QUEST INTERNATIONAL UNIVERSITY PERAK

Faculty of Business, Management and Social Sciences

School of Business Management BBA 1103 Principles of Microeconomics Group Assignment

Prepared For: Mr. Lawrence Arokiasamy Lecturer: BBA 1103 Principle of Microeconomics

Prepared by

: Nicholas Woo Wei Tatt (BBA00082) Ravi A/L Rajendran (BBA00115) Balvinajit Kaur a/p Ranjit Singh(BBA00063) Malathi A/P Sundra Saigaran (BBA00069) Vijayasakaraan A/L Punusamy (BBA00087)

Programme : Bachelor of Business Administration (Hons)

Question 1 Choice of Topic

We had chosen the local car industry as the topic we are discuss about .The local car industry in Malaysia is not performing well in these few years .This is related to the policy that has been implemented by our government . That is why we would like to change the policy to make it better and beneficial to the customers and car manufacturers .

Policy change that should be made :

Pollution Index Policy

The Pollution Index policy is a new policy that restrict the car manufacturers from manufacturing cars that surpass a certain amount of carbon monoxide emitted by cars .This policy will reduce the damage made by carbon monoxide emission to our ozone layer and also encourage the local car manufacturers to create more hybrid cars to compete in this modern car industry market .Hybrid cars are vehicle that uses two or more distinct power sources to move the vehicle eg. Electricity ,solar ,petrol and etc . People that bought this type of cars can save petrol and do a part in saving the environment.

Local and Non-local Content Policy

The policy we have now is the Local Content Policy. The main reason why it is introduced is because to protect the national automobile industry. The programme sets a such minimum value of local parts that automobile producers were forced to source from local parts suppliers to be assembled in their end automobile units. But parts inside a car are very complex especially , the parts manufacturer here sometimes are unable to produce quality parts because the lack of expertise and resources in our country .With the new local and nolocal Policy ,we could break the boundary of using the minimum value of local parts when assembling a car .This not only could increase the quality of the car and also the sustainability of the parts inside our local made cars .

Question 2 The market failure1

Market failure occurs when the allocation of goods and services by a free market is not efficient. That is, there exists another conceivable outcome where a market participant may be made better-off without making someone else worse-off. Market failures can be viewed as scenarios where individuals' pursuit of pure self-interest leads to results that are not efficient that can be improved upon from the societal point-of-view .

Sources of Market Failures2

Price and Quantity Regulations Price regulations Put a cap on the rent a landlord is permitted to charge and laws that require employers to pay a minimum wage sometimes block the price adjustments that balance the quantity demanded and the quantity supplied and lead to underproduction . Quantity regulations Limit the amount that a farm is permitted to produce also lead to underproduction . Taxes and Subsidies

Taxes - increase the prices paid by the buyers and lower the prices received by sellers. - So, the taxes decrease the quantity produced and lead to underproduction. Subsidies - pay by the governments to producers, decrease the prices paid by buyers and increase the prices received by sellers. - So, subsidies increase the quantity produced and lead to overproduction

High Transaction Costs E.g. when u go to starbucks you will pay more than the coffee that u bought. You pay your share of the cost of the barristas time, the expresso maker, and the dcor. Economists call the costs of the services that enable a market to bring buyers and sellers together transaction costs.

It is costly to operate any market so to use market price to allocate resources, it must be worth bearing the transaction costs. Some markets are too costly to operate.

E.g. , it is too costly to operate a market in time slots on a local tennis court. instead of a market, the court uses first-come, first served: You hang around until the court becomes vacant and pay with your waiting time .

When transactions cost high, the market might under produc

The Government Failure3 Government intervention to resolve market failures can also fail to achieve a socially efficient allocation of resource.Government failure is a situation where government intervention in the economy to correct a market failure creates inefficieny and leads to a misallocation of scarce resources. Examples of government failures include: 1. Government can award subsidies to firms,but this may protect inefficient firms from competition and create barriers to entry for new firms because prices are kept artificially low . Subsidies,and other assistance , can lead to the problem of moral hazard. 2. Taxes on goods and services can raise prices artificially and distort the efficient operation of the market. In addition , taxes on incomes can create a disincentive effect and discourage individuals from working hard. 3. Government can also fix prices, such as minimum and maximum prices, but this can create distortions which lead to: a) Shortages, which may arise when government fixes price below the market rate. Because public healthcare is provide free at the point of consumption there will be long waiting lists for treatment. b) Surplus,which may arise when government fixes prices above the natural market rate,as supply will exceed demand.For example guaranteeing farmers a high price encourages over-production and wasteful surpluses.Setting a minimum wage is likely to create an excess of supply of labour in markets where the market clearing equilibrium is less than the minimum. 4. Excessive bureaucracy is also a potential government failure. This is caused by the public sector when it tries to solve the principal- agent problem. Government must appoint

bureaucrats to ensure that its objectives are pursued by the managers of public sector organizations , such as the National Healthcare Service . 5. Finally , there is the problem of moral hazard associated with the payment of welfare benefits. If individuals know that the state will provide employment benefit, or free treatment for their poor health, they are less likely to take steps to improve their employability, or to avoid activities which prevent poor health, smoking, a poor diet, or lack of exercise.

Example of Negative Externalities

Negative externalities occur when the consumption or production of a good causes a harmful effect to a third party. An example is the petrol subsidies given to fisherman .The purpose of the subsidy is to reduce the price of fish caught by fishermen to the customer or consumer ..The graph show that the supply curve will shift to the right reducing the equilibrium price .The demand of fish will increase as the price has fallen .

Price
P0 P1

S0 S1

Demand
0

Q0 Q1

Quantity

Graph shows the demand and supply curve of fish caught by fisherman . The pros are that petrol subsidies can help reduce the price of fish that we eat and also encourage more fisherman to venture into this industry .As the demand for healthy and high nutritional value of food are getting higher ,the price for fish eventually has risen .This is also a pro for fisherman for they can afford to have a better living standards . The cons are the greediness of some fisherman ,they tend to use the subsidised petrol the government gave ,and sell to other fisherman from other country . This mean that the money used for subsidising petrol from the government has been misused.