ECO10004: Australian east coast brick operations, - Economics Assignment

Assignment Task :

Economics Assignment:

Scenario: CSR and Boral have announced the intention to form a joint venture of  Australian east coast brick operations, citing reduced brick usage as a major cause for consolidation. The companies have proposed to combine brick operations in New South Wales, Victoria, Queensland, South Australia, Tasmania and the ACT. The move is subject to clearance by the Australian Competition and Consumer Commission (ACCC). A joint statement from the companies explains brick demand in Australia has experienced a sustained structural decline, with bricks becoming an increasingly smaller component of the broader cladding market. Despite a general increase in construction activity over this period, total brick production in Australia has fallen by 46 per cent from its peak in 1981, according to Boral and CSR.

1) Using the concept of economies of scale to explain the two companies’ argument that it is now necessary for CSR and Boral to merge. For this question assume that CSR and Boral are the only two companies in the market and form an oligopoly (Hint: think about the cost curves and the market demand curve)? A graph is likely to be helpful in explaining this question.

2) If the joint venture is allowed to proceed, how would you describe the new market? What would be the impact on price, quantity and profit? Explain.

3) If the government allows the merger to go ahead two options are available for regulating the price. What are the two options and which would be the better option? Explain

Scenario 2: “Dead capital” is Hernando de Soto’s term for an asset that cannot easily be bought, sold, valued or used as an investment. Despite obvious poverty in the informal sector in Peru, de Soto’s work shows that even those who live in slums possess far more capital than anyone realizes. In fact, the informal economy is so large in Peru that almost 70 percent of the working population work in informal arrangements. … Possessions … are not represented in such a way as to make them fungible (i.e. easily exchangeable) assets. Dead capital cannot, therefore, create value for the poor. What you’re really leaving behind is the world of legally enforceable transactions and property rights. The developed world has devised a formal property system of titles, title registries, and inclusive property law that includes real estate used for homes or businesses. De Soto shows that this is a large part why some nations are rich while others remain in poverty. He says: With titles, shares and property laws, people could suddenly go beyond looking at their assets as they are — houses used for shelter — to thinking about what they could be—things like security for credit to start or expand a business. The moment Westerners were able to focus on the title of a house and not just the house itself, they achieved a huge advantage over the rest of humanity. When purchasing a home, an open records system enables buyers and sellers not only to gauge the value of homes in nearby areas but to set reasonable prices based on comparative values. Clear titles and title insurance give buyers the confidence they need to complete a purchase. No clear title? No sale. The system also gives banks the assurance they need to offer a mortgage. It represents a real house (house, land, a factory, a car, etc.)

Questions:

1) Explain how “Dead Capital” is related to the informal economy? Define these terms and explain what they mean in the context of DeSoto’s ‘dead capital’.

2) Many of the owners of houses in ‘shanti towns’ in the outskirts of Peru’s capital Lima are happy that they do not have to pay land taxes, or municipal rates, as we do in Australia. Is this an advantageous situation to be in for the poor in Peru? Explain your answer.

3) Would the informal economy hinder or promote economic growth in Peru? Explain your answer. Hint: look at “New Growth Theory” and the case study on Botswana on p. 380-381 to answer this question.    

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