- March 19, 2013
- Posted by: essay
- Category: Term paper writing
1. In the industries where one or several companies play the leading role, two types of structures can be witnessed: oligopoly or monopoly. Monopoly is a market structure with one firm producing a good without close substitutes which has tight control over consumer prices. Oligopoly is a market where there are several key players producing several goods which are relatively close substitutes; companies also have certain control over price level, but they also compete to increase their market share. Monopolies tend to concentrate on one of several products, while oligopolies generally tend to diversification. Oligopolies can turn into monopolies through cooperation and collusion, and most countries have antimonopoly laws aimed at eliminating such attempts. The Herfindalh-Hirschman index (HHI) is used to measure the state of competition within an industry. HHI is commonly calculated as the sum of market shares of 10 key companies in the industry (Mayer & Fox, 2010); high HHI value means that the industry is close to oligopoly or monopoly, and low HHI rate indicates that the industry is highly competitive.
BHP Billiton is a global resource group, operating in the spheres of production and distribution of minerals, petroleum and mineral products. It is one of three key players in the world iron ore production. Two other major players are Rio Tinto and Vale. Fig. 1 shows market capitalization of 20 major mining companies.
Figure 1. Market capitalization of major mining companies (at 31.05.2011, in $US bn)
(World Bank, 2011)
According to this chart, it is possible to state that mining industry is an oligopoly. Market shares of three key players are: Vale ”“ 32.8%, Rio Tinto ”“ 18.6%, and BHP Billiton ”“ 17.1% (World Bank, 2011); thus, total market share of these companies is 68.5%. In 2010, the HHI of iron ore trade industry was 1,786 (Mayer & Fox, 2010), and the level for the “highly concentrated”¯ industry defined by the US Federal Trade Commission is 1,800 (Mayer & Fox, 2010). The attempt of BHP Billiton to acquire Rio Tinto, which took place in 2008, could raise HHI value to 2,500; this action could turn the industry into a monopoly or duopoly (especially at the absence of close substitutes of iron ore production) and thus was rejected due to antimonopoly legislation (World Bank, 2011). Thus, BHP Billiton is one of three key companies in an oligopoly.
2. The idea of fiscal stimulus package provided by the government during recession periods is based on the ideas of Keynesian economics. Keynes stated that output level and employment in the economy depend on the interaction of aggregate demand and aggregate supply. According to Keynes, there are fluctuations on the functioning of the economy, representing a business (trade) cycle. There are four phases of the business cycle: expansion, peak, contraction and trough. In this model, economy does not automatically balance itself, and government intervention in the form of fiscal policy is required during the expansion and contraction phases.
Fiscal policy is based on the effect of the multiplier: changes in investment expenditure (most often, this expenditure is government spending) cause proportionate changes of income and consumption (usually greater than initial investment changes). Moreover, increase in consumption leads to further increase of investment (effect of the accelerator). Thus, during the recession times the government should use these effects to boost aggregate demand. The policy of fiscal stimulus is also called “deficit spending”¯. There are two major instruments of fiscal stimulus: government spending and tax cuts. Similarly, during the expansion phases the government should reduce spending and/or increase taxes.
3. A carbon tax is the tax associated with the carbon content of fuels, and is to a large extent an environmental tax. From July 1, 2012, carbon tax will be implemented in Australia during an expected 3-5-year period, after which it is expected to switch to cap-and-trade scheme (manne, 2011). The expected scheme of the distribution of funds for carbon tax is shown on Figure 2.
Figure 2. Diagram of carbon tax funds distribution (Manne, 2011)
Each ton of carbon pollution released as a result of burning fossil fuels will be taxed. Prices of goods and services with high energy consumption will increase and, as a result, energy-effective technologies will have a certain cost advantage.
The economic rationale of carbon tax include are related to the environmental externalities, their financial effects and high costs of developing new resource-effective technologies. Environmental damage caused by pollution creates additional social costs, and carbon tax collections are aimed to help those affected by the consequences of the pollution, compensate increased spending for the most vulnerable categories of population and help companies developing more effective technologies. Higher prices should motivate companies to reduce carbon emissions and individuals will also be encourage to track their use of energy.
At the same time, carbon tax might cause a greater price reduction than carbon tax collections can cover due to the multiplier effect. Negative external costs would be compensated to a certain extent, but growing prices might affect the development of new technologies and financial compensation to vulnerable categories of people might not cover the real decrease of purchasing power of their income. Thus, the economic rationale for the carbon tax do not take into account the macroeconomic effect of this tax and can cause negative economic consequences.