1.

Micro Economics
1.1 Fiscal policy and objectives

Fiscal policy means the use of taxation and public expenditure by the government for
stabilization or growth. According to Culbertson, By fiscal policy we refer to government
actions affecting its receipts and expenditures which we ordinarily taken as measured by the
governments receipts, its surplus or deficit. The government may offset undesirable variations
in private consumption and investment by compensatory variations of public expenditures and
taxes.

Arthur Smithies defines fiscal policy as a policy under which the government uses its
expenditure and revenue programmers to produce desirable effects and avoid undesirable effects
on the national income, production and employment. Though the ultimate aim of fiscal policy in
the long-run stabilization of the economy, yet it can be achieved by moderating short-run
economic fluctuations. In this context, Otto Eckstein defines fiscal policy as changes in taxes
and expenditures which aim at short-run goals of full employment and price-level stability.

Objectives of fiscal policy are:

1. Increase in savings

This policy is also used to increase the rate of savings in the country. In the developing
countries rich class spends a lot of money on luxuries. The government can impose taxes on
them and can provide the basic necessities of life to the poor class on low rate. In this way by
providing incentives, savings can be increased.

2. To Encourage Investment
The government can encourage the investment by providing various incentives like the tax
holiday in the various sectors of the economy. The capital can be shifted from less productive
sectors to more productive sectors. So the resources of the country can be utilized maximum.

3. To Achieve Equal Distribution of Wealth

Fiscal policy is very useful for the achievement of equal distribution of wealth. When the
wealth is equally distributed among the various classes, then their purchasing power increases
which ensures the high level of employment and production.

4. To Control Inflation
Fiscal policy is very useful weapon for controlling the rate of inflation. When the expenditure
on non productive projects is reduced or the rates of taxes are increased then the purchasing
power of the people reduces.

5. To Reduce the Regional Disparity

 In the less developing countries the regional disparity is found. Some areas are more developed
while the others are less developed. Government provides the infrastructure facilities in less
developed areas. The tax holiday incentive is also provided in these areas which are very useful
in increasing the per capita income.

6. Stabilization of Price Level

Fiscal policy is also used to achieve desirable level of prices in the country. It means the cost
and price should be at such level that production and employment may increase.

7. Increase in Agriculture and Industrial output

Fiscal policy is also used that the output of various sectors of the economy must increase. The
demand inside and outside the country should be satisfied.

8. To Attain Maximum Welfare of the People

Fiscal policy main objective is to achieve maximum welfare of the people. The quality of life
must improve in the country.

9. To Check Rapid Increase in Consumption

Fiscal policy is also used to check the rapid increase in the consumption will be high then the
rate of saving will be low and consequently rate of investment will be low. Hence, one country
cannot improve its economic condition without increasing the investment.

10. To Achieve Economic Stability

The aim of fiscal policy is to increase the rate of production and employment without inflation.
So in the entire countries fiscal policy major objective is to ensure the economic stability in the
country.

1.2 Features of Fiscal policy

Although particular tax or expenditure measures affect the economy in many ways and may be
designed to serve a variety of purposes, several more or less distinct policy objectives may be set
forth. They include:

1. Allocation Function:

The provision for social goods, or the process by which total resource use is divided between
private and social goods and by which the mix of social goods is chosen. This provision may be
termed as the allocation function of budget policy. Social goods, as distinct from private goods,
cannot be provided for through the market system.
The basic reasons for the market failure in the provision of social goods are: firstly, because
consumption of such products by individuals is non rival, in the sense that one persons partaking
of benefits does not reduce the benefits available to others.

The benefits of social goods are externalized. Secondly, the exclusion principle is not feasible in
the case of social goods. The application of exclusion is frequently impossible or prohibitively
expensive. So, the social goods are to be provided by the government.

2. Distribution Function:

Adjustment of the distribution of income and wealth to assure conformance with what society
considers a fair or just state of distribution. The distribution of income and wealth determined
by the market forces and laws of inheritance involve a substantial degree of inequality. Tax
transfer policies of the government play an important role in reducing the inequalities in income
and wealth in the economy.

3. Stabilization Function:

Fiscal policy is needed for stabilization, since full employment and price level stability do not
come about automatically in a market economy. Without it the economy tends to be subject to
substantial fluctuations, and it may suffer from sustained periods of unemployment or inflation.
Unemployment and inflation may exist at the same time. Such a situation is known as
stagflation.

The overall level of employment and prices in the economy depends upon the level of aggregate
demand, relative to the potential or capacity output valued at prevailing prices. Government
expenditures add to total demand, while taxes reduce it. This suggests that budgetary effects on
demand increase as the level of expenditure increases and as the level of tax revenue decreases.

4. Economic Growth:

Moreover, the problem is not only one of maintaining high employment or of curtailing inflation
within a given level of capacity output. The effects of fiscal policy upon the rate of growth of
potential output must also be allowed for. Fiscal policy may affect the rate of saving and the
willingness to invest and may thereby influence the rate of capital formation.

Capital formation in turn affects productivity growth, so that fiscal policy is a significant factor
in economic growth.

3. Advanced Microeconomics topic

3.1 Price Discrimination under Monopoly: Types, Degrees and Other details
In monopoly, there is a single seller of a product called monopolist. The monopolist has control
over pricing, demand, and supply decisions, thus, sets prices in a way, so that maximum profit
can be earned.

The monopolist often charges different prices from different consumers for the same product.
This practice of charging different prices for identical product is called price discrimination.

According to Robinson, Price discrimination is charging different prices for the same product or
same price for the differentiated product.

According to Stigler, Price discrimination is the sale of various products at prices which are not
proportional to their marginal costs.

In the words of Dooley, Discriminatory monopoly means charging different rates from different
customers for the same good or service.

According to J.S. Bains, Price discrimination refers strictly to the practice by a seller to
charging different prices from different buyers for the same good.

Let us learn different types of price discrimination.

3.2 Types of Price Discrimination:

Price discrimination is a common pricing strategy used by a monopolist having discretionary

pricing power. This strategy is practiced by the monopolist to gain market advantage or to
capture market position.

There are three types of price discrimination, which are shown in Figure-13:

The different types of price discrimination (as shown in Figure-13) are explained as follows:

i. Personal:

This refers to price discrimination when different prices are charged from different individuals.
The different prices are charged according to the level of income of consumers as well as their
willingness to purchase a product. For example, a doctor charges different fees from poor and
rich patients.
ii. Geographical:

This refers to price discrimination when the monopolist charges different prices at different
places for the same product. This type of discrimination is also called dumping.

iii. On the basis of use:

It occurs when different prices are charged according to the use of a product. For instance, an
electricity supply board charges lower rates for domestic consumption of electricity and higher
rates for commercial consumption.

3.3 Degrees of Price Discrimination:

Price discrimination has become widespread in almost every market. In economic jargon, price
discrimination is also called monopoly price discrimination or yield management. There are three
degrees of price discrimination.

Figure-14 shows the degrees of price discrimination:

These three degrees of price discrimination (as shown in Figure-14) are explained as follows:

i. First-degree Price Discrimination:

Refers to a price discrimination in which a monopolist charges the maximum price that each
buyer is willing to pay. This is also known as perfect price discrimination as it involves
maximum exploitation of consumers. In this, consumers fail to enjoy any consumer surplus. First
degree is practiced by lawyers and doctors.

ii. Second-degree Price Discrimination:

Refers to a price discrimination in which buyers are divided into different groups and different
prices are charged from these groups depending upon what they are willing to pay. Railways and
airlines practice this type of price discrimination.

iii. Third-degree Price Discrimination:

Refers to a price discrimination in which the monopolist divides the entire market into
submarkets and different prices are charged in each submarket. Therefore, third-degree price
discrimination is also termed as market segmentation.

In this type of price discrimination, the monopolist is required to segment market in a manner, so
that products sold in one market cannot be resold in another market. Moreover, he/she should
identify the price elasticity of demand of different submarkets. The groups are divided according
to age, sex, and location. For instance, railways charge lower fares from senior citizens. Students
get discount in cinemas, museums, and historical monuments.

3.4 Necessary Conditions for Price Discrimination:

Price discrimination implies charging different prices for identical goods.

It is possible under the following conditions:

i. Existence of Monopoly:

It implies that a supplier can discriminate prices only when there is monopoly. The degree of the
price discrimination depends upon the degree of monopoly in the market.

ii. Separate Market:

It implies that there must be two or more markets that can be easily separated for discriminating
prices. The buyer of one market cannot move to another market and goods sold in one market
cannot be resold in another market.

iii. No Contact between Buyers:

It refers to one of the most important conditions for price discrimination. A supplier can
discriminate prices if there is no contact between buyers of different markets. If buyers in one
market come to know that prices charged in another market are lower, they will prefer to buy it
in other market and sell in own market. The monopolists should be able to separate markets and
avoid reselling in these markets.

iv. Different Elasticity of Demand:

This implies that the elasticity of demand in the markets should differ from each other. In
markets with high elasticity of demand, low price will be charged, whereas in markets with low
elasticity of demand, high prices will be charged. Price discrimination fails in case of markets
having same elasticity- of demand.

3.5 Advantages and Disadvantages of Price Discrimination:

A monopolist practices price discrimination to gain profits. However, it acts as a loss for the
consumers.
Following are some of the advantages of price discrimination:

i. Helps organizations to earn revenue and stabilize the business

ii. Facilitates the expansion plans of organizations as more revenue is generated

iii. Benefits customers, such as senior citizens and students, by providing them discounts

In spite of advantages, there are certain disadvantages of price discrimination.

Some of the disadvantages of price discrimination as follow:

i. Leads to losses as some consumers end up paying higher prices

ii. Involves administration costs for separating markets.