The Essay Covers Australian Wine Industry, Perfect Competition, Price Discrimination, Externalities, Business Cycles, And HDI Of Australia.

Monopolistic Competition in Australian Wine Industry

Question 1: Refer to Chapter 6- Imperfect Competition 
(a) Explain why the Australian wine industry may be regarded as an example of an industry that can be categorized as monopolistically competitive. How does this industry differ from a perfectly competitive industry?
(b) ‘The parliamentary inquiry into the big major banks has claimed that their market dominance has significant adverse consequences for the economy and consumers and proposes a range of measures to encourage new entrants and to monitor competition in the sector.’
i. Why is there a lack of competition in the market for banking services in Australia? 
ii. What barriers to entry might limit the amount of competition in this market? 
(c) Describe the method of price discrimination used by airlines. Is price discrimination ever socially desirable? Explain your answer with examples. 
Question 2: Refer to Chapter 7- Market Failure and Government Policy
(a) Vaccination rates in children up since ‘no jab, no pay’ introduced, Federal Government saysThe Federal Government is heralding its "no jab, no pay" policy as having led to an extra 5,700 children being vaccinated since its implementation at the start of the year.
The policy involves the withholding of family payments worth up to $15,000 per year to parents who fail to have their children vaccinated. Parents who conscientiously object to vaccination for philosophical or religious reasons are also not able to collect the payments.
Since the policy was introduced in January, the immunisation rate for one and five-year-olds has now reached 93 per cent, up from around 90 per cent when the plan passed Federal Parliament.
(i) Describe the type of externality associated with vaccinations and explain why a private market would underprovide vaccinations (ii) Draw a graph to illustrate the external benefit of vaccinations
(iii) What alternative policies can encourage the uptake of vaccination?
(b) One form of negative externality is global warming and climate change caused by greenhouse gas emissions. Discuss at least three plausible policy alternatives to address this market failure.
Question 3: Refer to Chapter 9- Introduction to Macroeconomics
(a) Australia's economy shrank 0.5 per cent in the September quarter, well below already pessimistic analyst forecasts and its steepest decline since the global financial crisis of late-2008.
(i) What are the latest figures for the unemployment rate, the growth of GDP and the inflation rate in Australia? [To find out, visit the Australian Bureau of Statistics (ABS)

(ii) Based on your analysis of the above data, where would you place Australia in the business cycle? Explain your reasoning.
(b) In terms of the Australian circular flow of income, are the following examples net injections, net withdrawals or neither? If there’s uncertainty, explain your assumptions.

(i) Firms are forced to take a cut in profits in order to give a pay rise
(ii) Firms spend money on research
(iii) The government increases the tax-free threshold
(iv) The general public invests more money in credit unions
(v) Australian investors earn higher dividends on overseas investments
(vi) People draw on their savings to finance holidays in Australia

Question 4: Refer to Chapters 9 &10- The Determination of GDP
a. The table below gives the national accounts data for a hypothetical economy.
Amount ($m)
Gross Private Domestic Investment 945
Government Consumption Expenditure 275
Government Investment Expenditure 120
Household Consumption Expenditure 4900
Using the data in above Table, calculate GDP and the country’s Gross National Expenditure (GNE) using the expenditure approach. (i) What factors limit the usefulness of GDP as a measure of economic well being?
(ii) The United Nation’s Human Development Index (HDI) has been proposed as an alternative to GDP. Describe the indicators included in the measurement of HDI. Comment on the HDI ranking of Australia.

Monopolistic Competition in Australian Wine Industry

The features of Australian wine industry are similar to that of the monopolistic competition. Those are as follows:

• Many producers and many consumers: The wine industry comprises of almost 2000 producers, but few major ones dominate the entire market. The consumer market is also very large and consists of domestic and international consumers.
• Product differentiation: There are many varieties of wines in the market. The wines are not perfect but close substitutes. The wines differ in terms of color, quality, taste, packaging etc.
• Non-price competition: Due to product differentiation, there is high level of non-price competition among the wine producers.
• Free entry and exit of the firms: There is not much barriers to entry in the market, hence any new wine producer can enter the market anytime.

Hence, it can be said that the wine industry of Australia is monopolistic competition.

The features of perfect competition are: too many producers and consumers; identical product; the firms are price taker and has no power on the market; the producers act independently; and there is no barrier to entry in the market. The features are different from those of the monopolistic competition.

• The banking services market in Australia is oligopoly market. Four major banks, ANZ, NAB, Westpac and Commonwealth Bank dominate the entire banking industry of the nation. The market share of the four banks is 66.6% and for other banks all together is 33.3%. There is lack of competition in the market due to high barriers to entry created by the major banks. These banks act together as a group and are interdependent. One bank’s actions affect the others. For instance, when ANZ decides to reduce their rates, the other banks would follow to retain the customers.
• The high barriers to entry in the banking industry are as follows.
• As the major banks are operating in the market for the past few decades, hence, people have more trust and confidence on these banks than on a new bank.
• The cost of establishment is much higher for new banks than the older banks.
• New banks suffer from bad debt based on the cost-to-income ratio.
• Financial barriers such as lack of capital for technological improvement, salaries, bonuses and incentives for the employees, building cost etc. create obstacles for new banks,

Hence, the new banks face the challenges of building trust and raising funds and low profit margin in the initial years. The resizing and restructuring cost is also much higher for the new banks.

The airlines industry of the world has always practiced price discrimination over the years. There are passengers in every flight who pay different prices for tickets and services. The airlines industry creates market segments and charges differently for the tickets. The most prominent example of price discrimination in this industry is the division of Business and Economy class. The services are also different in these two classes. The airlines also offer priority services to frequent fliers. The price for the Business class is much higher than the Economy class. Based on the convenience of flying time, the prices are different. Moreover, the airlines charge extra money for services like meals on board, baggage, ticket purchasing time, peak or off peak season, change of seat allocation or flight schedule etc. Thus, there is price discrimination in the airlines market.  

In some cases, price discrimination is beneficial for the society. People from the lower income group can buy bulk products at lower prices. At the same time, it deprives the people of higher income from the benefits of consumer surplus due to the higher price they have to pay for same quality or quantity of goods. Moreover, misallocation of resources occurs due to price discrimination which is not beneficial.

(i) Positive externality is created from vaccination of children. Vaccination gives a better life and healthy future to the children, so that they can get education without any disruption due to health issues and finally earn good living. It is a social investment program of the government.

Positive externalities are often not valuated correctly by the free markets. Thus, the services can be under-provided. The vaccination programs result in heavy cost in private market. Therefore, they put higher price on the vaccination and also under provide the service for their profit maximization. It results in the fall in the social welfare.

Characteristics of Perfect Competition

In figure 1, marginal private benefit (MPB) equals marginal social benefit (MSB) at Q*. But, MSB exceeds MSC (marginal social cost) due to the positive externality from vaccination and this results in inefficiency. At Q1, efficiency is achieved as MSC = MSB = MPC. Therefore, the private market would under-provide the service in the absence of government intervention.

(iii) Some ways, other than the ‘no jab, no pay’ policy; can uptake the level of vaccination in the society. The government can provide incentives in the form of money and medical facilities to the families for taking vaccination. Also, awareness programs on the benefits of vaccination, welfare programs for the children, like free primary education for underprivileged children can increase the level of vaccination among children.

Emissions of greenhouse gases lead to negative externality as well as market failure. This affects the society and environment in a negative way. Three realistic policies to solve the market failure can be as following:

• Government can impose corrective taxation on the activities causing greenhouse gas emissions.
• Industries should use more of low-carbon technologies.
• Implementation of regulations to raise the awareness on the negative effects of the gases and reduce the activities

(i) Australia’s current unemployment rate (in March 2017) = 5.9%

(Source: Australian Bureau of Statistics 2017)

Australia’s GDP growth (quarterly) = 1.1% (December 2016)

(Source: Australian Bureau of Statistics 2017)

Inflation rate of Australia (based on CPI) = 2.1% (March 2017, quarterly)

(Source: Australian Bureau of Statistics 2017)

(ii) There are 4 stages in a business cycle:

1. Expansion: when the economy grows by 2-3% and stocks are in bull market
2. Peak: growth of economy is more than 3%, price rises due to inflation, stock market shows ‘irrational exuberance’.
3. Contraction: economic growth slows down but does not become negative and the stocks in the bear market.
4. Trough: recession exists in the economy.

According to the data of Australian Bureau of Statistics (ABS), the growth of the GDP of Australia is 1.1% that is lower than 3%; inflation rate is 2.1%, which is moderate and unemployment rate is stable at 5.9%. Thus, the Australian economy is in the expansion cycle.

The way the money is circulated among the different sectors of the economy is referred to as the circular flow of income. The different sectors of the economy consist of firms, households, government, financial institutions and businesses. This flow explains the changes in the national income, expenditures and level of investments in the country. This is represented as the following equation:

Where,

Y = total national income

O = total national output

E = total national expenditure

C = consumption of households

G = government expenses

I = total investment

X = exports

M = imports

According to the question:

• It is neither net injection, nor net withdrawal, because it is redistribution of fator payments
• Net injections in the form of investments
• Net withdrawal on behalf of the government
• Rise in net withdrawal since investment in the credit unions represents savings
• Reduction in net withdrawals since high dividends refer to a fall in the outflow to abroad from households
• Reduction in net withdrawal as savings is cut down for a holiday.

The total monetary value of goods and services produced within the country in a financial year is referred to as Gross domestic product (GDP).

The total expenses of a country, including private and public and excluding export expenses is referred to the Gross National Expenditure (GNE) of the country.

(i) GDP has some limitations for measuring the welfare of a nation

• The elements that comprise the GDP do not measure the wellbeing of people. These calculate only the monetary value of the goods and services produced within the nation in a financial year.
• GDP does not measure standard of living, any unpaid or voluntary work, or transactions in the black market.
• Wealth distribution is not included in the calculation of GDP. Hence, high GDP value and income inequality can coexist in a country.
• Type of production is not considered in the GDP.
• Externalities of production are not included in GDP.

(ii) The social and economic developments and welfare of the nations are evaluated with the help of Human Development Index (HDI). The three elements of HDI are:

• Life expectancy at birth: measurement of the health factors of people
• Education level: it is assessed by the average and expected years of schooling of the children and adults
• Standard of living: it is assessed by Gross National Income (GNI) per capita.

If a country has a higher educational level, high lifespan and healthy people and high GNI per capita, then it has a high rank in the HDI ranking.

Currently, Australia holds the second position in the HDI ranking of countries, with a score of 0.939. It represents that Australia has a high level of standard of living, healthy citizens and higher level of education.

References:

Australian Bureau of Statistics, 2017. Australian Bureau of Statistics. [online] Abs.gov.au. Available at: https://www.abs.gov.au/.

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Hdr.undp.org, 2017. Human Development Index (HDI). [online] Hdr.undp.org. Available at: https://hdr.undp.org/en/content/human-development-index-hdi.

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