USEFUL FOR THE FOLLOWING:

INDIAN ECONOMIC SERVICE

UGC NET ECONOMICS JRF/ASSISTANT PROFESSOR

UPSC & SPPSC- ECONOMICS OPTIONAL

POST GRADUATION (ECONOMICS) ENTRANCE EXAMINATION FOR JNU, HCU, MSE, IGIDR, ISI DELHI, ISI KOLKATA, SNU, GIPE ETC.

BY: RAVENDRA KUMAR

FORMER ASSISTANT MANAGER

MSQE - ISI, DELHI CENTRE

BA ECONOMICS (HONS)

UNIVERSITY OF DELHI

EMAIL ID: RAVENDRA.ISID19@GMAIL.COM

WEBSITE ADDRESS: FOLLOW MY BLOG

Environmental Economics1

1.Environmentally Sustainable development

2.Rio Process from 1992 to 2012

• Landmark gathering on environment and economic development
• Acknowledgement of EIA at global level.

To Study in this topic:

• 1: EIA is the main document come out of Rio 92 conference
• 2: Development in EIA in the later conferences.

• Transfer from economic to greener economy through EIA, SEA and other initiatives.
• In the final step discuss the details about the Gap in desired results and decision making
• It included the AGENDA 21 (blue print) to offer practical approaches at local and international level.
• EIA in Rio 92:

• Principle 17: EIA for activities that have potential to impact env. significantly through competent authority.
• Article 14 for CBD to minimize the impact of activities:

• Each contracting party needs to acknowledge and work for the same.

• AGENDA 21 asks to take climate change and its impact into consideration while making any decision.

• Rio documents are influenced by Ramsar Conventions(1971) and Bonn Convention on Migratory Species.
• It also inspired follow-up conventions, organizations and governments.
• Some flaws in Rio declarations:

• Concerns the global governance in atmosphere, oceans and poles except Antarctica.
• UNFCCC does not consider EIA as a tool to reduce greenhouse emissions.
• No conventions tackle the fundamental challenge put forward by Brundtland Commission (1987)

• Development of EIA 1992-2012

• Legally required in some countries or optional in other countries.
• Few countries adopted the new EIA and some updated their existing.
• Adopted by financial institutions World Bank (Pioneering it) and IFC launched guidelines for private in 2006 (updated in 2011)
• Emergence and consolidation of strategic environmental assessment (SEA) 
• SEA promoted and disseminated into the world through OECD and other development orgs.
• Important development occurred in public participation in SEA.

Industrial Economics

1.Market structure, conduct and performance of firms

• Key de­terminant of market structure is barrier to entry otherwise monopoly (fully concentrated ) to perfect competitive industry is the eventual.
• Two possibility of entry barriers: a) no significant barriers b) significant barriers
• Price taker, price maker, price searcher (oligopoly)

1.1Conduct of Market Structure

The firm’s conduct depends on four major aspects of market structure

(i) The number of buyers and sellers,

(ii) The existence and degree of barriers to entry,

(iii) The existence of economies of scale, and

(iv) The degree of product differentiation.

1.2Performance of Market Structure:

• Conduct, in its turn, determines performance or the degree to which certain ideal macroeconomic goals are attained i.e. consumer protection, profit maximization, social welfare maximization etc.
• Conduct ⇔ Market structure ⇔ Performance. Hence the relationship between these three is fairly complex and differs in theory and practicality.

1.3The Structure-Conduct- Performance (SCP) Paradigm:

• framework for the study of industrial organization

1.3.1 Structure and Pricing

• The policy implications of the paradigm are of great significance

For example if Equitable and Welfare state is desirable then

        i) monopolist will not be treated favourably

        ii) explicit or implicit (i.e., overt or covert) oligopolistic co-ordination or collusion may be re­garded as undesirable.

1.3.2 The SCPP presupposes the existence of a causal relationship from:

• Structure ⇔  Conduct => Performance
• The in­terrelationships are undoubtedly complex and dif­ficult to isolate

1.3.3 One Major Facet Relationship Between Profit And Concentration:

• Industries in which a few dominant firms account for a major portion of total output are often said to be concen­trated.
• Even high concentration=> Super-normal profit
• Hence this super-normal profit can be reduced if not eroded completely using structural change.

1.3.3.1 Two dimensions of concentration:

1. Aggregate Concentration: It refers “to the degree of control over economic activity exercised by the largest firms in the economy”

This definition im­plies at least two things:

i)Increasing control on the economy by large firms and

ii) A corresponding reduction in the role of the individual entrepren­eur

Possible conduct of a firm in this structure: 1) Harmony b/w firms and no change in price or 2) Increase concentration so become the price maker

2.  Market (Industry) Concentration: It is the degree of con­centration within an industry rather than in the aggregate economic system.

Measuring Market Concentration

• Most markets lie between the two extremes of perfect competition and monopoly.
• The measure of degree of monopoly power in an in­dustry is said to measure the degree of imperfection in a market.
• But in the in-between cases, how do we measure the degree of imperfection of the market?

Rough And Ready Measures:

• One type of measure of market concentration is obtained by calculating the percentage of the in­dustry’s size accounted for by the largest few firms. (bold terms are ambiguous in nature).
• Incomplete picture of the spread of market imperfection.

Summary Measures:

Gini Coefficient

1. If the cumulative percent of sales is plotted against the cumulative percent of firms we get a curve like the one shown in Figure 20.1. This curve is called the Lorenz curve.
2. The straight line OO’ is called the egalitarian line
3. The area ODEFGHO’, called the area of concentration.
4. Calculation is the same as the Gini inequality measure.
5. Gini coefficient does not de­pend on the scales of measurement in this sense
6. The Gini coefficient varies between 0 and 1

Herfindahl-Hirschman Index (HHI)

• The Herfindahl-Hirschman Index (HHI) is a common measure of market concentration and is used to determine market competitiveness, often pre- and post-M&A transactions.
• A market with an HHI of less than 1,500 is considered to be a competitive marketplace, an HHI of 1,500 to 2,500 to be a moderately concentrated marketplace, and an HHI of 2,500 or greater to be a highly concentrated marketplace.
• It is calculated by squaring the market share of each firm competing in a market and then summing the resulting numbers. It can range from close to zero to 10,000. (Note it ranges 0 to 1 if we use only share not percentage of the firm n)

Limitations of indices:

• Issue of industrial growth and concentration: If one of the large firms in the industry increases its output while the other do not, there will be a rise- in the value of H indicating that there is greater concentration in the industry now. If keeping down the value of H is of overriding importance, the pol­icy implication would be that the firm in question must be prevented from increasing its output. This obviously clashes with the objective of industrial growth.)
• The concentration ratio ignores the im­pact of potential competition on the industry.

Lerner Index

 The Lerner Index of monopoly power = (P – MC)/P where P is the price, and MC is the marginal cost of producing the commodity.

• The index is based upon the degree to which price deviates from marginal cost.
• The greater the numerical value of the index, the greater the de­gree of monopoly power
• The Lerner Index as a measure of monopoly power or industrial con­centration requires the measurement of marginal cost which is a complex exercise.

1.4  Economies Of Scale In Market Structure:

• The shape of the long run average cost curve depends on economies and diseconomies of scale.
• At the early stages of the production process economies of scale are stronger than the diseconomies.

1.5  Barriers to Entry

• The existence of marginal firms (i.e., firms con­templating entering the industry) affect the pric­ing decisions of existing firms
• Joe S. Bain has pointed out that the existence of barriers to entry such as economies of scale, product differentiation or absolute cost-advantages is, therefore, a very important determinant of a firm’s potential compe­tition and thus of their pricing policies.
• Examples of absolute cost advantages are patents, control of sources of raw materials, goodwill, and access to cheaper sources of credit