Socio Economic Study of Planning

SOCIO ECONOMIC STUDY OF PLANNING
Module-5
 Market failures and need of government interventions and regulations.

 Growth and development indicators
 Measures of national income
 Defining development and under development
Girindra Narayan Konwar

M.Plan 1st sem.
MARKET FAILURES AND NEED OF GOVERNMENT INTERVENTIONS AND REGULATIONS
WHAT IS MARKET :
 Usually, Market means a place where buyer and seller meets together in order to carry on
transactions of goods and services. Market refers to an arrangement, whereby buyers and
sellers come in contact with each other directly or indirectly, to buy or sell goods.
 As an example In stock or share market, the buyer and seller can carry on their transactions
through internet. So internet, here forms an arrangement and such arrangement also is
included in the market.
MARKET FAILURE :
Efficient resource allocation is outcome of

1. Rational choices/decisions by economic agents.
2. Free and competitive market structure.
 Market failure occurs when the market fails to give efficient allocation of resources, due to
non- fulfillment of any of above conditions.
 Government can play a crucial role to improve the inefficient market outcomes.
CAUSES OF MARKET FAILURE
Nature of the Market Nature of goods
Imperfect market Public goods: Free Rider Problem

Monopoly Merit Goods
oligopoly Externality
Common Property Resources
Nature of Exchange Other causes
Asymmetric information Lack of Equity

Moral Hazard Atomistic decision making
Adverse selection Market indiscipline
IMPERFECT MARKETS:
 Monopoly leads to imbalance of power in market- monopolist restrict Quantity

supplied and increase prices in market to make super-profit.
 Oligopoly consists of few big firms/suppliers dominating the market. (Like petroleum
exporters) cartelization leads to monopoly behavior.
ASYMMETRIC INFORMATION
 Transactions where one party has access to more or better information than the
other and chooses not to share it with others.
 This creates an imbalance of power in market which can lead to market failures.
Two forms of market failure associated with information asymmetry are:
1.Moral hazard - Caused by hidden action and hidden characteristics.

E.g : Insurance industry: People tend to make irrational choices
2. Adverse Selection-Caused by hidden information.

Eg. when buyers and sellers have different information about the quality of good.
PUBLIC GOODS INVOLVE FREE RIDER PROBLEM
 A free rider is a person who enjoys the benefit of public good without paying for it.
 Merit goods are socially desirable and individual expenditure on it my be socially inadequate.
 An externality is defined as the uncompensated impact of one person’s actions on the well
being of another who is not involved in the activity.
 Depletion of a common resource by the action of individuals acting in their self interests may
lead to over exploitation of the resource.
NEED OF GOVERNMENT INTERVENTIONS AND REGULATIONS
 Direct provisioning of goods and services (public goods, merit goods).

 Legislations defining property rights and responsibilities.
 Tax collection and subsidization.
 Price control and regulation.
 Quality and quantity control, and regulation.
 For example, electricity and railways; setting product standardization like clean
air, worker safety.
 Incentive building and creating new markets where there are none.
GROWTH AND DEVELOPMENT INDICATORS
ECONOMIC GROWTH: A measure of the value of output of goods and services

within a time period
ECONOMIC DEVELOPMENT: A measure of the welfare of humans in a society
Basis Economic Development Economic Growth
Factors Development relates to growth of Growth relates to a gradual increase in

human capital indexes, a decrease one of the components of Gross
in inequality figures, and structural Domestic Product: consumption,
changes that improve the general government spending, investment, net
population's quality of life. exports.
Measurement: Qualitative .HDI (Human Quantitative.
Development Index), Increase in real GDP.
gender- related index
(GDI), Human poverty
index (HPI), infant
mortality, literacy rate etc.
Concept: Normative concept Narrower concept
than economic
development
GROWTH AND DEVELOPMENT INDICATORS:
 Per Capita Income

Per capita income or average income measures the average income earned per person in a given area
(city, region, country) in a given time period
 Gross Domestic Product (GDP)

Gross domestic product (GDP) is a monetary measure of the value of all final goods and services
produced in a period (quarterly or yearly). Also known as Nominal GDP.
 Gross National Product (GNP)

Gross national product (GNP) is the market value of all the products and services produced in one year
by labor and property supplied by the citizens of a country.
 Gross Domestic Income (GDI)

The sum of all income earned while producing goods and services within a nation's borders is called
Gross Domestic Income (GDI)
GDI = rental income + interest income + profits + wages + income tax

+ dividends.
The Human Development Index (HDI)

The Human Development Index (HDI) measures poverty using a combination of life expectancy, literacy,
and amount of education, along with the domestic purchasing power of GDP
Human Poverty Index
Measurement of absolute poverty of country.
 Gross National Income (GNI)
The gross national income (GNI) is the total domestic and foreign output claimed by residents of a
country, consisting of gross domestic product (GDP) plus incomes earned by foreign residents, minus
income earned in the domestic economy by nonresidents.
GNI = GDP + Net compensation receipts + Net property income receivable + Net taxes (minus subsidies).
 Inequality of wealth
Wealth inequality (also known as the wealth gap) refers to the unequal distribution of assets among
residents of a country.
 Inflation
Inflation is an increase in the general price level of goods and services in an economy over a period of
time.
 Unemployment
Unemployment occurs when people who are without work are actively seeking work.
MEASURES OF NATIONAL INCOME
National income measures the total value of goods and services produced within the economy over a
period of time
Some Measures of nation income are
Gross Domestic Product (GDP)

 GDP measures the value of output produced within the domestic boundaries of the country.
 GDP includes the output of the foreign owned firms with production plants located in the country.
Gross National product (GNP

 GNP is the market value of all goods and services produced by the residents of a particular
country.
 It includes the income of those residents earned by corporations owned overseas and from
working abroad.
 GNP = GDP + Net Factor Income from Abroad.
Net National Product (NNP)

NNP is defined as GNP minus Depreciation, i.e. NNP = GNP - Depreciation
DEFINING DEVELOPMENT AND UNDER DEVELOPMENT
DEVELOPMENT
 In economic terms, development has been understood as achieving sustainable rates of growth of
income par capita to enable the nation to expand its output faster than the population (Todaro and
Smith 2011).
 This definition fails to take into consideration problems of poverty, discrimination, unemployment
and income distribution; the assumption being that increased output or economic growth would
deal with these issues.
UNDER DEVELOPMENT
 The term underdevelopment refers to that state of an economy where levels of living of masses are
extremely low due to very low levels of per capita income resulting from low levels of productivity
and high growth rates of population.
Torado and Smith (2011) sum up development and underdevelopment using 3 key questions;
What has been happening to poverty?
What has been happening to unemployment?
What has been happening with inequality?
If one or more of these problems have been growing worse, especially if all the three have, then
that would be a period of ‘underdevelopment.

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SOCIO ECONOMIC STUDY OF PLANNING

 Market failures and need of government interventions and regulations.

Girindra Narayan Konwar

Efficient resource allocation is outcome of

Nature of the Market Nature of goods

Imperfect market Public goods: Free Rider Problem

Nature of Exchange Other causes

Asymmetric information Lack of Equity

 Monopoly leads to imbalance of power in market- monopolist restrict Quantity

Two forms of market failure associated with information asymmetry are:

1.Moral hazard - Caused by hidden action and hidden characteristics.

2. Adverse Selection-Caused by hidden information.

NEED OF GOVERNMENT INTERVENTIONS AND REGULATIONS

 Direct provisioning of goods and services (public goods, merit goods).

ECONOMIC GROWTH: A measure of the value of output of goods and services

ECONOMIC DEVELOPMENT: A measure of the welfare of humans in a society

Basis Economic Development Economic Growth

Factors Development relates to growth of Growth relates to a gradual increase in

 Per Capita Income

 Gross Domestic Product (GDP)

 Gross National Product (GNP)

 Gross Domestic Income (GDI)

GDI = rental income + interest income + profits + wages + income tax

The Human Development Index (HDI)

 Gross National Income (GNI)

Some Measures of nation income are

Gross Domestic Product (GDP)

Gross National product (GNP

Net National Product (NNP)

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