Chapter 2 UNIT III

Government Interventions to correct Market Failure

Dr. Neelam Tandon

Efficient Market Functioning Government Intervention

Physical Infrastructure: Roads, Flyover, Bridges

Institutional Infrastructure: Legal / Regulatory

RULE OF LAW

RBI, SEBI , Company’s Act 2013 , GST , IBC 2016,

Consumer Protection Act , Motor Vehicle Act

,Competition Act 2002

Forms of Government Intervention

Market Power restricts to lower level of output and leads to dead-

weight loss.

Government imposes rules and regulations to overcome market

power inefficiencies

Competition Act 2017 Amended (2002)

Competition Act UK 1998

The Antitrust Law in the US

Other measures include

Market Liberalization to promote competition

Control mergers and acquisitions

Price capping

Profit capping on Rate of Return Regulation

Performance Target and standards

Consumer Protection

Check of collusion and predatory pricing

Control on Import

Nationalization

Market Power

Patent and Copyright leads to innovation

Natural Monopoly outcome of lowest marginal cost

Objective is to Maximize Social Returns and Minimize Social Cost to

maximize welfare of the society

Internalize social and social benefit

Or it will lead to Over production in case of negative

externalities / under production in case of positive

externalities

How Government Controls Negative Externality

Direct Control: Prohibit or Put limit to negative externalities

Pollution control devices, licensing, quota, Production /use and sale of

certain commodities is prohibited

Emission Standards, Control devices, tax on emission

Tax increases private cost

Pay Tax or reduce pollution

Negative Production Externality:

AA1 is corrective tax= Negative Production Externality

Indirect Control

Pollution Emission Cap /Tradable Permits/ Cap and Trade /

Perform Achieve and Trade (PAT)

June 2019

The Indian state of Gujarat has launched the world’s first emissions

trading system for particulate pollution, in collaboration with

researchers from Harvard Kennedy School, Yale, the Energy Policy

Institute at the University of Chicago (EPIC), and The Abdul Latif

Jameel Poverty Action Lab (J-PAL). The launch took place on World

Environment Day, June 5, at an event was hosted by the Chief

Minister of Gujarat State, Shri Vijay Rupani, and attended by over

3000 people from industry, academia, and the government.

The pilot trading program is a market-based system where the

government sets a cap on emissions and allows industries to buy and

sell permits to stay below the cap, similar to the policy that

successfully reduced the effects of acid rain in the United States in the

1990s. It is being initiated in the city of Surat, a densely populated

industrial center where textile and dye mills release a significant

amount of air pollution. As the first market-based approach to

regulating pollution emissions in India, it is expected to reduce air

pollution at a low cost to both government and industry and provide

best practices for replicating trading schemes for other emissions.

The Emissions Trading Program builds on another early innovation by

the GPCB, the use of continuous emissions monitoring systems to

track industry emissions in real time basis.

About 350 industries around Surat have installed continuous

emissions monitoring systems and now transmit real-time, high-

quality emissions data. The new scheme takes advantage of this

technology’s modern, transparent approach to monitoring.

Of the program, Nicholas Ryan, team member and Assistant Professor

of Economics at Yale, says: Gujarat’s adoption of emissions trading

shows great leadership and innovation in environmental regulation. I

expect this model of local trading to address local environmental

concerns will be widely replicated.

Emissions trading can help bring down pollution at a reasonable cost,

so this kind of environmental regulation can succeed for regulated

plants and for the public.

Globally, cap-and-trade systems have been used to reduce other

forms of pollution, such as programs that have successfully reduced

sulfur dioxide (SO2) and nitrogen oxides (NOx) in the United States.

But the Gujarat program is the first in the world to regulate

particulate air pollution, which is considered the single greatest threat

to human health globally. Its effects on life expectancy exceed that of

devastating communicable diseases such as tuberculosis and

HIV/AIDS, behavioral killers like cigarette smoking, and even war,

according to the Air Quality Life Index (AQLI). The AQLI, produced by

EPIC, converts particulate air pollution into its impact on life

expectancy, and finds that it cuts global life expectancy short by about

2 years.

The history of cap-and-trade programs also reveals that by employing

market forces, they greatly reduce the costs that industries incur

complying with regulations. Such reductions in compliance costs

would facilitate the rapid growth that is the Government of India’s

focus.

Promote Positive Externality through Subsidies

Subsidy = External Benefit

Price Intervention : Non Market Pricing

Government intervention for correcting information

failure

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Equitable Distribution

Jal Shakti Abhiyan': Government launches water conservation

campaign

Beti Bachao Beti Padhao

This scheme started by the BJP-led NDA government in January 2015

aims at reducing the CSR (Child Sex Ratio), provide equal

opportunities for education. This is a joint initiative undertaken by the

Ministry of Women and Child Development, Ministry of Health and

Family Welfare and HRD Ministry. The scheme had an initial funding

of Rs 100 crore.

Sukanya Samridhhi Yojana

This scheme started by the government helps parents save for the girl

child's education and marriage from the beginning. The girl child

should be less than 10 when the account is opened. The account can

remain operational till the girl is 21. This small savings scheme can be

opened in post offices and designated private and public banks. It can

be opened as a savings account in the name of the baby girl with

parents or legal guardians as the joint account holders. The initial

investment can be as low as Rs 250 and go upto Rs 1, 50,000.

Government grants an interest rate of 8.5 per cent with a minimum

balance of Rs 1,000.

Market Power / Higher Price /Deadweight Loss/ Lower

Supply/ Cartel

Case Study of Cement Industry

Before The Competition Commission of India

Case No. 29/2010

Date of Order: 20.06.2012

Builders Association of India - through Shri O. P. Dua & Shri

Rahui Goel - Informant

Versus

1. Cement Manufacturers' Association - through Shri Askok Desai

& Others

2. Associated Cement Co. Ltd. - through Shri K. Venugai and

Ms. Pallavi Shroff

3. Gujarat Ambuja Cement Ltd. - through Shri Ramji Srinivas

& Ms. Anu Tiwari

4. Grasim Cement - through Shri Aski Chinoy & Shri

Pravin Parekh

S. Hltratech Cement Ltd. -through Shri Aski Chinoy & Shri

Pravin Parekh

6. Jaypee Cement -through Shri Parag Tripathi &

Shri G. R. Bhatia

7. The India Cements Ltd. - through Shri Harishankar

8. J.K Cements (JI< Group) - through Shri P. K. Bhalla

9. Century Textiles & Industries Ltd.(Century Cement)- Shri

Pramod Agarwala & Others

10. Madras Cement Ltd. - through Shri T. Srinivas

Murthy

11. Binani Cement Ltd. -through Shri Aditya Narain

&Shri R. Sudhinder

12.Lafarge India Pvt. Ltd. -through Shri A. Haskar &Shri

Samir Gandhi

Order under Section 27 of the Competition Act, 2002. The present

matter relates to an information filed under section 19 of the

Competition Act, 2002 (herein after referred to as the Act) on

26.07.2010 by Builders' Association of India (herein after referred to

as the informant) against the Cement Manufacturers' Association

(herein after referred to as the Opposite Party-1 or OP-1) and 11

other cement manufacturing companies (OP-2 to 12)

The OP-1 is an association of the cement manufacturers of India in

which both public and private sector cement units are members.

As per the informant, the total strength of the OP-1 as on March 31,

2009, comprising of most of the big cement manufacturer stands at 46

in number. They are the leading manufacturers, distributors and

sellers of cement in India.

They have divided the territory of India into five (5) zones so as to

enable themselves to control the supply and determine or fix

exorbitantly high price of cement by forming a cartel in contravention

of provisions of section 3 of the Act.

Due to their large market share of more than 57.3 percent in Indian

market, they are in a position to fix price and also curtail competition

by controlling the supply of cement in the market.

Despite having large capacities, the Opposite Parties with the sole

intention to control the supply, produce less cement and increase the

market price of the cement deliberately.

In addition to limiting production in order to create artificial scarcity,

the Opposite Parties through their concerted actions also resort to

the practice of restricting the supply of cement to the builders and

consumers, causing artificial increase in the price of cement,

irrespective of areas and regions and irrespective of availability of

cement or artificial scarcity thereof in the markets, the cement prices

have been increasing continuously. The acts of cement manufactures,

in the past as well as in the present, have an adverse effect on the

competition in the real estate sector and affect the interest of the

consumers at large.

The price of cement has been increased in all the five zones (North,

East, West, South and Central), in which they are operating, without

any direct link or correlation to increase in input costs in the

respective zones.

The construction and housing are the sole consumers of cement. The

growth in the construction sector decreased from 10.10% in 2007-08

to 7.25% in 2008-09 and was further projected at 6.5% for the year

2009-10. Similarly, the growth

In real estate sector came down from 8.52% in 200708 to 7.77% in

2008-09 and was projected at 8.10% in 2009-10 as per data published

by National Account of Statistics, 2009 and press reports for 2009-10.

Due to slowdown in the growth of construction and real estate

sectors, growth in cement sector witnessed a downward trend from

9.75% in 2006-07 to 8.13% in 2007-08 to 7.90% in 2008-09. As a

result of this slowdown, utilization of installed capacity also came

down to 85.55% in 2008-09 from 94% in 2006-08. The growth in

cement sector increased to 11.68% in the year 2009-10 due to revival

in housing segment of real estate sector from April 2009. In spite of

growth in production of cement, the utilization of installed capacity

got reduced to 82.46% in 2009-10.

In spite of slowdown as discussed above, the cement industry during

the year 2008 earned an Operating Profit Margin (OPM) of 26% on

turnover of Rs. 45,717 crore, the highest OPM amongst 16 major

industries save and except mining as reported by Capital Market,

dated November 2, 2009 the cement manufacturing units had

deliberately reduced their production and produced much less than

their installed capacity to create an artificial scarcity and raise the

prices to earn abnormal profits.

Despite various concessions and stimulus packages announced by the

government in the wake of financial crisis of 2008 in form of reduction

in excise duties, reduction in the price of coal, petrol and diesel,

instead of reducing the price as was anticipated and expected by the

government and consuming industries such as construction and real

estate, the cement industry through an agreement caused an

increase in the price per bag by Rs. 5/- between December, 2008 and

February, 2009. In addition, the cement manufacturers increased the

price from a minimum of Rs. 10/- to a maximum of Rs. 27/- per bag

between January-March 2009

It is clear that the cement industry despite increased demand and

increased capacity continuously utilized less of their capacity with the

intention and motive of increasing sale price of cement through prior

arrangement amongst themselves while wrongly defending the same

act of increase in price due to reduced demand.

Direct Control

New Motor Vehicle Act: Pollution Control

Number of vehicles turning up at pollution checking Centre’s across Delhi for

PUC (pollution under check) certificates has increased after the implementation

of the new Motor Vehicle Act. There has been a three-fold increase in the first

three days since the new rule came into force on September 1 2019.

Around 1.25 lakh vehicles turned up for pollution checks at around 950 centres

from September 1-3 and more than 84,000 'pollution under check' (PUC)

certificates were issued during the period.

Under the new Motor Act, the violation of PUC norm invites a penalty of Rs

10,000. Previously it was Rs 1,000 on the first violation and Rs 2,000 the second

time. The rule stated that PUC tests are mandatory in Delhi after every three

months.

It seems that the enhanced amount of penalty has instilled the fear of the law in

people. Earlier, they avoided the test even after expiry of the certificates as the

fine amount was less.

Previously, the number of vehicles turning up for PUC tests was around 10,000

to 12,000 per day, which has increased significantly to 35,000 to 40,000 vehicles

per day.

Computerized facilities for checking of pollution levels and issue of PUC

Certificates (to vehicles meeting emission standards) are available at many

petrol pumps/workshops. These authorised Pollution Checking Centres are

available across the country.

After the expiry period of one year from the date of first registration, every

motor vehicle is required to carry a valid PUC certificate and subsequently after

every six months.

By obtaining the PUC Certificate, as a law abiding citizen you are adhering to the

rules set by the Government of India through the Motor Vehicle Act, 1988. This

also avoids any possible penalties for not carrying the PUCC for your vehicle.

During the car or bike insurance renewal, the PUCC is one of the mandatory

documents to confirm and approve a renewal for your vehicle. The IRDAI has

made it compulsory for insurance companies to renew the vehicle insurance

upon producing the emission certificate.

The Commission of Air Quality Management on Tuesday stressed the

need to switching over of all industries in Delhi NCR to Piped Natural

Gas (PNG) while adding that the industrial sector is one of the major

contributors to air pollution here.

The Commission for Air Quality Management in NCR and Adjoining

Areas reviewed the progress of switching over of industries operating

in Delhi to PNG during a meeting, which was attended by

representatives of the city government, the Gas Authority of India

Limited (GAIL) and the Indraprastha Gas Limited (IGL).

According to the statement from the Ministry of Environment, Forest and

Climate Change, about 1,644 of industrial units spread across 50

industrial areas here had been identified to switch over to PNG. Though

a sizable number of industries are using PNG, the Commission stressed

the need to switch over to PNG by all identified industries in Delhi.

The IGL, Delhi Pollution Control Committee (DPCC) and the Delhi

government were also asked to work in close coordination with the

industrial units so as to target the completion of infrastructure work and

switch over to PNG by January 31, 2021.

DPCC was also directed to inspect and identify the industries using

unapproved fuels and to take stringent penal action in case of non-

compliance, the statement added.