Allocation of Scarce Resources in a Market Mechanism - Assignment Example

Allocation of Scarce Resources in a Market Mechanism The economies of the world are facing the impact of increase consumerism. With the rise in the per capote income level of the countries the needs, wants and demands of the people are becoming insatiable in nature. However, it is found that the global economy is failing to meet the growing needs and demands of the growing population. The production of goods and services is failing to meet the growing expectations of the world economy. To this end, it can be inferred that the natural resource base of the world is slowly getting depleted hampering the production system of the country. Hence the need for an effective allocation of the existing resource base through prioritization of wants is being felt increasingly. Effective allocation of the scarce resource base is the only way through which a country can satisfy the demands of its growing population and work towards profitability. To counter the system of effective allocation of the existing resource base the economies of the world are generally faced by three fundamental questions. Firstly, the economy needs to consider the nature and the pattern of the goods and services that needs to be produced to meet the needs and demands of the growing population. Secondly, the economy needs to identify the most effective way through which the goods and services can be produced to justify the use of depleting resource base. Thirdly, the economy must understand the needs of the target population who will eventually consume the goods and services produced. (Riley, 2006; Economic Systems, 2010). To this end, it is found that allocation of scarce and limited resource base in an economy driven by ‘market mechanism’ is conditioned on the price quotes obtained through auctions or bids. The resources of the economy are transferred to private hands through the system of bids and auctions. Observation made in this regard shows that the government of different countries operating in a market mechanism has made the private sector get license in relation to oil exploration and land property rights. The private system in the economy owing to the above fact has emerged as key players in areas like broadcasting, education, housing and oil exploration. Here, it must be noted that allocation of the limited resource base through market mechanism depends on the purchaser’s desire to pay for the same. Information about the highest price that can be paid by the purchasers are gathered through the bidding system and decision is taken henceforth on the acquired data. The promotion of the activity of the private organizations in a market mechanism system using the base of natural resources helps in augmenting the economic production. Moreover, the expansion of the production opportunities in the private sphere also helps to enhance the employment opportunities in the economy. Thus, it is found that firms operating in a market mechanism helps not only in promoting economic growth through increased production of goods and services but also in generating huge employment opportunities. Thereby, it is held that the market system is the best means for distributing scarce assets and also plays a positive role in bringing about a positive ‘investment climate’. (Condorelli, 2008) Governments Role in encouraging a positive ‘investment climate’ Organizations tend to flourish in a system of a favorable ‘investment climate’. The term favorable ‘investment climate’ is coined in respect to a situation where the business firms operating in a region are found to avail huge opportunities in terms of profitable investment and employment opportunities. In turn generation of huge amount of investment and creation of employment opportunities helps the global economy to grow and expand. ‘Investment Climate’ of any economy is generally found to depend mainly on three parameters viz. macroeconomic variable sets like policies relating to trade, finance and monetary schemes, regulatory practices of the government institutions and on the availability of better infrastructural facilities. Moreover, the political and legal environment of the region also plays a considerable role in generating a positive ‘investment climate’. The encouragement of creating a positive ‘investment climate’ helps the economy to gain far fledged growth through the generation of Foreign Direct Investment in the country. It is also found that the medium and small-scale industries also flourish in a healthy ‘investment climate’. The government of a region can help in generating a favorable business climate through curbing the weight of the tax policies. To this end, the government of the day must make endeavor to simplify the process of charging taxes. Moreover, the government can also pursue technical means like online filing of taxes. The labor policies pursued by the government must be liberalized to a certain extent in helping the business to take autonomous decisions on recruitments and retrenchments. The government should take active role in developing the infrastructural system of the country pertaining to transports and communication. Development of infrastructural facilities would help in business expansion creating a healthy environment. Moreover, actions taken by the government in promoting vocational education would also help to generate skilled labor force for the industries. The government of a country must generate regulations and economic policies based on the policy practices of international trade bodies like the World Trade Organization, European Union and World Bank so as to create a global environment for the business to thrive. Finally, the acts of privatization pursued by the government of a region give further boost for the industries to operate. (Best Practice Guide for a Positive Business and Investment Climate, 2006. pp. 17, 60-61; Montgomery & Tuladhar, n.d. p. 1). Henceforth, it is found that the government of a region has significant role to play in boosting up a healthy ‘investment climate’ of a region. The government’s action would certainly help in welcoming foreign companies to invest in the country, which will help in the development of the economy. Government Policies of United Kingdom towards promoting a healthy ‘Investment Climate’ The government of United Kingdom is found to take significant steps towards promoting a healthy ‘investment climate’ in the region. The government of United Kingdom has a liberal view in inviting huge amount of Foreign Direct investment to the country. An estimate made in 2007 shows that the total amount of Foreign Direct Investment acquired by the country from United States of America amounted to $398 billion. Moreover, it is observed that the government of United Kingdom has no personal bias towards any particular nation. Henceforth, foreign companies operating in the region are treated in the same way to the treatment offered to the domestic companies. In regards to the system of charging taxes levied upon the foreign and domestic companies are found to be almost alike. The United Kingdom government to promote the upliftment of the employed class takes special tasks to render concessional grants to foreign investors investing in such areas. This helps to create a moral boost to the foreign investors to render huge investments. Moreover, the country of United Kingdom represents economic and political solidarity, which throws a positive signal to the foreign investors investing in it. The financial and monetary instruments of the United Kingdom bear the feature of being easily transferred and converted to any foreign currency. Hence, trading based on the use of pounds and sterling does not impose pressure on the foreign firms. Moreover, the government of United Kingdom is further looking forward to joining an international trade and economic body like the European Union. The economy of the United Kingdom is also observed to nationalize some foreign companies in regards to the country’s necessity. However, to this end, the government of United Kingdom follows international practices while setting the right compensation package to be paid to the governing authority of the foreign companies. Keeping an eye on the legal practices of the government of United Kingdom it is observed that the country settles any disputes amounting to corporate issues in the courts of the country. It is found that United Kingdom has a very strong legal structure, which helps in the settlement of huge number of disputes. The contract law of the country also does not permit international settlement of contractual disputes. The country also has a very lucrative incentive scheme, which is rendered to the foreign companies investing in weaker areas needing employment. United Kingdom is also found to have a strong legal base which helps to safeguard properties created on an intellectual stand point. The country is observed to be a member of international bodies created to safeguard ‘intellectual property’. Hence, the government helps in the promotion of companies carrying on research activities and thus invites huge investment in that direction. The regulatory practices of United Kingdom are found to be quite transparent with terms clearly spelt out to avoid confusion. The government of the country seeks to reduce administrative pressure and create a healthy atmosphere for business to flourish. The labor population of the country amounts to around 30 million people. United Kingdom is also looking forward to develop the skill base of its labor population through vocational training schools. (Dimireva, 2009) Part B Forecast of Oil Prices The prices of oil in the international market counter heavy fluctuations in the long run. In this regards several factor considerations can be brought forward to understand the reasons behind such continuous fluctuations in the oil prices. It is found that firstly, the cost of the oil exploration in the medium and high level ranges goes on increasing owing to more intensive exploration practices and change in the scientific and technological development made in such processes. Moreover, in the second part it is observed that increase in the demand for oil in the international market also increases the price of oil. In the third case it is observed that a rise in the economic growth in a global scale also helps to increase the prices of the oil in the international market. Fourthly, it is found that alterations made in the policy structures regarding the use of natural resources also counter a change in the price structures of oil in the international market. In the fifth case it is found that huge amount of investment fluctuations also tends to influence the prices of oil in the international sphere. Sixthly, the course of events in the political and military sphere of the different international countries also tends to influence the price dynamics of the oil market. In the seventh point it can be observed that certain regulatory changes brought about by international bodies like Oil and Petroleum Exporting Countries and International Energy Agency also tends to have an impact on the global oil prices. Moreover, the eighth point is found to focus that change in the strategic lookouts of the organizations involved in the trading of oil also influences the global price changes in such. In the ninth point it is observed that alterations made in the public policy practices regarding the usage of public commodities also tends to affect the oil prices. Finally, in the tenth point it is observed that apprehensions of the customers speculating changes in the global economy also tend to render impact on the price dynamics of such. However, the above factors underlined sometimes affect the oil prices by assimilating themselves in groups. Thus, in carrying out an operation to forecast the prices of oil in the international market the interrelatedness of the above factors should be taken into account. It must also be observed that such price forecasting turns out to be an indefinite approach for the existence of factors involving political and military endowments. (Dokuchaev, Rogacheva, & Evtushenko, 2007. pp. 1-2). A graphical analysis is given to show the pattern of price forecasting that is made depending on the level of combination of the factor endowments. In the graph Y1 refers to 1974, Y2 to 1976, Y3 to 1978, Y4 to 1980, Y5 to 1983, Y6 to 1984, Y7 to 1985, Y8 to 1986, Y9 to 1987, Y10 to 1988, Y11 to 1990, Y12 to 1992, Y13 to 1993, Y14 to 1995, Y15 to 1996, Y16 to 1997, Y17 to 1998, Y18 to 1999, Y19 to 2000 and Y20 to 2003. (Dokuchaev, Rogacheva, & Evtushenko, 2007. p.6) It is found that the price of oil per barrel incresed during the 1974 period and was left standardised until the 1976 period. The reason attributed to this end is the nationalissation of the oil companies which took place during that period. Thus, the focus shifted to the oil exporting companies of the middle east. However, it is found that price of oil showed a dipping trend during the period from 1980 to 1986. Reason attributed to the effect were standardisation practces in the global oil prices. The standardisation ocurred due to the emergence of technological innovations focussing on the conservation of natural resources. Moreover, it was found that the Oil and Petroleum Exporting Countries failed to gain dominance at that point of time in regulating the prices. However, from the period ranging from 1986 to 2003 it is observed that inflationary changes in the world economy caused ther price of oil to rise from $15 per barrel to $50 per barrel. Still seasonal fluctuations could be observed owing to slow inflatioary growth which renders an avarge growth in the price of the oil. It is also obsaerved that during the period from 1973 to 1986 the consumption patterns of the economy changed. The approach taken to conserve power made the price of oil per barrel take a stagmnant mode. (Dokuchaev, Rogacheva, & Evtushenko, 2007. pp. 6-9). Further observation shows that during the period of 2007 the global prices of oil again increased. The reason inferred to this ends shows that a number of refineries in America had to be closed down owing to under maintenance. This led to the decrease in supply of oil which failed to meet the demand of the growing urban market. Thus, the prices of products like petrol and gasoline soared during that period. Further, it is also observed that price of oil products was somewhat indifferent to changes in supply. The reason attributed to the above cause is that there was a continuous lag of the needed production capacity. Thus, it is held that with the increase in the production capacity by creating additional refineries the price of oil products would turn elastic to the changes in supply of the product. Moreover, anticipatory activities by the consumers would also amount to the fall in the oil prices at a future period. (Dees, Gasteuil, Kauffman & Mann, 2008. p.5). The above situation is shown in a graphical manner as follows. The first graph shows that owing to the increase in demand for the petrol the demand curve D shifts to D1. In a similar fashion the equilibrium price P increases to P1 while the quantity increases from Q to Q 1. Again, due to anticipation for the future rise in market prices for petrol the demand curve declines from D to D2. Correspondingly, the price of petrol decreases from P to P2 while quantity for the same decreases from Q to Q2. In regards to the supply curve it is found that owing to closed refines in America the supply shifted from S to S2. Correspondingly, the price increased from the equilibrium price level P’ to P’4. The quantity of petrol however decreased from Q’ to Q’2. Though, at a later stage with the opening up of new refineries the supply increased for which the supply curve S shifted to S1. With the rise in petrol supply the quantity increased from Q’ to Q’1. The price for petrol on the other hand deceased from P’ to P’3. D D1 Price S2 S Price P1 D2 P’4 S1 P P’ P2 P’3 Q2 Q Q1 Q’2 Q’ Q’1 Quantity Quantity The forecasting of the prices of oil should also take into account the rise and fall in the rate of exchange of the monetary instruments between different nations. It is found that the fall in the value of the Russian currency Ruble had an impact on the oil industry of the country. Moreover, it should also be observed that the emerging technological market also causes a change in the market economy of oil products. It is stated that with the rise in the Information Technology industries the rate of power consumption also increased. The industries related to the Information Technology sector was found to flourish more in emerging markets like China and India. Owing to the rise in Information Technology industries in these areas the demand for oil also shifted from the Western countries to that of the East. Again, the demand and prices for petrol encounters a change with the fall in the value of the American dollar. The fall in the value of the dollar is taken as the contributing factor in reducing the supply of oil from the areas of North Sea. It is because with the fall in the value of dollar the sale proceeds obtained in dollar also deceased affecting the supply of the product. Further, it also observed that the forecasting activities take into account redundant predictions obtained from the Oil and Petroleum Exporting Countries. The Oil and Petroleum Exporting Countries have been found to fail in satisfying the demands of petrol in the recent years. (Alhajji, 2006) To this extent, forecasts are carried out which shows that the price of oil would increase to $83.50 by 2011. The forecasted figure was carried out observing the growth in the oil prices from $77 per barrel from the first quarter of the 2010 period. It is expected that such increase would amount to the rise in oil prices to reach $85 by the end of the fourth quarter of the 2011 period. Hence, the average forecasted price of oil in 2011 is taken at $83.50 per barrel. On the other hand the prices of other oil products like Gasoline and Diesel are also observed to increase during the 2010 period and would sustain such growth during 2011. It is expected that prices of gasoline would amount to $2.84 per gallon by the end of the 2010 period. The prices for diesel products are also taken to increase to $2.98 per gallon by the close of the 2010 period. Forecasts made for the 2011 period suggests that prices of gasoline and petrol would increase to $2.96 and $3.14 per gallon on an average basis. The rise in the prices for the oil products is observed to occur for the growth in the economy of the world from the 2010 to the 2011 period. It is stated that the economic growth of the countries belonging to the Oil and Petroleum Exporting base would increase from 1.2 percent recorded in 2010 to a forecasted figure of 2.7 percent by the end of 2011. In regards to the winter months of the 2010 period it is held that the average prices of oil meant for heating purpose would amount to an average amount of $2.78 per gallon. Thus, the forecasts show that the prices of oil in the global economy would be surging ahead by 2011 due to a rise in demand for various oil products in the world market. (Crude Oil Price Forecast 2011, 2010) Reference 1. Riley, G. (2006), AS Markets & Market Systems: Scarcity and Choice in Resource Allocation. Retrieved on December 3, 2010 from: http://tutor2u.net/economics/revision-notes/as-markets-scarcity-and-choice.html 2. “Economic Systems”, (2010). bized.co.uk. Retrieved on December 3, 2010 from: http://www.bized.co.uk/learn/economics/notes/systems.htm 3. Condorelli, D. (2009), Market and Non-Market Mechanisms for the Optimal Allocation of Scarce Resources. Retrieved on December 3, 2010 from: http://privatewww.essex.ac.uk/~dcond/VWASR.pdf 4. “Best Practice Guide for a Positive Business and Investment Climate”, (2006). osce.org. Retrieved on December 3, 2010 from: http://www.osce.org/publications/eea/2006/07/19786_640_en.pdf 5. Montgomery, W. & S. Tuladhar. (n.d.). The Asia Pacific Partnership: Its role in promoting a positive climate for investment, economic growth and Greenhouse Gas reductions. Retrieved on December 3, 2010 from: http://www.iccfglobal.org/pdf/APPsummary.pdf 6. Dimireva, I. (2009). UK Investment Climate 2009. Retrieved on December 3, 2010 from: http://www.eubusiness.com/europe/uk/invest 7. Dokuchaev, E., Rogacheva, A, & E. Evtushenko. (2007). The Forecasting of the World Oil Price by summing up Linear Trend and Periodic Functions. Retrieved on December 3, 2010 from: http://www.ogbus.ru/eng/authors/Dokuchaev/Dokuchaev_2.pdf 8. Dees, S, Gasteuil, A., Kaufmann, R., & M, Mann. (2008). Assessing the factors behind Oil Price changes. Retrieved on December 3, 2010 from: http://www.ecb.int/pub/pdf/scpwps/ecbwp855.pdf 9. Alhajji, A. (2006). Forecasting Oil Supply And Demand: Difficulties And Challenges. Middle East Economic Survey. 49(1/2). 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