The Public Sector in the Global Economy 139
Chapter Twelve
The Public Sector in the Global Economy
I. Fundamental Issues
1. In what ways do government regulators seek to safeguard the interests of consumers?
2. How do the world’s governments protect rights to intellectual property?
3. What are international externalities and global public goods, and what can national governments or multinational institutions do about them?
4. How can the world’s nations protect the global environment?
5. How does increased globalization complicate the efforts of governments to finance their activities?
II. Chapter Outline
1. Protecting Consumer and Producer Interests in the Global Economy
a. Protecting Consumers — Is There Common Ground?
b. Online Globalization: Are Privacy Protection and Online Protectionism Synonyms in the European Union?
c. Management Notebook: The U.S. Drug-Import Ban — Protecting Consumers from Inferior Medicines, or Pharmaceutical Firms from Foreign Competition?
d. Safeguarding Intellectual Property Rights
e. Visualizing Global Economic Issues: The Trade-Off in Patent Protection
f. Online Globalization: Does the U.S. Patent and Trademark Office Know What It’s Doing?
2. Dealing with Market Failures — Should Regulators Go Global?
a. Are Market Externalities Bounded By Borders?
b. Online Globalization: A French Judge Combats an International Externality
c. Visualizing Global Economic Issues: Correcting International Externalities via Multilateral Interventions
3. Protecting the Global Environment — A Multinational Problem with Multilateral Solutions?
a. Public Good Aspects of the Global Environment
b. Alternative Approaches to Solving the World’s Environmental Problems
c. Visualizing Global Economic Issues: Determining How Much to Reduce Pollution
4. Funding the Public Sector — Globalization and International Tax Competition
a. The Growing International Rivalry for Tax Revenues
b. Globalization and Tax Competition
c. Visualizing Global Economic Issues: The Static Prescription for Dealing with a Shrinking Tax Base
d. Visualizing Global Economic Issues: The Dynamic View’s Bad News for Efforts to Attain a Tax-Revenue Goal with a Declining Tax Base
e. Management Notebook: Fighting Over Capital Flows in the European Union
f. Online Globalization: Should U.S. Internet Sellers Have to Collect Taxes on Behalf of European Governments?
5. Questions and Problems
III. Chapter in Perspective
This chapter explores the role of governments in providing consumer protection, providing protection for intellectual property rights, limiting externalities, providing public goods and environmental protection, and funding the whole range of activities. The difficulties in rationalizing different laws and policy aims in different countries are first discussed. Market failures and positive and negative externalities are considered next and the need for multilateral solutions to deal with international spillovers. The concepts of public goods, merit goods and common resources are introduced along with the free rider problem. The extent to which the global environment can and cannot be considered a public good is considered and reasons why many nongovernmental organizations oppose international trade are discussed (and why some support it). The final section of the chapter presents the static and dynamic theories of tax revenues and introduces the concepts of tax competition between countries and the growing trend toward multilateral tax agreements that essentially form tax cartels. The text has many critical analysis questions that allow students to apply the concepts covered.
IV. Teaching Notes
1. Protecting Consumer and Producer Interests in the Global Economy
a. Protecting Consumers — Is There Common Ground?
Business transactions throughout the first half of the twentieth century and before were governed by the rule of “caveat emptor” or “buyer beware.” As the number of product liability lawsuits today indicates, consumers have much more protection now than in the past. Consumer protection is needed for three reasons:
· In every business transaction there is potential asymmetric information, with either the seller or the buyer having access to different information than the other party. Consumer protection laws provide recourse when material information is withheld. Asymmetric information gives rise to two more related problems:
· Adverse selection is the tendency for manufacturers of the lowest quality products to engage in the greatest amount of product misrepresentation because they have the greatest incentive to do so.
· Moral hazard is the potential for a seller (or buyer) to act in a different manner after the transaction is completed than what was agreed to or expected before the transaction was completed.
b. Online Globalization: Are Privacy Protection and Online Protectionism Synonyms in the European Union?
For Critical Analysis: Which residents of Europe gain or lose if the costs of meeting the Data Protection Directive discourage a significant number of U.S. firms from offering to sell their products online in Europe?
Online buyers in Europe lose and online sellers in Europe gain, because the Data Protection Directive provides a significant entry barrier that prevents U.S. (and other country’s sellers) from entering the European online market. Intentionally or not the Data Directive is a form of protectionism for European online sellers.
c. Management Notebook: The U.S. Drug-Import Ban — Protecting Consumers from Inferior Medicines, or Pharmaceutical Firms from Foreign Competition?
For Critical Analysis: Why is it likely to be difficult to balance the gains from consumer protection with gains from trade?
Consumer protection laws can provide significant barriers to entry, so industry participants have a vested interest in preserving them. Consumers generally prefer lower cost and greater variety so their advocacy groups will prefer allowing more trade. Policymakers have to be careful, however, because international trade does increase asymmetric information and the related adverse selection and moral hazard problems. Enforcement of domestic consumer rights is also much more difficult when dealing with foreign sellers not under U.S. jurisdiction.
d. Safeguarding Intellectual Property Rights
The three main forms of protection for intellectual property rights are:
· Copyrights, which grant legal title and the right to distribute, perform or otherwise display and disseminate creative works including articles, books, software and recordings.
· Trademarks, which grant a company legal title and exclusive use of a word or symbol that identifies its product. (See Chapter 11 of the IM for recent values of several large brands).
· Patents, which grant the inventor exclusive rights to manufacture, use and market an invention for a specified time period.
Teaching Tip:
Innovations can take various forms. Some innovations are the prototypical inventions; some are new theories of management or breakthroughs in the physical sciences. Many innovations improve production processes and these are often generated by employees. This is one reason why employee empowerment and rewards for performance, competition among individual employee units and consensus management within units have become increasingly prevalent. These characteristics contribute to innovation.
By definition, an innovation results in something unique. Intellectual property rights provide a barrier to entry that protects the innovator and allows him or her to earn monopoly profits for a time. Many innovators have risked large amounts of time and money in the hopes of generating a profitable outcome. The monopoly profits provide the incentive for the creator to make the innovation and to disseminate the innovation to others. Without these economic profits, many innovations would not occur, or would not be made publicly available. In a utopian altruistic society, intellectual property rights protection would not be needed and social welfare would be increased relative to the system we have today because there would not be a time period where the innovator earned monopoly profits, but we don’t live in that kind of society.
Today many nations abide by international standards of intellectual property rights established by the multilateral agreement called the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS). TRIPS establishes three standards:
· 50-year minimum copyright protection
· 20-year minimum patent protection
· Standard rules for international trademark protection.
Many developing nations have agreed to meet the TRIPS standards by 2006 (most developed nations already do so because it is to their benefit). Developing nations may suffer short-term losses by joining TRIPS. They may do so anyway though to avoid potential sanctions from the United States and other developed nations and in the hopes of attracting more foreign capital, particularly FDI.
Parallel imports (gray-market imports of goods transshipped to one country legally, but then transported and sold in a third country by an unauthorized dealer) are goods sold without the permission of the intellectual property owner and may erode the value of other sales.
Teaching Tip:
Levi Strauss has experienced problems similar to parallel imports in which Levi jeans (immensely popular in many overseas markets) trade in gray markets, usually at inflated prices. Levi does not receive any of the proceeds and is concerned with the occurrence of unauthorized transactions taking place without their permission. The more general concern is often that high-price goods wind up being sold (or copied and sold) in discount markets, eroding the brand value of legitimately sold products. In countries, such as Taiwan, which in the past did not recognize copyright protections, many books were illegally (by U.S. standards) copied and sold at a discount. Authors and original publishers received no royalties.
e. Visualizing Global Economics Issues: The Trade-Off in Patent Protection
For Critical Analysis: If the inventor who receives a patent lives in another country, then what area in the figure constitutes an international resource transfer resulting from granting global patent protection to that inventor?
The area of a rectangle with a height equal to PM-PPC and a base equal to QM represents the wealth transfer. The remaining triangular portion of the lost consumer surplus is a deadweight loss. Note that the entire lost consumer surplus is an opportunity loss, not a cash outlay.
f. Online Globalization: Does the U.S. Patent and Trademark Office Know What It’s Doing?
For Critical Analysis: Analysts’ estimates of the patent royalties that DE Technologies might receive were based on total trade processed using computer links in the absence of payment of fees to DE Technologies. Why did some economists argue that these estimates probably were too high? (Hint: Remember the law of demand: An increase in the price of any item reduces the quantity demanded.)
The law of demands states that the greater the price of the service, the lower the resulting demand. One cannot take the preexisting quantity times the fee and obtain a proper estimate of the royalties because the demand for the service would fall once a fee was implemented.
2. Dealing With Market Failures — Should Regulators Go Global?
A market failure occurs when the normal market solution fails to arrive at a socially optimal quantity of output and price. The failure could imply that the outcome was inefficient, socially unacceptable or in violation of accepted principles. Market failures arise when there are externalities. Externalities are spillover effects that affect the welfare of entities that are not principles in the transaction. There are two types of externalities:
· Negative externalities occur when there is some social cost in the production (or sale) of the good or service that is not included in the price. As a result, the optimal supply curve for society is above the producer’s supply curve, too many resources are thus input into that industry and industry output is too high relative to the socially optimum outcome. The classic example is a firm that is polluting when the firm’s product price does not include the cost of pollution cleanup. In this case the firm’s actual profit is greater than its true economic profit. The remedies typically require government intervention such as requiring the firm to stop polluting and pay for the clean up, establishing industry standards to limit pollution, taxing the firm to raise the product price, or making payments to affected external constituencies.
· Positive externalities occur when there is some social benefit in the production (sale or distribution) of the good or service that is not included in the price. In this case, too few resources are thus input into that industry and industry output is too low relative to the socially optimum outcome. The classic example of a positive externality is a vaccine that can help stop the spread of a disease. Society receives additional benefits from widespread distribution of the vaccine, and the socially optimum output of the vaccine may be greater than the market solution. The remedies typically include subsidies to the producer, direct government intervention to produce and distribute the vaccine, and/or encouraging more of the populace to be vaccinated via subsidies to the public or via education and advertisement. The purpose is to get the demand up to the socially optimal level.
Teaching Tip:
Basic research is another area that generates many positive externalities. Understanding physical and social properties contributes to the overall knowledge base and benefits societies in many ways, but its value often cannot be captured by any one firm. As a result, the U.S. university system subsidizes much basic (and applied) research. Government funding for chip research and funding for research on the human genome are other recent examples.
a. Are Market Externalities Bounded by Borders?
Some externalities affect only members of one country but many affect multiple countries as in the case of acid rain and spread of diseases, etc. These are called international externalities, and solutions for these problems require international cooperation between governments and their agents.
Public goods are any good (or service) that meet the following three criteria:
· They can be consumed by many people at once.
· The marginal cost of an additional individual consuming the good is zero.
· It is impossible or prohibitively expensive to exclude one individual and not others from using the good, even if someone does not contribute to funding its contribution.
Citing examples of public goods can spark debate because many goods meet one or two of these criteria, usually the first two, but not all three. Examples that most people would agree upon generally include national defense, police protection, forest fire suppression, flood control, ocean pollution cleanup, protection of the ozone layer, and efforts to predict natural disasters. Some of these are undoubtedly global public goods. Global public goods are public goods that benefit people from multiple nations simultaneously. Merit goods (goods and services that a society deems should be provided to its citizens) are not necessarily public goods. They will usually fail to meet the third criteria. Health care is a good example. A free rider is one who partakes of a good without contributing his or her fair share to pay for the provision of that good. He or she relies on others to pay. The free rider problem is the main reason why tax systems are compulsory. It is important to understand that public goods and merit goods are not necessarily free goods and provision has to be made for their funding. A clean environment, for instance, could arguably be considered a global public good, but it is certainly not a free good.