Returns to Scale in the Australian Life Insurance Industry*

This paper seeks evidence of economies of scale for superannuation, ordinary and total business of a sample of 38 Australian insurance companies. It was motivated by the work of Rutledge and Tuckwell, but in contrast to their results, significant evidence, of economies is found.     

Briefing Paper Import Penetration in the United Kingdom

There is widespread concern about the growth of imports in the United Kingdom. British industry is said to be ‘bleeding to death’ as a result of foreign competition and calls are heard for protective measures such as import controls to save the economy. There are three elements in the case for protection. The first is that trends in Britain's foreign trade in manufactured goods have been extremely adverse and that there are no good grounds for believing that they will change spontaneously. The second is that the growth of the economy is constrained by the balance of payments and that consequently a serious and growing depression will develop throughout the 1980s which could reach catastrophic proportions towards the end of the decade when North Sea oil production declines. The third is that import controls are an effective way of coping with the problem. It is recognised that the second two elements are controversial. As it happens we disagree with both of them. However, it is generally assumed that the first element - the view that increasing import penetration will destroy British industry - is common ground and that no-one disagrees with it. Our aim in this Briefing Paper is to challenge this view. There is no doubt that import penetration (which we measure as the share of imports in GDP) has growth rapidly, especially over the past two decades. In 1960 imports amounted to 25 per cent of GDP. By 1970 this proportion had risen to 28 per cent and in 1979 it had risen to 35 per cent. However, we shall argue that the economic processes that have been responsible for this development have on the whole been poorly understood. We reject the popular view that Britain is structurally unable to compete in world markets. Instead we propose an alternative interpretation of import penetration which explains UK trade performance in terms of the broader pattern of the world trade order. In the light of this theory we argue that import penetration in the UK is not an inexorable trend reflecting the relative weakness of the UK in international trade. On the contrary, UK import penetration has been adjusting to a new world trading environment and now that this process of adjustment is nearing completion the rate of increase of import penetration seems likely to abate. Moreover, the British people have benefited from this greater degree of free trade and any protective measures designed to inhibit the economic forces that we describe below would damage the economic welfare of the British public as a whole.     

A NEW THEORY OF THE BUDGETARY PROCESS

This paper offers an alternative to the view that budgetary decisions are incremental because they are complex, extensive, and conflicted. Our model interprets incrementalism as the result of a legislative political strategy in response to interest group politics and economic conditions. Accordingly, a legislator chooses between single-period budgeting or multiperiod budgeting, where single-period budgeting is associated with a greater chance of non-incremental budgeting outcomes. We use a statistical procedure developed by Dezhbakhsh et al. (2003) for identifying non-incremental outcomes to test the implications of the model. Results support the model's predictions: a higher discount rate and a persistently large deficit appear to cause departures from incremental budgeting; Democrats' control over the political process have a similar effect, while a higher inflation rate has an opposite effect.     

Correcting Market Failure Due to Interdependent Preferences: When Is Piecemeal Policy Possible?

Allowing for general utility interdependence and agent heterogeneity, we characterize taxes that will generate first best solutions in markets. We show the equivalence of tax corrections derived from the Marshallian and compensated demand approaches. Next we analyze the conditions that are required for the market failure to be corrected by: (1) specific indirect ad valorem taxes on commodities, (2) the same proportional tax rate on every commodity, and (3) a proportional income tax rate on each individual. The conditions are related to the restrictions necessary to have H synthetic consumers without externalities who replicate behavior of individuals with externalities.     

The Consumer Tax Equivalent of a Tariff with Imperfect Substitutes

In estimating the Consumer Tax Equivalent (CTE) and Producer Subsidy Equivalent (PSE) of a tariff, it is often assumed that the imported good is a perfect substitute for the relevant locally made good. However, in evaluating the economy-wide effects of a change in tariff using general equilibrium models, it is common to assume that the imported good is an imperfect substitute (so-called Arming-ton assumption)¹ This paper estimates CTE assuming imperfect substitution in order to be consistent with the assumption commonly used in general equilibrium models. It shows how estimates of the CTE and PSE are sensitive to assumptions about the substitution elasticity of demand and the price elasticity of supply for the locally made good.     

Tariff Compensation Without Omniscience*

The piecemeal application of second-best arguments to practical policy-making is highly dangerous. This paper attempts to demonstrate this by taking the recent Australian debate over ‘tariff compensation’ as an example. The attempt to ‘compensate’ for tariff-induced distortions in output prices by means of input subsidies is shown to lead to informational problems so serious that the pursuit of such a policy in practice seems unwise. This point is argued by means of extensive numerical examples. These suggest that the potential welfare gains from tariff compensation, optimally applied, are small relative to the potential costs of well-intentioned but erroneous interventions.