Effect Of Fair Work Commission Decision On Penalty Rates In NSW On Hospitality Industry And Market Failure

Impact on restaurant output due to penalty rate cut in NSW

According to the decision of Fair Work Commission, the penalty rates paid to the workers engaged in retail and hospitality jobs in NSW is going to be slashed by a certain percentage. The consequent impact of such a decision on the output at the restaurants on Sunday in the locality of Sydney is shown as follows by the diagram below:

In the figure above, due to slash in the percentage of penalty wage rate, there has been a decrease in the supply of hospitality work in the market. As a result the supply curve shifted backward from Supply 1 to supply 2. This led to a decrease in the restaurant output during Sundays due to the less number of people and less number of hours dedicated by them in working to serve the consumers. Hence, there is going to be a decrease in the output produced and consecutively increase in price of food supplied whereas the demand for food remains same.

The situation when Marginal Social Cost (MSC) overrides the marginal private cost (MPC) it is termed as negative externality (Mankiw 2014). This leads to sub-optimal

production of the goods and loss of social welfare and henceforth is undesirable within the society. This situation is related and said to be the root cause of market failure in any economy.

Pollution from cars is an example of negative externality whereby no individual is ready to take any measure to reduce it and the whole society including those who do not own a private car suffers. In the above figure the ideal quantity of pollution produced from cars should be at Q_opt but since MSC of reducing it is more than MPC, hence Q₁ quantity is produced.

The economy where equilibrium is guided by the unfettered interaction of both the supply and demand is known as market economies. Under this system, every individual is guided by their self-satisfying motives. Hence, this often leads to market failure and has negative impact on the environment (Pigou 2013). Any outcome that is environment friendly is likely to have MSC > MPC and MPB > MSB. People guided by the motive of benefit maximization therefore bears only the private marginal cost thereby leading to environmental degradation.

According to the question, there has been an establishment of a new renewable energy plant in the locality of New South Wales. It is expected that this establishment is going to increase the supply of energy in the place and thereby reduce the price of energy supply. The following figure might be helpful in explaining the same. 

Negative externality and market failure

Prior to establishment of the renewable energy plant, the supply and demand intersected to provide an equilibrium quantity of energy at Q1 at price P1. The establishment of new firms increases the supply within the economy while the demand remains the same. Since it is a new firm, it has the capacity to produce output more efficiently and henceforth at any given price it produces more than earlier. Therefore, the overall energy supplied within the economy increased at each price level causing an outward shift in the curve. As a result post establishment of energy plant, the equilibrium price diminished to P2 and quantity supplied increased to Q2.

Rationale consumer behaviour suggests that as the price of any goods or service increases, the consumer demand it less (Sowell 2014). Here the increase in the university fee is making the service costlier for the student. But education is the service which in future can help these students to fetch a job and also there is no substitution available for it. Hence the currently enrolled student might be unhappy but it is expected that they would continue their education. On other hand, those planning to get enrolled would prefer to end up their education in the less possible units.

In this scenario, rationale behaviour is to continue with the education as there are no substitutes and the rise in price took place in all over Australia. It is expected that the already existing students should continue with their education. The students planning to get enrolled may try out getting admitted to any other university outside Australia to reduce their cost.

The government usually apply per unit tax either to generate revenue or to discourage production of the goods (Rios, McConnell and Brue 2013). It has been stated that the government of Western Australia imposed a per unit tax on each unit of goods sold by the mining industry.

At the initial level, without imposition of per unit tax the quantity of iron ore supplied was much more and the price of the product was reasonable. With imposition of tax, the buyers now have to pay more for the same quantity of goods and the sellers receive less than before. Hence the buyer reduces their demand and the seller reduces the volume of goods they bring in the market for selling (Kates 2014). From the figure above it can be seen that the quantity sold after taxation is much less than the quantity sold without tax. The green triangle shows the dead-weight loss due to per unit tax and the blue rectangle highlights the volume of revenue generated by the government through this taxation.

Establishment of a renewable energy plant in NSW

Robotic technology can increase the efficiency of production and reduce the need of man-power and time. If this technology is successfully applied in agricultural sector it is going to impact the production and consumption within the economy which has been shown in the diagram below:

Technological advancement has always been associated with the increase in the level of supply in the economy (Stiglitz and Rosengard 2015). Since robotics can efficiently sow and reap the agricultural product at lesser time and cost, hence more agricultural output is going to be produced in the economy. There is going to be a shift in the supply curve from supply 1 to supply 2. Assuming ceteris paribus the quantity produced changes from Q1 to Q2 and price reduces to P2.

Usually improvement in technology does not change the demand directly but due to the reduction in price of quantity, a situation may arise in such a way that the demand curve shifted outward with increase in demand. In such a case the price may go back to initial level of P1 but quantity produced increases further to Q3. This situation is very less likely to occur for agricultural production as people have a certain capacity to consume food. Under certain circumstances especially if the region had scarcity of food, it might occur that the demand increased in such a scenario.

The existing situation is the one where there is demand of police service which goes unnoticed and uncalculated as people do not have to pay for it and get it free. On other hand there is a fixed price of this service as borne by the government. Hence the supply depends on the volume of criminal activity and service required in different parts of Australia. Now after privatization, people now have to pay money for this service. The consequent short-term impact of this privatization can be depicted through the figure below.

In the left part of the figure the supply of police force has been shown as vertical as the government used to provide service at a fixed price. The volume of service depended on the need within the society but the exact demand was immeasurable. On other hand, with privatization people now have to pay for it and they are less likely wanting to do so. But since police service is amongst one of the important thing to maintain law and order in the system hence more service is going to be provided at higher price. Demand for the service is going to be negligible at higher price. That is the demand for police service is very elastic in nature and the supply of service is strongly inelastic in nature.

The measurement of the fluctuation in demand of any goods due to the change in the price of it is known as Price elasticity of demand. Mathematically it is written as,

The value of price elasticity lies between zero to infinity. If the value lies within the range zero (0) and one (1) then the good is said to be inelastic in nature and if it exceeds one it is said to be elastic in nature. It is said that goods that are necessity is usually inelastic in nature whereas luxury goods are elastic. On other hand, if ample numbers of substitutes are available for any particular good then it have elastic demand and vice-versa.

The concept of elasticity is used to measure the reaction of any goods in respect to the changes in its price and or the price of other goods (Engel, Fischer and Galetovic 2014). It is not necessarily the change in demand but also several times the fluctuation in supply is also considered. Hence, the concept depends on two factors namely the specific good whose responsiveness should be measured and the price against which it is measured. It can either be from demand side or supply side.

References:

Engel, E., Fischer, R.D. and Galetovic, A., 2014. The economics of public-private partnerships: a basic guide. Cambridge University Press.

Kates, S., 2014. Free market economics: An introduction for the general reader. Edward Elgar Publishing.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Pigou, A.C., 2013. The economics of welfare. Palgrave Macmillan.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Sowell, T., 2014. Basic economics. Basic Books.

Stiglitz, J.E. and Rosengard, J.K., 2015. Economics of the Public Sector: Fourth International Student Edition. WW Norton & Company.

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