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GROUP ASSIGNMENT I

REVIEW OF LITERATURE PAPERS


ON
MANAGERIAL ECONOMICS
SUBMITTED TO:
ASST. PROF. Dr. DHIREN JOTWANI

SUBMITTED BY:

Prateek Sharma (161243)


Sakshi Prabhu (161252)
Saransh Bagdi (161253)
Vinaysheel Pandey (161266)
Rajat Parmar (161246)

DATE OF SUBMISSION: 23rd AUGUST 2016

INSTITUTE OF MANAGEMENT, NIRMA UNIVERSITY


Government Intervention in Price control

Introduction
In most of the developing countries and even industrial ones, markets are rarely completely
free of government intervention. Beside imposing indirect taxes and granting subsidies,
government often regulate market in variety of ways for different purposes like public
procurement, a guaranteed price to producers, open market sales, buffer stocks etc.

Why price control:


The price mechanism in a free enterprise economy brings about an optimum allocation of
resources given certain assumptions. These are
a) perfect competition in both the product and factor markets
b) perfect divisibility of all resources and pro-ducts
c) absence of direct interdependence among producers and consumers, i.e., absence of
any divergence between social benefit and private gain as well as social cost and
private cost.
In India, price control has been one of the instruments in the armoury of the Government for
achieving economic objectives and for implementing the Five Year Plans. Specifically, there
are four objectives which price controls on the 17 non-agricultural products are expected to
fulfil. These are;
a) to protect the interests of the vulnerable sections of the consumers given the income
distribution";
b) to facilitate investment in priority industries which are essential for laying the
foundation for rapid economic development of the country;
c) to prevent monopolistic exploitation by a few- firms belonging to a single industry,
and to ensure a reasonable degree of price stability.

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Government Intervention in Price control

Impact of Government Intervention in Procurement of


Rice
on Smallholder Farmers in Subtropics of Jammu

This article studies the effect of procurement policy (2010) in various districts of Jammu. The
procurement policy of the government aims at increasing the price of rice in these areas so
that the producers get higher price for their produce. Procurement policy is a part of price
support program. Under this, the government sets a Minimum support price (MSP) and then
buys up whatever output is needed to keep the market price at this level. Hence, this policy
is a part of the national commitment to make the Minimum Support Price (MSP) policy
effective. The need for such a policy was created as prior to 2010, distress sales were on the
rise. Distress sales occur when the stocks are sold in an urgent manner, often at a loss. Thus
the government intervention protected the smallholders of Jammu and also increased the
prices of different varieties of rice like Basmati thereby increasing the market competition.
The government executed the procurement policy by setting up procurement centres in
different districts of Jammu like Jammu, Kathua and Samba. In these procurement centres,
the farmers sell their food grains at Minimum Support Price (MSP).
The impact of procurement policy was studied using the difference in differences model (DD
Model). In this method, the farmers were divided into two groups, namely, Experimental
group and Control group. The experimental group consisted of 100 farmers who sold their
produce at procurement centres (with government intervention) and control group consisted
of 50 farmers who sold their produce in the open market (without government intervention).
First, the difference between price per quintile of rice sold by the experimental group of
farmers in year 2011 and 2012 was calculated. The same was done for the control group of
farmers. The difference of control farmers was then subtracted from the difference of
experimental farmers. The number thus obtained depicts the impact of procurement policy.
This number was found to be 175/q for coarse variety of rice and 77/q for semi-fine variety
of rice. Thus the DD between experimental and control groups was statistically significant only
in case of coarse variety of rice. There was no significant DD in the prices of semi fine varieties
of rice. This clearly shows that the farmers in the experimental group benefitted from the
procurement of coarse and semi-fine rice produce at MSP. Thus, the procurement policy
generated an additional income of 6,837 per farmer. On extrapolating the benefits based on
DD model, the economic impact of 6,725 per farmer is evident.
The socio-personal and economic factors affecting a farmers decision were also studied using
the binary logistic model. The results showed that educated farmers were benefitted more
from the procurement policy as they were able to take more informed decisions regarding
the sale of their produce. Thus, spreading awareness and educating the farmers will ensure
that more and more farmers are benefitted from the policy.

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Government Intervention in Price control

Price Controls for Drugs in India Fail to Improve Access for


Patients: Report
Government intervenes to keep prices of certain items higher or lower than what would result
from the market finding its own equilibrium price. It is done to with a purpose to help a certain
group of people. The economics terms to higher or lower the price are: Price Floors and Price
ceilings. Price floors create surpluses by fixing the price above the equilibrium price. At the
price set by the floor, the quantity supplied exceeds the quantity demanded. Price ceilings
create shortages by setting the price below the equilibrium. At the ceiling price, the quantity
demanded exceeds the quantity supplied.
The Drug Price Control Order, 2013 is in effect from June 2013 end and it is an implementation
by the National Pharmaceutical Pricing Authority to revise the price of the formulations listed
under National List of Essential Medicines. The DPCO 2013 replaces DPCO 1995 which
accounts price regulation of 74 bulk
drugs, while DPCO 2013 accounts
almost 652 drugs. It will also enable the
National Pharmaceutical Pricing Policy
2012 to regulate prices of 348 drugs
covered under the National List of
Essential Medicines (NLEM) 2011. The
major aim being making essential Figure from [2]

medicines available to common man by reducing their prices to an affordable level, it has
caused havoc to retailers & manufacturers. The 20 % retail margin & 10 % wholesale margin
earned by Chemists Under DPCO 1995, has reduced to 13 % retail & 6 % wholesale margin
after DPCO 2013 implementation. This led to production rate cut off up to 20-30 %.
As the new Drug Price Control Order (DPCO) has come into effect, the growth of major
pharmaceutical companies has taken a hit in the basket of drugs for which the ceiling prices
have been fixed by the government. Data analysis by the All India Organization of Chemists
and Druggists (AIOCD) - AWACS, a pharmaceutical market research organization, shows that
during July 2013, the basket of products where the ceiling prices were fixed de-grew by 2.2 %
compared to the other products which grew by 10.8 %. For some companies the impact of
the DPCO has been significantly higher, mainly due to the percentage coverage of products
under the DPCO where the ceiling price has been fixed, and partly due to their products or
brands being above the ceiling price.
Even though after all this what we see in the article published on the wall street journal is that
the price control has not had the desired impact on the consumers. It has failed to improve
access for the patients. The situation is turning to a new direction, with an addition of a dozen
of more drugs to the list, the Pharmaceutical Producers of India are questioning the
government that why such steps are been taken even though it is not reaching the desired
effects.

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Government Intervention in Price control

In this article there are figures given to show the decline in usage of drugs after the
implementation of Drug Price Control Order. Similarly, a comparison was shown that there
was muted growth for price-controlled medicines outside metropolitan areas compared
with 5% growth for drugs not subject to price controls.
The reasons given for this decline in low income household are due to poor healthcare
infrastructure and low availability of drugs in public sector. These reasons seem to be valid till
some extent but still fail to answer why there is a decline if not rise. Moreover, experts have
also stated that the people below poverty line are hardly affected by these changes.
At last the articles connects the world market with the Indian market. It also traces the
changes happening in different countries where such schemes are implied. Overall this article
is giving the real picture of present situation. It is not giving any solution to the problem but
only stating the problem that is being faced by the end user. It was an informative paper
showing giving data and stating facts.

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Government Intervention in Price control

Tamil Nadu Government Intervention and Prices of


Medicines
This article examines the approach of the government of Tamil Nadu towards drug
procurement and supply, which is undertaken through an autonomous agency established
in 1995 called the Tamil Nadu Medical Services Corporation (TNMSC). This agency has
formulated detailed procedures for the procurement of quality essential drugs that are
supplied to the government healthcare providers according to their needs.
A drug committee consisting of professors of medicine, pharmacology, and therapeutics, a
representative from WHO, the health secretary and the managing director of TNMSC
decided the list of drugs to be procured. However, it was not clear as to how a drug is added
or removed from price control.
In India, prices of drugs are regulated under the Drug Price Control Order (DPCO),
announced by the government of India from time to time. In 2007, only 74 drugs covering
36 per cent of the drugs were under price control. The remaining drugs were monitored by
the National Pharmaceutical Pricing Authority (NPPA).
In order to examine the price impact of TNMSCs intervention, the author compares the
prices with the help of a data available for the period from 2002 to 2007 pertaining to 258
drugs that were common through these years. This resulted in an overall reduction in the
prices of several drugs in the range of 1 per cent to more than 50 per cent over the period
2002-07. Also, while a majority of the drugs' prices declined over the five years, a few of
them did register an increase.
In July 2007, the government of India fixed prices of nine commonly used drugs, where it
was noticed that prices had shot up for no valid reason. The NPPA had asked the major
companies including Novartis, Ranbaxy, Nicholas Piramal and USV to revise drug prices
downwards to the levels fixed by the body.
In the end, the author suggests that such government intervention may be adopted in other
states to keep the prices of medicines in check. According to the TNMSC officials, several
state governments have come and studied the system. TNMSC itself has provided
consultancy services to the state governments of Rajasthan, Karnataka, Gujarat, Orissa and
Andhra Pradesh.

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Government Intervention in Price control

Government cuts Bt cotton royalty fee by 74%


Bt cotton:
Bt cotton is a genetically modified organism (GMO) cotton variety, which produces insecticide
to bollworm. It is developed by US based seed company Mosanto. Rights to produce this kind
of seed is reserved with Mosanto.
Royalty Fee:
A royalty fee is an ongoing fee that the franchisee pays to the franchisor. This fee is usually
paid monthly or quarterly, and is typically calculated as a percentage of gross sales. Mosanto
has the patent of Bt cotton seeds. Therefore, it charges royalty fee to the companies which
are permitted by Mosato to produce Bt cotton seed using the patented technology.

Government Intervention:
Government has cut the Bt cotton royalty or trait fee by74%. Before the cut it was 163 per
packet, after cut is became 43 per packet. The cut introduced will reduce the royalty fee
payable to seed technology companies, such as Monsanto. Thus results in reduction of
maximum selling price of genetically modified Bollgard II cotton seed reduced from 830-
1000(per 450gm packet) to 800.
Government has cut the royalty fee to provide relaxation to farmers, who are already
suffering from insufficient rain since past three years in row. High price had created a fall in
quantity demanded as income of farmer has decreased due to short rainfall. Which resulted
in decrease of production of cotton in India. By making seed available at lower price
government is trying to maintaining cotton production.

Source: http://www.reuters.com/article/india-monsanto-idUSL3N16O4DF

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Government Intervention in Price control

Consequences of intervention:
Intervention has major impact on company have patent rights of Bollgard II cotton seed.
Monsanto has taken the government to court over the royalty. Monsanto India Ltd, in a
statement said that it will re-evaluate every aspect of its position in India and rethink
bringing new technologies in a regulatory environment that is arbitrary and innovation
stifling.

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Government Intervention in Price control

Global Crude went two-thirds in May 2014 while Petrol


Price went down by 16% only
It was quite a controversial issue when there was a huge decrease in the global crude oil price
and what would be its impact all over the world. The global crude oil price headed towards
significant down in the price which has an obvious but a less than expected impact on the
petrol prices in India as there is a very lesser oil proportion used in the petrol.
The crude oil price decreased by as large as 40% margin and its value approached $77 per unit
barrel from $115 per unit barrel before the decrease to be precise.
One of the main reasons was the shifting of higher demand from oil to other fuels. The other
being an oversupply by OPEC producers. Also, America had been the worlds leading producer
of oil in the world but it imported very less of oil and created the vacant supply. The countries
like Saudi Arabia can afford to have lesser prices as they have plenty of reserves.
But this drop in price does not have a large effect on the petrol price in India which fell only
by 16%. This is mainly due to the constantly increasing excise duty by the government under
Prime Minister Narendra Modi. He had an eye on generating good amount of revenue from
oil sector and hence raised the excise duty on petrol by 3.75 per liter in a couple of months
and on diesel by around Rs.2.50 per liter in the same time. In a year, both these values raised
by approximately 13%.
The price of petrol remained just at Rs.60 per liter going down only by 16% and of diesel
reduced to Rs.45 per liter. They also hiked VAT on petrol and diesel. So, the decrease in prices
of petrol brought along with it the increase in the excise duty.

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Government Intervention in Price control

Analysis
Impact of Government Intervention in Procurement of Rice on Smallholder
Farmers in Subtropics of Jammu
The government intervention in Jammu has not only helped the experimental group of farmers
by procuring the rice at MSP, but has also helped the control group of farmers by creating
competition in the market. However, this policy can also have implications on the consumers.
The government must pay for the output it purchases in order to maintain the MSP. This amount
will be paid by the consumers in the form of taxes. Thus the prices paid by the consumers will
rise leading to a decrease in demand if the product is highly elastic. But, here rice is an inelastic
product and cannot be easily substituted. Hence, the increase in price of rice will not affect the
demand in the short run but will be affected in the long run. The graph obtained will be as
follows:

Source: http://slideplayer.com/slide/4931869/
Initially when the prices of rice increase, consumers will continue buying rice as it would be
difficult to substitute and thus the demand will increase. But if the situation persists, the
consumers will look up different options and switch over to other cheaper substitutes thereby
decreasing the demand for rice in the long run. Hence, the short run elasticity for rice is low
and its long run elasticity is high.

Price Controls for Drugs in India Fail to Improve Access for Patients: Report
For a layman hearing the terms like price floor and price ceiling, and even on paper these
theories might seem very beneficial but on practical ground this is failing in the

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Government Intervention in Price control

Pharmaceutical sector in India. This paper has given a snapshot of the loophole present in our
system because of which the grants provided by the government is not reaching the end user.
From the effect of price control some people gain and some lose but this is rather a lose-lose
situation for both the producer and the consumer. As per the book those who can buy the
goods at lower price are fine with government intervention but the section below poverty
line are hardly affected by price control so this paper draws out the cons or No-effect of
Government intervention in price control.
Tamil Nadu Government Intervention and Prices of Medicines
Government intervention in Tamil Nadu has proved to be effective in purchasing select
drugs at low prices and has helped the government streamline the entire drug procurement
and supply in a rational manner. The article shows that the intervention by TNMSC to
control prices has helped the government reach out to more people, especially the poor,
and has strengthened the technology in government healthcare.
Also, in the absence of health cover for majority of people, such targeted interventions
would go a long way in impacting economic decisions by reducing the morbidity level among
the population.
Government cuts Bt cotton royalty fee by 74%
As income decreases, income curve also decrease. Thus demand curve shifts to left from D to
D. At previous price of 915 (average value of 830 & 1000) let the quantity demanded was
Q1. But as income decreases to D quantity of seed demanded decreases to Q2. Now when
government has reduced the price farmers can afford more quantity of seed. At the new price
of 800 farmers can afford a quantity more than Q2 let say Q which lies on demand curve D.

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Government Intervention in Price control

Another reason for the cut of royalty fee is to discard the monopoly of Monsanto, which
control 90% of cotton seed supply.

Global Crude went two-thirds in May 2014 while Petrol Price went down by 16%
only
As we know, petrol is less elastic in the short run and highly elastic in the long run. Therefore,
decrease in petrol price will not change consumption in the short run. But, consumption will
increase over the long run. Hence, if prices decrease sharply fuel petrol consumption will
increase drastically. Thus, to control the emissions from the use of petrol, government is not
letting market price to fall by imposing excise duty.

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References
Agricultural Economics Research Review Vol. 28 (No.2) July-December 2015 pp 263-
270 DOI: 10.5958/0974-0279.2016.00005.7.

Price Controls for Drugs in India Fail to Improve Access for Patients: The wall street
Journal: by Ed Silverman, Jul 20, 2015 1:41 pm ET.
Nichols, L. M. (2012). Government intervention in health care markets is practical,
necessary, and morally sound. The Journal of Law, Medicine & Ethics, 40(3), 547
557.
N.lalitha, Economic and Political Weekly, Vol. 43, No. 1 (Jan. 5 - 11, 2008), pp. 66-71.

Sayantan Bera, Shreeja Sen (2016, March 10). Government cuts Bt cotton royalty
fee by 74%. Livemint.

http://indiatoday.intoday.in/story/petroleum-dharmendra-pradhan-excise-
duty/1/406286.html

http://www.thehindu.com/business/industry/global-crude-down-twothird-since-
may-2014-petrol-falls-only-16/article8276110.ece?css=print

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Annexure
Price Controls for Drugs in India Fail to
Improve Access for Patients: Report
Article from The wall Street Journal
By
Ed Silverman
Jul 20, 2015 1:41 pm ET
As public and private payers grapple with rising costs for many prescription drugs, there is
increasing debate over the extent to which some form of price controls may be warranted. In
India, however, the government has already taken such a step, although a new industry-
sponsored report finds the move has not achieved the key goal of improving access to
medicines for the neediest citizens.
There was also a drop in R&D resulting in fewer new introductions of generic drugs and
there has been reduced competition since India expanded its list of priced-controlled
medicines two years ago. These trends can strengthen oligopolistic behavior, which will
result in reduced set of choices for the doctors and patients, according to the report, which
was conducted by IMS Health, the market research firm.
Whether the findings prompt the Indian government to rethink its policies remains to be seen.
Just last week, the National Pharmaceutical Pricing Authority added a few dozen medicines
to the number of drugs under price control. But the report may give new ammunition to the
pharmaceutical industry to argue that putting a lid on prices is not going to help patients.
The report which was supported by the Organization of Pharmaceutical Producers of India,
an industry trade group for brand-name drug makers found that price controls led to overall
marginal price benefits for patients. Moreover, there was no significant penetration of price-
controlled medicines in various markets.
For instance, usage of drugs with price controls declined 7% since 2013, when the
Department of Pharmaceuticals published its Drug Price Control Order and boosted to more
than 650 the number of drugs that are subject to a price ceiling. Similarly, there was muted
growth for price-controlled medicines outside metropolitan areas compared with 5% growth
for drugs not subject to price controls.
Price control measures appear to be subsidizing the medication cost of high- and middle-
income segments who can already afford these medicines, IMS writes. For low-income
households reliant on the government system for healthcare, due to poor healthcare
infrastructure and low availability of drugs in public sector, [controls] would not improve the
patients ability to purchase drugs.
One expert says the findings are not surprising. Indias healthcare sector is significantly
underdeveloped and consumer and patient needs, especially those below the poverty line, are too