Long-Term Investment Decisions

Stephanie Piris ECO 550 Dr - Long-Term Investment Decisions introduction. Gerace Assignment 4 December 20, 2012 Long-term Investment Decisions 1. Explain why government regulation is or is not needed, citing the major reasons for government involvement in a market economy. Provide support for your explanation. In a free market economy, buyers and sellers freely trade with each other according to their own self-interest and the laws of supply and demand. Competitive market forces efficiently allocate resources.

The role of government is limited to controlling the law and order of a country, but most people agree that society needs some form of government regulation and public policy in order to balance public and private interests and promote economic growth. One major reason for government involvement in a market economy is externalities. Externalities come about when economic activity has an unintended effect on a third party that is not directly involved in a transaction (Jack Welsh Management Institute, 2012). Externalities can be negative or positive to society.

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Examples of negative externalities are damage to the ecosystem, loss to the tourism industry, etc. The fundamental problem with a negative externality is how to measure the full social cost associated with economic activity. A positive externality happens when the production or consumption of a good or service benefits a third party who did not pay for that benefit. Education, for example, benefits society as much as it benefits the individual. Educated people tend to spur higher productivity for companies, create new inventions, and generate taxes from salaries. . Justify the rationale for the intervention of government in the market process in the U. S. The use of private goods and public goods would be the rationale for the U. S. government to intervene in the market process. Private goods are exclusionary and limited in the sense that when you use them, other people cannot. An example would be food and clothing. And because these kinds of goods are limited, it can induce competition among consumers. Public goods, on the other hand, do not induce competition among consumers.

They are funded by the government. They are products and services that everyone can use. For example, national defense, police and fire protection, public television, and radio, does not reduce the availability or benefit to use when someone else is in use of it. Public goods are therefore non-exclusionary, meaning that it is impossible to prevent the benefits of the public good from spreading to others who are also in need of it. The U. S. government must fund things that are in society’s best interest overall.

The government aims for a project that has net positive benefits from a cost-benefit perspective. For example, to build a public road that will provide faster access to the interstate, private property can be taken by eminent domain. Those who travel on an everyday basis will gain from a faster connection but those private property owners will lose their land and may not even receive compensation equal to the land’s value including personal memories. A public good or service should be supplied up to the amount where marginal social cost equals marginal social benefit.

Social benefits are maximized when each government project or public investment’s ratio of marginal social benefits (MSB) equals its ratio of marginal social costs (MSC) across all programs (Jack Welsh Management Institute, 2012). The government can make use of the same economic tools as the private sector. If MSB/MSC is greater than 1, net marginal benefits to society can be achieved through public-sector expansion. If MSB/MSC is less than 1, resources are being wasted. Effective government practice in the market process requires a comparison of marginal social benefit of a public good against the marginal social cost. . Assume that the company’s is considering a merger. The possible merger currently faces some threats and that the industry decides on self-expansion as an alternative strategy, describe the additional complexities that would arise under this new scenario of expansion via capital projects. Hospital mergers are clearly presenting antitrust concerns which convey the more compelling strategies that hospitals are using to offset federal antitrust concerns used by the federal agencies, Federal Trade Commission (FTC) and Department of Justice (DOJ).

FTC and DOJ’s likelihood of contesting a merger is now based on the merging hospitals’ ability to provide strong evidence of substantial savings resulting from a merger. Further, evidence indicates that states are taking on increasing authority for the oversight of hospital mergers. This federalism trend suggests that consumer protection for hospital mergers may be enhanced through a combination of federal and state oversight measures. Traditional antitrust analysis of horizontal consolidations has focused on increased market power, which results from rising market share.

Mergers have been considered illegal if they resulted in market power increases great enough to allow nontransitory increases in hospital prices (Spang, Bazzoli, and Arnould, 2001). Health care restructuring has not been limited to hospitals. Health insurers have also undergone a series of mergers, with increases in concentration. Hospitals and physicians argue that buyer-side monopolies or monopsonies should be scrutinized for anticompetitive effects. Antitrust law is concerned about monopsony as well as monopoly, since both can depress output and impair allocative efficiency.

First, the geographic market for insurance is often considered national or regional rather than local, making it hard for any insurer to achieve dominance as defined by antitrust law. Second, barriers to entry by new competitors in insurance markets are thought to be low, making it hard to prove that even a dominant insurer will abuse its position. Third, physicians and hospitals may not have the legal right to challenge conduct by insurers that harms consumers (Hammer and Sage, 2003).

Economists generally believe that the exercise of bilateral monopoly typically harms rather than helps consumers. 4. Analyze how the different forces will come together to create a convergence between the interests of stockholders and managers indicating the most likely impact to profitability. Provide support for your response. Health care markets are widespread with principal–agent relationships. The principal-agent theory is used to explain agency issues. These inefficiencies or issues include the quality of care in the relationship etween hospital and patient, and the internal organization, i. e. relationship between the hospital and its main departments. Courts have begun to question whether private insurers adequately advance the interests of consumers generally, or whether they represent narrower constituencies such as their enrollees, the employers who sponsor coverage, or merely themselves. There are a several types of agency relationship issues that arise in hospitals, i. e. , the relationship between the hospital and the patient, the hospital board and medical specialists, and the hospital board and departments.

In the relationship between a hospital and a patient, the patient has to rely on the specialized knowledge of the doctor and there is an asymmetry in information about the treatment of the health problem. It is difficult for the patient to measure the performance of the hospital and the hospital might thereby prefer to optimize its own utility function, minimizing its costs, which may come at the cost of the utility of the patient. In the relationship between the hospital and its departments, it is useful to describe the hospital organization.

It has been said that hospitals have a functionalistic structure: surgeons in the surgery department, clinical chemistry in the laboratories, etc. (Ludwig, Van Merode, and Groot, 2010). For instance, Dutch hospitals are organized as a functionalistic organization of medical disciplines and facilitating departments, which implies that it is difficult to realize integration. Antitrust law requires a clearer framework for evaluating agency failures, and the regulatory response to them, as a source of overall market failure in health care.

Antitrust oversight of hospital–payer relations has extended to public insurance programs such as Medicare or Medicaid, for the simple fact that those programs pay administered rather than negotiated rates. References Hammer, Peter J. and Sage, William M. (2003). Critical Issues in Hospital Antitrust Law. Health Affairs: http://content. healthaffairs. org/content/22/6/88. full Jack Welsh Management Institute (2012). Managerial Economics: Government in the Market Economy. Retrieved at http://www. wmi. com/content/managerial-economics-governament-market-economy. Ludwig, M. , Van Merode, F. , and Groot, W. (2010). Principal agent relationships and the efficiency of hospitals. The European Journal of Health Economics. http://www. ncbi. nlm. nih. gov/pmc/articles/PMC2860099/ Spang, Heather R. , Bazzoli, Gloria J. and Arnould, Richard J. (2001). Hospital Mergers And Savings For Consumers: Exploring New Evidence. Health Affairs: http://content. healthaffairs. org/content/20/4/150. full

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