greater responsibilities in this direction. Maintenance ofreasonable ecological balance has become one of the pre-requisite conditionsfor any business to flourish.

    Environmental DegradationIn recent years, there has been very fast and quick economic growth in manycountries of the world. There is a visible change in the pattern of economicgrowth. In the name of quick economic development in a very short period of

    time, there is fast depletion of all kinds of resources and many types ofresources may be exhausted in the near future. There has been excessive andover-utilization of many resources. Shortsightedness in the developmentalpolicies has shifted the emphasis from future to the present welfare of thepeople. This has been responsible for environmental disorder, dislocation anddegradation. There is widespread air, water, soil and noise pollution on accountof rapid industrialization and growth in all modes of transportation. There isenvironmental decay and degeneration all round the world. The destruction ineco-system has dangerous and demoralizing effects on the economy.Degradation and destruction of resource-base is unpardonable. They have

    adverse effects on health, efficiency and quality of life of the people. Hence,there is cry for environmental protection in recent years. Unless concretemeasures are taken in right time, the man kind may have to pay a heavy pricein the near future. In this background, today economists are talking about theconcept of sustainable economic developmentSustainable economic development seeks to meet the needs and aspirations ofthe present without compromising the ability of future generations to meettheir own needs. It is felt that sustainable development can be achieved onlywhen the environment is protected, conserved, saved and improved consciouslyby the people in a country. The process of development will become sustainable

    only when the stock of various types of resources are maintained and furtherimproved. The various sources of resources, their quantities represent acommon heritage for all the generations. Hence, all out efforts are to be made

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    to augment these resources in several ways and means. There should beproper balance between the present and future use of resources. There shouldbe proper balance between short-run and long run interests. Hence, it has beensuggested that there should be some form of environmental accounting systemin the development policy measures.While estimating the national income of a country, under the new system of

    accounting, one has to take in to account of the total physical volume ofresources and their monetary value. The total depreciation charges include thewear and tear of capital assets, depletion of natural resources,, various kinds oflosses arising out of environmental decay and degradation etc. This will give usa new measure of environmentally adjusted national output.Environmental damages may be in the following categories. They areas follows.1. Water pollutionIt is one of the most important types of pollution that is taking a heavy toll inrecent years. The main water pollutants are disease-causing agents which

    include bacteria, viruses, protozoa and parasitic worms that enter water fromdomestic sewage and untreated human and animal wastes, oxygen-depletingwastes, inorganic plant nutrients, fertilizers, pesticides, water-soluble inorganicchemicals which includes acids, salts, and compounds of toxic metals such asmercury and lead, organic chemicals like oil, gasoline, plastic cleaning solvents,detergents and many other varieties of items. As industrial wastes are dumpedin to the rivers and lakes, water is contaminated and it cannot be used fordrinking purposes. It creates health hazards. The capacity of the water topreserve the aquatic life is becoming more and more difficult. Evenunderground water is polluted today on account of various reasons and iscreating innumerable problems. Billions of people are affected by watercontamination in the world.2. Air pollutionThe air may become polluted by natural causes such as volcanoes, whichrelease ash, dust, sulphur, and other gases or by forest fires that areoccasionally naturally caused by lightening. But there are five primarypollutants that together contribute to about 90% of the global air pollution.These are- carbon monoxide, sulfur oxides, nitrogen oxides, hydrocarbons andparticular. Human sufferings increase due to the air pollution. Respiratorydisorders and cancers are due to inhalation of polluted air. The vehiclesincrease the sulfur dioxide concentration in the air creating breathing problems

    for children and affect their neurological developments.3. Soil pollutionIt arises as a result of excessive use of fertilizers, soil erosion, Salinization andwater logging, dumping of garbage and other kinds of unused wastes.4. DeforestationForests protect environment in several ways. They provide a livelihood andcultural integrity for forest dwellers and a habitat for a wealth of plants andanimals. They protect and enrich soils, provide natural regulation of thehydrologic cycle, affect local and regional climate through evaporation,influence watershed flows of surface and ground water, and help to stabilize the

    global climate. Hence, they play a more useful role in preserving the ecologicaland environmental balance and in maintaining the biodiversity and ecosystems. However, in recent years, there is terrific deforestation due to reckless

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    industrialization and growth in urban areas which is responsible for severalproblems.5. Loss of biodiversityBiological diversity, a composite of genetic information, species and ecosystems, all provide material wealth in the form of food, medicine and inputs toindustrial processes. It supplies the raw material that may assist human

    communities to adapt to future and unforeseen environmental stresses.Furthermore, many people value sharing the earth with numerous other formsof life and want to bequeath this heritage to future generations. Loss ofbiodiversity jeopardizes all this benefits.6. Solid and hazardous wastesExcessive quantities of solid wastes generation, inadequate collection andunmanaged disposal etc present serious problems for human health andproductivity. Open dumping and uncontrolled land filling causes several types ofdiseases and contributes for the spread of diseases. Solid and hazardouswastes pollute ground water resources.

    Thus, several factors have contributed for environmental degradation.Business And Natural EnvironmentBusiness and environment are very closely related to each other. The nature,magnitude, composition and direction of business basically depends upon thetype of natural environment exists in a country. Business and environment hassymbiotic relationship with each other. They are inseparable in nature. Naturalenvironment includes land form, location aspects, topographical conditions,mountains, rivers, oceans, coast lines, forests, soil, weather and climaticconditions, natural endowments, flora and fauna etc. Natural environment isalso called as physical environment. Ecological factors which include bothrenewable and non-renewable resources would affect the type of economic andbusiness activities in a country. Geographical factors would decide the type ofgoods and services that may be produced most economically in a county.Natural hazards like floods, droughts, earth quakes, storms, heat and coldwaves and volcanic eruptions would decide the nature of business. Thus, allbusiness activities are guided and influenced by natural environment eitherdirectly or indirectly. Nature is a great storehouse of all kinds of materials whichare to be used by a business unit in the most economical and profitablemanner.Apart from it, the natural environment also provides certain physical andbiological conditions within which man lives, works and carry on his business.

    How best business units exploit and use these resources to maximize theirprofits and maximize social benefits is the question before any economy.Business units have to come out with such business plans which results inproper, better and full utilization of all kinds of resources in the most optimummanner leading to higher output, income and employment in the country withminimum costs. It is to be remembered that business activities should notcreate environmental pollution and degradation at any cost. This calls forgreater social responsibilities on them. They have to realize that only goodenvironment can bring good business. Social costs are to be considered whilemaking private profits and private profits should not come in the way of social

    benefits and welfare. Hence, proper balancing is required between the two. Ifsocial costs exceed private profits, in that case, government interference will

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    become inevitable and it will be justified in the overall interest of the entiresociety.Environmental Degradation And Market FailureWhile taking any decision, one has to weigh the impact of each one of them onanother. In a competitive market oriented economy, everything is left to thefree and automatic market mechanism.

    Internalizing externality occurs when an individual business unit takes externalcost or benefits in to account. In case there are external benefits, they can beinternalized or external costs may be borne by the business unit itself.However, a firm has to make cost-benefit analysis in its business operationsboth at the micro level and macro level. Externalities will not always result ininefficiency as a firm compares the benefits also. Some sort of governmentintervention is necessary to overcome the market failures associated withpollution and other externalities. The government may take several measuresto solve the problems arising out of negative externalities. The following

    measures deserve our attention in this direction.1. Government taxes and subsidiesa. If MSC > MPC of an activity, the government has to tax on producers.b. If MSC < MPC of an activity, the government has to subsidize producers.c. If MSB < MPB of an activity, the government has to tax on consumers.d. If MSB > MPB of an activity, the government has to subsidize consumers.Again, if the government wants to control pollution, in that case, it will collectpollution cost in the form of imposing taxes on business units. But it is to benoted that the entire pollution cost cannot be compensated by the firm.Industrial growth inevitably leads to the creation of negative externalities andthe society has to bear a part of the cost unavoidably. Hence, total eliminationof industrial pollution is not possible and industrial units cannot pay in the formof taxes to compensate the adverse effects of pollution. The tax amount is to becompared with loss to consumers and reduction in the quantity of output by thefirms.2. Direct government regulationsIn case of all kinds of pollution and other health and security externalities, thegovernment may introduce direct regulatory controls [social regulations] overthe externality by setting certain rules and regulations regarding pollution,which every industry should follow. Under the command and controlregulations, the government would simply order the firm to comply, giving

    detailed instructions on what pollution-control technology to use and where toapply etc. For example, installation of pollution control equipment in factoriesand disposing the chemical and industrial wastes in a specific way is directlyregulated by the government.3. Introduction of emission standardsAn emission standard is a legal limit on how much pollution a firm can emit. Ifthe firm exceeds the limit, it can face monetary and even criminal penalties.The standard prescribed by the government ensures that the firm producesefficiently. The firm meets the standard by installing pollution abatement orreducing equipment. The cost incurred by the firm to install the new equipment

    is included in its final market price and thus it internalizes the externalities.4. Prescribing emission fees

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    An emission fee is a charge levied on each unit of a firms emissions. Suchemission fees would require that firms pay a tax on their pollution equal to theamount of external damage it causes. If a firm is imposing external marginalcosts of Rs. 200-00 per ton on the surroundings, in that case, the appropriateemissions charge would be Rs. 200-00 per ton. This is another way ofinternalizing the externality by making the firm to include the social costs of its

    activities in total cost of production.5. Introduction of transferable emissions permitsUnder this system, each firm must have a permit to generate emissions. Eachpermit specifies exactly how much the firm is allowed to emit. Any firm thatgenerates emissions that are not allowed by permit is subject to substantialmonetary sanctions. Permits are allocated among firms, with the number ofpermits chosen to achieve the desired maximum level of emissions. Thepermits are marketable-they can be bought and sold.6. Introduction of Liability rulesInstead of direct government regulations, a government may come out with the

    introduction of liability rules or laws. Under this approach, the legal systemmakes the generators of externalities legally liable for any damages caused toother persons. In effect, by imposing an appropriate liability system, theexternality is internalized.7. Defining property rightsDefining individual property rights to some extent solve the problem ofexternalities. Property rights are the legal rules that describe what people orfirms may do with their property. When people have property rights to land forexample, they may build on it or sell it or protect it from interference by others.A factory constructed near a lake starts throwing wastes and toxic chemicals inthe river. This leads to water pollution as people have an attitude that lake isnobodys property and convenient to dump the wastes and garbage. Cleaning ofsuch a polluted lake either by a private institution or the government involves afree-rider problem if no one owns the lake. The benefits of a clean lake areenjoyed by many people and no one can be charged for these benefits.However, if the same lake is owned by a person or institution, they can chargehigher prices to fishermen, boaters, recreation users and others who benefitfrom the lakeGlobal environmental threatsRapid industrialization, urbanization and economic growth have createdinnumerable global environmental problems in recent years. They have posed

    severe threats to the very survival of the mankind. Some of the importantthreats are as follows- change in climate, global warming, acid rain, ozone layerdepletion, nuclear accidents and holocaust etc. Let us study them in somedetail.1. Climate changeClimate is the average weather conditions of a place for a fairly long period oftime covering a number of years. Climate change is a shift in the averageweather that a given region experiences. This is measured by changes in all thefeatures one can associate with weather, such as temperature, wind patterns,precipitation and storms etc. Global climate change implies changes that occur

    in global climatic conditions. Climate change is a normal process.

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    It may reduce the availability of clean drinking water, contaminate water,damage sewage systems, spread infectious diseases, increase in pests andplant animal diseases, reduce food production, create starvation andmalnutrition etc. Food and water shortages may lead to conflicts leading todisplacement of a large number of people. Changes in climate may also affectthe distribution of vector species like mosquitoes which in turn will increase the

    spread of diseases like malaria and filariasis and spread to new areas. Thus,climatic change may have serious impacts on human health. It may alsoincrease various current health problems and also bring new and unexpectedones.2. Global warming or green house effect.Global warming means an increase in the average temperature of theatmosphere, oceans, and landmasses of Earth. The average temperature hasbeen increasing in many regions in recent decades. The average temperature ofEarth is about 15 oC. Over the last century, this average has risen by about 0.6Celsius degrees. Scientists are of the opinion that it may increase to 1.4 to 5.8

    Celsius degrees by the year 2100. This warming will be greatest over landareas and at high latitudes. The main causes for global warming are as follows-burning of fossil fuels such as coal, oil, gas which releases into the atmospherecarbon dioxide and other substances known as greenhouse gases. As theatmosphere becomes richer in these gases, it becomes a better insulator,retaining more of the heat provided to the planet by the sun.The word Green House Effect was first coined by J. Fourier in the year 1827.Greenhouse is constructed for plants mainly in the cold countries where totalinsolation at least during winter season is not sufficient enough to support plantgrowth. The glasses of greenhouses are such that they allow the visible sunlightto enter but prevent the long wave infra red rays to go out. The greenhouseeffect on earth means progressive warming-up of the earths surface due to theblanketting effect of man-made carbon dioxide in the atmosphere. In short, thetrapping of heat from the sun by certain pollutant gases like carbon dioxide,chlorofluoro carbons, nitrous oxide, methane etc in the atmosphere, leading torise in the earths mean temperature, is known as greenhouse effect. Carbon-dioxide is a natural constituent of the atmosphere but its concentration isincreasing in that air at an alarming rate. It is released by combustion of fossilfuels. About half of the CO2 emitted stays in the atmosphere and the other halfof it is removed by the oceans and the plants. When there is an increase ingreenhouse gases, it causes warming up of the earth. The greenhouse effect is

    also known as global warming.

    Adverse effects of global warming1. It causes climatic changes. Extreme weather conditions like floods anddroughts are likely to occur more frequently.2. It results in melting of ice and glaciers leading to rise in sea levels andflooding of coastal areas.3. Small islands may even disappear due to submergence.4. It leads to a change in crop pattern.5. It creates adverse effects on eco systems biodiversity.

    6. It results in changes in hydrological cycle and storms will be morefrequent and intense.3. Acid rain

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    The term acid rain was first coined by Robert Angus in 1872. When fossil fuelssuch as coal, oil and natural gas are burned, chemicals like sulfur dioxide andnitrogen oxides are produced. These chemicals react with water and otherchemicals in the air to form sulfuric acid, nitric acid, and other harmfulpollutants like sulfates and nitrates. These acid pollutants spread upwards intothe atmosphere, and are carried by air currents, to finally return to the ground

    in the form of acid rain, fog or snow. The corrosive nature of acid rain causesmany forms of environmental damage. Acid pollutants also occur as dryparticles and gases, which when washed from the ground by rain, add to theacids in the rain to form an even more corrosive solution. This is called as aciddeposition.

    Adverse effects of acid rain1. Have ill-effects on vegetation.2. Have ill-effects on soils and crop productivity.3. Have effects on monuments statues and buildings.

    4. Have adverse effects due to acidification of lakes and streams andacquatic life

    4. Ozone layer depletionOzone is formed by the action of sunlight on oxygen. Ozone in the upperatmosphere however, is vital to all forms of life as it protects the earth from thesuns harmful UV radiation. Ozone layer is a thin band in the ozonosphere whichblocks out suns ultra violet rays [ie, screens out sun's harmful ultra radiation]and protects life on earth from the harmful ultraviolet radiation from the sun.In the ozonosphere, small amounts of ozone are constantly being formed bythe action of sunlight or oxygen. At the same time, ozone is being broken downby natural processes. Normally, the total amount of ozone usually staysconstant, because its formation and destruction occur at about the same rate.But unfortunately, human activities have recently changed the natural balance.Some manufactured substances, such as chlorofluoro carbons,hydrochlorofluoro and hydrochloric carbons, which are used in refrigerators, airconditioners, solvents, hospital sterilizations etc, enter ozonosphere anddestroy ozone much faster than it is formed. The result is ozone depletion.

    Adverse effects of ozone depletion1. More ultra violet radiations are harmful to the life system on the earth

    and natural vegetation.2. Create adverse effects of productivity and crop yield3. Create adverse effects on animal life and cause damage to wild life andmarine life.4. Create adverse effects on human health. It is responsible for sunburn,skin cancer, blindness etc.

    5. Nuclear accidents and holocaust.

    Nuclear accidents refer to accidents resulting from nuclear devices and radio-

    active materials. It also includes accidents resulting from the release ofradioactive contamination. One can recollect a few nuclear accidents in someparts of the world.

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    The Chernobyl disaster is the most serious one. This accident occurred ion 26thApril, 1986 at the Chernobyl reactor near Kiev, the capital of Ukraine. Thisaccident occurred 3whenan explosion and fire took place at the nuclear reactor.The core fires allowed a continuous release of activity which was slowlyreduced. Again a second release of activity occurred on 5th may 1986. Nearly31 people were killed, 200 people were diagnosed as suffering from acute

    radiation effect. About 1 35,000 people and a large number of animals wereevacuated from a 30Km radius surrounding the plant

    Nuclear holocaust refers to whole sale destruction caused by fully burnt nuclearweapons or bombs.The best examples of nuclear holocausts are the dropping of atom bombs byAmerican army on Hiroshima and Nagasaki cities in Japan during the II worldwar. On 6th august 1845, the nuclear bomb was dropped on the city ofHiroshima and on 9th August 1945, another bomb was dropped over theindustrial city of Nagasaki. It was estimated that as many as 1,40,000 people

    died in Hiroshima and about 74,000 people died in Nagasaki on account of thedropping of the bombs. The incidence is in the green memory of the entireworld.Another serious threat is emerging in many countries on account of usingmobile phones while driving the vehicles. It has created problems not only forthe person who drive the vehicle but also for other people who drive theirvehicles on the roads and pedestrians.Yet another major threat is from international terrorism which has taken aheavy toll in the entire world.

    6.Write a note onStagflationPhilip Curve

    Stagflation

    The present day inflation is the best explanation for stagflation in the wholeworld. It is inflation accompanied by stagnation on the development front in aneconomy. Instead of leading to full employment, inflation has resulted in un-employment in most of the countries of the world. It is a global phenomenontoday. Both developed and developing countries are not free from its clutches.Stagflation is a portmanteau term in macro economics used to describea period with a high rate of inflation combined with unemployment andeconomic recession. Inflationary gap occurs when aggregate demandexceeds the available supply and deflationary gap occurs when aggregatedemand is less than the aggregate supply. These are two opposite situations.For instance, when inflation goes unchecked for some time, and prices reachvery high level, aggregate demand contracts and a slump follows. Privateinvestment is discouraged. Inflationary and deflationary pressures exist

    simultaneously. The existence of an economic recession at the height ofinflation is called stagflation.

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    The effects of rising inflation and unemployment are especially hard tocounteract for the government and the central bank. If monetary and fiscalmeasures are adopted to redress one problem, the other gets aggravated. Say,if a cheap money policy and public works program are adopted to remedyunemployment inflation gets aggravated. On the other hand, if a dear moneypolicy and stringent fiscal measures are followed unemployment will get

    aggravated. It is the most difficult type of inflation that the world is facingtoday. Keynesian remedial measures have not succeeded in containing inflationbut actually have aggravated un-employment. Thus, the world stands todaybetween the devil (inflation) and deep sea (unemployment).

    Phillips CurveA.W.Phillips the British economist was the first to identify the inverserelationship between the rate of unemployment and the rate of increase inmoney wages. Phillips in his empirical study found that when unemploymentwas high, the rate of increase in money wage rates was low; and when

    unemployment was low, the rate of increase in money wage rates was high.Phillips calls it as the trade-off between unemployment and money wages. Thisis illustrated in the figure below.

    In the figure the horizontal axis represents the rate of unemployment and thevertical axis represents the rate of money wages. In the figure PC represents

    the Phillips curve; PC is sloping downwards and is convex to the origin of thetwo axes and cuts the horizontal axis. The convexity of PC shows that moneywages fall with increase in the rate of unemployment or conversely moneywages rise with decrease in the rate of unemployment.This inverse relationship between money wage rates and unemployment isbased on the nature of business activity. During the period of rising businessactivity wage rate is high and the rate of unemployment is low and duringperiods of declining business activity wage rate is low and the rate ofunemployment is high.Paul Samuelson and Robert Solow extended the Phillips curve analysis to therelationship between the rate of change in prices and the rate of unemploymentand concluded that there is a trade-off between the level of unemployment in acountry and the rate of inflation.

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    We can use the same figure to illustrate this concept, instead of money wageswe show rise in the price level on the OY axis. It will be clear from the abovefigure, that the higher the rate of inflation, the lower is the rate ofunemployment in the country; and lower the rate of inflation, the higher the

    rate of unemployment in the country i.e., one can be achieved at the cost ofthe other. Phillips curve analysis can be a guide to the government in striking abalance between the measures to be adopted to solve the problem ofunemployment and inflation.