Price and quantity regulation

1
Price and quantity regulation

• Overview
• The egg police and the wool mountain
• Taxi regulation
• The professions

2
Price regulation

• Maximum price regulations (eg. Rent control,
  telecommunications, proposals for petrol, PSA
  controls)
• Minimum price regulations (eg. Agricultural price
  support schemes)
• These differ depending on the governments buying
  policy
• Either ignore any surplus or buy and store (or
  destroy) the surplus

3
Statutory marketing authorities

• Examples
• Banana industry committee, Dried fruit board,
  State dairy authorities (or milk and egg boards),
  Rice marketing board, Tomato industry development
  committee, Queensland sugar corporation, Chicken
  meat committees.
• Practices
• Control production, compulsory acquisition, fix
  prices, monopoly marketing.
• Queensland sugar corporation
• Victorian eggs

4
Price floor the chicken police
The government sets the price floor but does not
buy excess Notes Q potentially supplied Q
demanded excess supply Need to control quantity
chicken police Consumers lose B E Producers
gain B F DWL E F B about 23m 1987-88
5
Price floor - the wool stockpile

• The price support for wool began in 1973
• It was initially conservative and intended to
  stabilise prices
• From mid-1980s on the price paid by the wool
  corporation rose while world demand fell
• Abolished in 1991 owing federal government 3b
• Stockpile of 4.75m bales (about one years
  production)
• Price dropped from about 9 per kg in 1991 under
  support to about 4 per kg in 1993
• Production fell from 1100m kg in 1990-91 to 700 m
  kg in 2000

6
Price floor the wool stockpile
The government buys the excess and stores it or
wastes it Notes Consumers lose B E Producers
gain B E G Government pays E F G H I
DWL (E F ) (H I )
7
The hangover selling the surplus wool
Stockpile sold until 2001 Harms wool growers by
lowering price and crowding out
production Overall growers lose because the
scheme leads to high cost production in 1980s
then reduces low cost production in 1990s
8
Lessons from price regulation

• Helps profits in short-term
• If government does not buy, need licenses or
  production quotas (if do not get these, you lose
  out so need to be an insider)
• If government does buy get out before the
  scheme collapses!

9
Taxi regulation - background

• Origins
• 1848 the Melbourne City Council first began to
  regulate coaches and cabs - copying earlier
  English laws
• Regulations dealt with quality, insurance,
  drivers, ranks and maximum fares
• 1911 applied same price regulations to motorised
  cabs
• Yellow cabs successful start up in 1924
• 1932 licensing
• 1937 minimum price laws to protect public

10
State-of-play

• Still have both entry and price regulation
• Limited peak and off-peak pricing
• Plate values - 259,100 in 1997
• Plates have been an excellent investment in late
  1990s
• Most current plate owners bought them not
  issued them
• Most drivers do not own plates (and get very low
  pay)
• Some small increase in plate numbers usually
  for modified vehicles
• NCP reviews

11
The simple economics of taxis
Notes License price B C any fixed
costs DWL approximately (I H) (G E
F) Small changes to regulated price do not alter
DWL What if remove license restrictions but keep
price regulation? If full reform and allow free
entry then value of license goes to zero
12
Why regulate taxis?

• Uncertain quality of car and driver
• Price gouging of captive customers
• Competition does not work consumers cannot
  respond to higher or lower prices (importance of
  search costs)

13
How to deregulate?

• Have licensed companies and drivers, but allow
  any company with minimum number of taxis to
  enter.
• Companies set and register rates. Have advertised
  prices on taxis and company ranks.
• Mobile phones have reduced problems rise in
  called taxis relative to rank and hail taxis.
• Benefits of reduced price and differentiated
  product, reduced waiting times at peak periods
  for customers and flexible supply
• But drivers and compensation

14
The NT scheme buy back licenses and tax taxis
to pay for the buy back
Notes B total present value of licenses So if
put tax on to raise B, need to have price pushed
up to the original regulated price, so no
gain! Where is gain discount rate and
uncertainty, innovation and product
differentiation
15
The professions

• Arguments for regulation
• Guarantee quality
• Protect consumers from shoddy or fly by night
  operators
• Prevents abuse of asymmetric information due to
  professional ethics
• Real effect is to create a barrier that usually
  effects new but not existing entrants.

16
The economics of professions
Notes Restriction raises producers surplus by B
- F But if any qualified individual can practice,
total cost of qualification will be B C in
long run So DWL is (E F) and unnecessary
training costs (up to B C) Training is a sunk
cost, so licensed practitioners want to retain
barrier
17
Lessons

• Introducing restrictions to markets is easy
  getting rid of them is hard.
• Restrictions may help incumbents in the
  short-term. But in the long term, the gains
  either become fees or part of deadweight loss
• In Australia, the Hilmer reforms have changed the
  rules for many associations and for cooperative
  arrangements that were previously exempt from the
  Trade Practices Act