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Chapter 16
Microeconomic Policy
THE RATIONALE FOR MICROECONOMIC POLICIES
Microeconomic policies refer to government policies designed to raise the economy’s level of efficiency,
productivity and international competitiveness. At the microeconomic level of activity, firms, markets
and governments produce and distribute goods and services to the community. Microeconomic reform
policies aim to improve the efficiency of production, distribution and exchange by strengthening
market competition and the use of the latest technology. They are supply side policies used to increase
the economy’s long run aggregate supply curve (AS) or productive capacity. Microeconomic reform
policies are used to address specific structural problems in markets (such as labour market reform) which
cannot be addressed through the use of macroeconomic policies such as monetary and fiscal policies.
The major objective of microeconomic policies is to shift the economy’s aggregate supply curve (AS)
to the right as shown in Figure 16.1. In this model used by supply side economists, the price level is
flexible unlike the Keynesian model which uses a fixed price level. The aggregate supply curve represents
the total volume of the economy’s output at various price levels. The aggregate demand curve represents
total spending in the economy at various price levels. The intersection of the aggregate demand (AD)
and aggregate supply (AS) curves represents the economy’s equilibrium level of income and output at
Ye and at price level P. Any increase in aggregate demand without an increase in aggregate supply will
lead to a higher price level and inflation. This represents a constraint on the economy’s growth as more
resources or an increase in the productivity of resources are needed to increase economic growth by
increasing aggregate supply. This capacity constraint occurred in the Australian economy between 2005
and 2008 due to full employment in the labour market and high levels of capacity utilisation.
The aim of microeconomic policies is to shift the economy’s aggregate supply curve to the right from AS
to AS1. This would lead to more economic growth (Ye to Ye1) and a lower price level (P to P1), as more
output is available at a lower price level. An increase in aggregate supply could be sourced from higher
productivity of resource use or more resources being used to increase output. Microeconomic policies
include raising labour and capital productivity by encouraging firms to use the latest technology and
more efficient work practices. They also involve less government regulation of markets (i.e. deregulation)
and the use of competition policy to promote price competition and greater efficiency in markets.
Price Level
AD AS AS 1
P
P1
AD
AS AS1
0 Real GDP or
Ye Ye1 national income
Microeconomic policies are complementary to the government’s use of macroeconomic policies. If the
government can achieve economic growth, internal and external balance in the short to medium term
by using macroeconomic policies, microeconomic policies can operate simultaneously to improve the
efficiency of resource allocation in the economy in the long term or long run. This involves changing the
structure of the economy (i.e. structural change) to make it more productive, efficient and competitive.
Structural or microeconomic reform is a global phenomenon as many countries use microeconomic
policies to make their internal markets function more efficiently. If successful, microeconomic policies
can also improve international competitiveness and access to global markets through increased exports.
The three main types of efficiency gains from successful microeconomic policies are the following:
1. Technical or productive efficiency refers to firms producing output using the least cost combination
of resources. This means producing the maximum output at the minimum average cost. This is
known as the point of technical optimum for firms in microeconomic theory.
2. Allocative efficiency involves firms charging prices which reflect the marginal cost of production so
that resources are allocated in such a way as to reflect consumer preferences for goods and services.
3. Dynamic efficiency refers to firms adapting to changing economic circumstances by using the
latest cost reducing technology to meet changing consumer preferences. This is also known as inter-
temporal efficiency as firms respond to changes in demand in domestic and global markets over
time by producing output at the minimum cost.
Efficiency gains should lead to a rise in national income and living standards, and the Australian
economy’s ability to absorb adverse shocks transmitted from the global economy such as the fall in the
terms of trade in 1986; the 1997 Asian crisis; the US and global slowdowns in 2001-03; and the Global
Financial Crisis in 2008-09. Efficiency is linked to productivity growth as this was the major source of
growth in GDP per capita in Australia between 1990 and 2001. Annual productivity growth was 2.2%
in this period, which was higher than most other OECD countries (refer to Table 16.1).
Australia’s per capita income has been three quarters of the USA’s level for most of the past 50 years.
Between 1950 and 1990 the level of Australia’s per capita income relative to the United States fell,
although it still grew strongly in absolute terms. The main reason for the gap between Australia and the
United States was a relatively poor productivity performance in the 1950s and 1960s. Between 1973
and 1990 Australia’s productivity growth fell to 1.5% from the 2.6% recorded between 1950 and 1973.
However between 1990 and 2001 Australia’s productivity performance improved, restoring relative
productivity and GDP per person to the positions held in the 1950s. This improvement in productivity
can be attributed to the adoption of more flexible labour market practices including enterprise bargaining;
the range of microeconomic reform measures introduced to make markets more competitive; and the
increasing absorption of new technologies which led to capital deepening in the Australian labour force.
Australia’s average annual rates of growth in labour, capital and multifactor productivity were at their
highest in the 1960s and early 1970s. However they declined in the 1980s, before recovering in the
1990s and early 2000s. Labour productivity grew more rapidly during the 1990s than in any other
comparable period in the past forty years, outperforming the ‘New Economy’ of the United States and
the OECD countries (refer to Figure 16.2). Labour productivity growth averaged 2.2% in the 1990s,
capital productivity grew by about 0.3% and multifactor productivity by about 1.5% in this period.
Strong growth in Australian labour productivity in the 1990s and 2000s reflected the following factors:
• Increases in capital per worker, which is known as capital deepening;
• Improvements in the quality of labour through education and training; and
• Improvements in the efficiency with which labour and capital are used together in production.
All measures of productivity slowed to around 0.5% to 1% between 2004 and 2007 as the economy
reached full employment and labour shortages began to emerge as did capacity constraints. The Global
Financial Crisis in 2008-09 also reduced productivity growth as employers cut working hours.
1. Limiting the anti-competitive conduct of firms Competitive conduct rules of Part IV of the Trade
in product and factor markets Practices Act 1974 apply to all businesses
4. Providing third party access to certain facilities Access arrangements for the electricity grid
that are essential for competition and telecommunications network
Natural monopolies have been reformed and are subject to price surveillance by the ACCC. Markets
such as electricity and telecommunications have been opened up to competition through third party
access. Competitive neutrality between PTEs and private sector firms has been promoted by making
PTEs pay taxes; market interest rates on capital borrowings; and dividends to their government owners.
The bodies responsible for the application and enforcement of the national competition policy are
the Australian Competition and Consumer Commission (ACCC) which enforces the Competition
and Consumer Act 2010; the Australian Competition Tribunal (ACT) which reviews appeals; and the
National Competition Council (NCC) which co-ordinates policy initiatives.
On January 1st 2011 the Trade Practices Act 1974 was renamed the Competition and Consumer Act 2010.
This name change was brought about by two legislative amendments known as the Australian Consumer
Law Act Nos 1 and 2 (ACL). The new ACL is a single national law introduced by the Commonwealth
government to protect consumers and ensure fair trading in Australia. Key changes introduced by the
ACL include new consumer protection provisions and a national product safety system (see page 339).
The current rationale for deregulation is largely based on George Stigler’s (Nobel Laureate in economics
in 1982) economic theory of regulation, which provided a critique of regulation or ‘regulatory failure’.
Stigler argued that a policy of government regulation of markets was inefficient on several grounds:
• Regulatory policies involved large administrative and compliance costs to the government and
taxpayers. These costs resulted in the growth of government budgetary spending;
• There was an ever present danger of the regulators being ‘captured’ by the regulated industry
or enterprises through ‘rent seeking’ behaviour, and manipulated by the regulated industry for
favourable treatment by the regulators - known as the ‘theory of capture and rent seeking’; and
• There was a high opportunity cost of regulation in terms of the inefficient use or waste of resources,
higher prices to consumers, a lack of innovation, and less competition in markets.
The global push for the deregulation of markets is also based on ‘contestability theory’ developed by
William Baumol. He argued for the elimination of entry barriers to markets to raise the threat of actual
or potential entry by new firms. This would promote competition by making markets ‘contestable’.
The theories of Stigler and Baumol influenced governments in Britain, the USA, Chile, France, New
Zealand and Australia in the 1980s and 1990s to embark on the large scale deregulation of markets
and the privatisation of PTEs. The goals of these policies were to raise competition and efficiency, and
to reduce consumer prices in markets. The policy of deregulation began in Australia in 1983 with the
deregulation of the financial system. It accelerated in the 1990s with the deregulation of other industries
such as air transport, telecommunications and some agricultural markets such as dairying and eggs.
Deregulation refers to the removal of government restrictions on the operation of markets. Deregulation
can involve the removal of regulations affecting entry into an industry; pricing arrangements; or other
controls on businesses, to promote competition and efficiency, lower prices, and strengthen incentives for
technological innovation. Between 1983 and 2000 a number of Australian industries were deregulated:
• The financial system was deregulated in 1983 with controls on interest rates, bank lending and
deposits lifted, and 16 new foreign banks were granted licences to operate in Australia. In addition,
the exchange rate was floated by allowing its value to be determined by the market forces of demand
and supply instead of its value being fixed or adjusted by the Reserve Bank of Australia.
• The domestic airline industry was deregulated in 1991, with the ending of the Two Airlines Policy
(i.e. Ansett and TAA). Qantas and Australian Airlines (formerly TAA) were merged, and Compass
entered as a third carrier. Airline cabotage was abandoned in 1994, allowing Qantas to fly domestic
routes and Ansett to fly overseas routes.
The deregulation of the industry resulted in lower air fares and a large increase in the volume of
air passengers, as airlines developed new routes and engaged in vigorous product differentiation.
However airlines such as Compass, Freedom, Impulse and Ansett could not compete and exited the
industry in the 1990s or 2000s, but carriers such as Virgin Airlines, Qantas and Jetstar, and Tiger
Airlines remained in competition in the domestic airline industry in 2012.
• Telecommunications was partially deregulated in 1992, with the entry of Optus to compete with
Telecom on STD phone calls and in the mobile phone market. Telecom was subsequently merged
with OTC to become Telstra, and competed with Optus over pay television rights, with Vodafone
entering the market in 1993 to compete in the digital mobile telephone market. Other major
carriers such as AAPT, Primus, Dodo and Orange (now Vodafone) entered the market in 1997 after
full deregulation of the industry. With deregulation, the telecommunications market and industry
grew quickly, prices fell, and growth in services increased with higher Internet and mobile usage.
• In agriculture, the federal government lifted the import embargo on sugar, tobacco, dried and
citrus fruits in 1995. Wheat marketing was deregulated in 1989 and milk marketing support
removed in 2000. Egg marketing was also deregulated in NSW, South Australia and Victoria.
Competition Policy
The Australian Competition and Consumer Commission (ACCC) is an independent statutory authority
which administers the Competition and Consumer Act 2010 which came into force on January 1st 2011
(formerly the Trade Practices Act 1974). It promotes competition and fair trade in the market place to
benefit consumers, businesses and the community. The ACCC also regulates national infrastructure
industries and has primary responsibility for ensuring compliance with Commonwealth competition,
fair trading and consumer protection laws. The Australian Consumer Law Act (ACL) is a national law
introduced by the Commonwealth government in 2011 to protect consumers and ensure fair trading
and includes consumer protection provisions and a national product safety system.
The purpose of the Competition and Consumer Act 2010 is to enhance the welfare of Australians by
promoting competition, fair trading and consumer protection. The Act deals with the relationships
between suppliers, wholesalers, retailers, competitors and customers in markets. The Act covers unfair
market practices, industry codes, mergers and acquisitions of companies, product safety, product
labelling, price monitoring, and the regulation of industries such as telecommunications, gas, electricity
and airports. The major parts of the Competition and Consumer Act 2010 are the following:
• Part IIIA: third party access to nationally significant and essential facilities
• Part IV: anti-competitive practices
• Part IVA: unconscionable conduct in commercial and consumer transactions
• Part V: unfair practices, product safety and information, country of origin representations,
conditions and warranties, misleading and deceptive conduct
• Part VA: liability of manufacturers and importers for defective goods
• Part VC: criminal conduct in fair trading and consumer protection
• Part VII: authorisations and notifications
Part VIIA: price monitoring and surveillance of various ‘declared’ industries or businesses
• Parts XIB and XIC: anti-competitive conduct and access to services in telecommunications
Table 16.3 provides a very comprehensive summary of the overall microeconomic reform agenda in
Australian factor and product markets in the 1980s, 1990s and 2000s.
Table 16.3: The Microeconomic Reform Agenda in Product and Factor Markets
The Labour Market and Industrial Relations
Labour market reform began in 1985 under the Prices and Incomes Accord, with enterprise bargaining
introduced in 1991. The most important labour market reform was the spread of enterprise
agreements to promote labour productivity by linking wage outcomes to productivity improvements.
The Workplace Relations Act 1996 encouraged greater labour market flexibility and continued the
previous process of wage decentralisation and deregulation, with a number of key reforms such as:
• Introducing Australian Workplace Agreements (AWAs) which were individual workplace
agreements designed to ensure more flexible workplaces and improve work practices
• Reducing awards to only 20 allowable matters and limiting them to the role of a social safety net
• Reducing the power of unions by ending compulsory unionism and limiting the use of industrial action
• Relaxing the Unfair Dismissal Laws to promote more flexibility for employers in hiring labour
• Reducing the regulatory power of the Australian Industrial Relations Commission (AIRC)
Other reforms introduced in the labour market by the former Howard government in 1998 were:
• The Work for the Dole Scheme based on the principle of mutual obligation
• The establishment of Centrelink to streamline and simplify social security payments such as the
Youth Allowance and the Job Search Allowance
• The replacement of the CES with Employment National and other private employment agencies
in creating a competitive job placement market known as the Job Network
The Workplace Relations Amendment Act 2006 (WorkChoices) came into force in March 2006 and
further deregulated the labour market through the following measures:
• Creation of a unified national industrial relations system
• Simplification of awards by reducing the allowable matters in the award safety net from 20 to 16
• The creation of the Australian Fair Pay Commission (AFPC) to set minimum wages and use of
the Australian Fair Pay and Conditions Standard (AFPCS) as a safety net for wage adjustments
• An emphasis on AWAs and common law contracts in employment rather than awards
• The No Disadvantage Test was no longer applicable to AWAs and Union Collective Agreements
• A reduced role for the AIRC in industrial relations, largely confined to award simplification
• The unfair dismissals laws were no longer applicable to businesses with less than 100 employees
The Workplace Relations Amendment (A Stronger Safety Net) Act 2007 introduced a Fairness Test to
apply to all agreements as a safety net. The Office of Employment Advocate was replaced by the
Workplace Authority to oversee the administration of AWAs and to apply the new Fairness Test.
Further changes in the industrial relations system occurred in 2007 after the election of the Rudd
Labor government. The Workplace Relations Amendment (Transition to Fairness) Act 2008 strengthened
the safety net of minimum wages and employment conditions and the Fair Work Act 2009 began
the Rudd government’s ‘Forward with Fairness’ industrial relations policy with five major elements:
1. Prevention of the making of new AWAs
2. Introduction of ten National Employment Standards (NES) to underpin a strong safety net
3. Introduction of Modern Awards containing minimum wages and conditions
4. An emphasis on collective enterprise agreements and ‘good faith bargaining’
5. Regulation of the national system by Fair Work Australia and the Fair Work Ombudsman
training); and foundation skills (measures to improve language, literacy and numeracy). In the
2011-12 budget the $3b Building Australia’s Workforce package raised investment in VET skills and
workforce participation. In the 2012-13 budget further funding was provided under the Building
Australia’s Workforce programme to support the up-skilling and re-skilling of mature age workers.
In the 2010-11 budget the government announced an investment of $2.2b in the National Health
and Hospitals Network, resulting from a COAG agreement for the states and territories to receive a
greater share of GST revenue in return for agreeing to federal administration of the health system.
Other new measures were new GP Super Clinics, electronic health records and training of more
doctors, nurses and health professionals to alleviate shortages of skills in the health system. In the
2011-12 budget a further $1.8b was allocated to the Health and Hospitals Fund and $2.2b to
mental health. Major reforms in the 2012-13 budget included the first stage of a National Disability
Insurance Scheme and increased funding for the reform of aged care facilities and services.
Taxation Reform
Major reform of the taxation system was undertaken in The New Tax System, introduced in 2000:
• The introduction of a Goods and Services Tax (GST) of 10% on most goods and services except
for basic food, education, health and child care. The GST replaced sales tax and some state taxes.
• A reduction in marginal taxation rates (MTRs) so that the majority of Australians pay no more
than 30% of their incomes in tax.
• Lower compliance costs of taxation for individuals and businesses through the replacement of
several income taxes with the simplified pay as you go (PAYG) system of taxation.
• The states and territories receive all of the GST revenue to finance some of their spending.
• A reduction in the company tax rate from 36% to 30% and lower rates of capital gains tax.
Reform of the taxation system helps to improve resource allocation and the incentives to work, save
and invest. In various budgets between 2000 and 2010 marginal tax rates (MTRs) have been cut
for all income earners and tax thresholds increased to take into account the effect of ‘bracket creep’,
where taxpayers pay more tax as their incomes rise, forcing them into higher tax brackets.
Also plans to abolish the tax on superannuation for persons retiring at 60 were announced in the
2006-07 budget, as an incentive for increased saving and continued workforce participation by
older Australians. A ‘one off’ $1,500 government co-contribution payment into the superannuation
accounts of eligible low income earners was also announced in the 2007-08 budget.
In the 2008-09 budget the government announced a comprehensive review (the Henry Review) of the
tax system to make it simpler, fairer and more efficient. A major goal of the proposed changes was
to reduce the number of MTRs from four to three, and the top two MTRs from 45% to 40% and
from 40% to 30%. The government also announced major reforms to the taxation of pensions and
retirement incomes in the 2009-10 budget, and closed various loopholes to prevent tax avoidance.
The Henry Review’s report was completed in May 2010 and made over 100 recommendations to
improve the tax system. In the 2012-13 budget several of these were implemented by the government:
1. The tax free threshold was raised from $6,000 to $18,200 to encourage greater workforce
participation by low income earners and welfare beneficiaries capable of working.
2. A Minerals Resource Rent Tax (MRRT) of 30% was introduced from July 1st 2012 on the super
profits of large mining companies with royalties rebated to the states by the federal government.
3. Small businesses were to receive a ‘tax write off’ for assets costing up to $6,500 in 2012-13.
The Australian government also announced future plans to reduce the company tax rate from 30%
to 28% for businesses as one of the key recommendations of the Henry Review. It provided a loss
carryback reform and accelerated depreciation allowances for small businesses in the 2012 budget.
Microeconomic reforms target the use of natural resources and the quality of the environment.
This refers to all aspects of land management, including forestry and fishing policies. The federal
government’s Natural Heritage Trust (NHT) in 1997 provided funding for the conservation of
land, vegetation, biodiversity, coasts and oceans. In 2004 the Murray-Darling Basin Commission to
improve water quality, and the National Water Initiative (NWI) to create effective water markets in
Australia were established. In the 2007-08 budget various new policies were introduced such as the
National Plan for Water Security, reducing greenhouse gases, and dealing with climate change.
The Rudd government ratified the Kyoto Protocol in December 2007 and also announced major new
environmental policies in the 2008-09 and 2009-10 budgets:
• The introduction of an emissions trading scheme (the Carbon Pollution Reduction Scheme or
CPRS) by 2010-11 to reduce greenhouse gas emissions by 60% on 2000 levels, by 2050;
• Adoption of a Renewable Energy Target to ensure that 20% of electricity is generated by
renewable sources by 2020;
• A ten year $12.9b national water policy framework called Water for the Future; and
• A $4.5b Clean Energy Initiative to develop renewable sources of energy in Australia.
However the government was unable to pass the CPRS legislation because of a lack of political
support in federal parliament. In the 2010-11 budget a new measure introduced by the government
to reduce reliance on fossil fuels was the Renewable Energy Future Fund ($652m). This was part of
the Clean Energy Initiative to support renewable energy projects including wind, solar and biomass.
In the 2012-13 budget the Gillard government announced a $23 per tonne carbon tax on the 500
biggest emitters in industry to start on July 1st 2012, rising by 5% per year until Australia switched
to an emissions trading scheme on July 1st 2015. The policy of carbon pricing aimed to reduce
Australia’s emissions by at least 5% on 2000 levels or 160m tonnes by 2020 and 80% by 2050. It
also aimed to strengthen incentives for the increased development of sources of renewable energy.
Regulatory Reform
The reform of government regulation which restricts competition and reduces efficiency is an essential
part of the microeconomic reform process. This is more than just deregulating certain industries, but
reviewing the regulation process, making it more rigorous, accountable and transparent. The Review
of Regulation is part of the brief of the Productivity Commission which conducts public enquiries
into various industries and makes recommendations for policy reform to the Australian government.
National COAG Reform Agenda
In 2006 the federal government announced an ‘in principle’ agreement with the states for new reforms
in electricity, transport and infrastructure, and a reduction in regulations to increase efficiency and
productivity. In the 2008-09 budget the federal government established a new COAG Reform Fund
to channel finance to the states for expenditure in areas of COAG national reform. A new COAG
framework agreement in 2009 provided $15.2b in funding for the states’ delivery of services in
health, education, workforce skills and public housing. Recent COAG agreements are the National
Health and Hospitals Network (2010) and the National Disability Insurance Scheme (2012).
Performance of Governments
All aspects of government businesses have been reviewed by the Productivity Commission. The
performance of PTEs is monitored to ensure that they are operating efficiently and there has been a
reduction in state reliance on tied grants from the Commonwealth. There is increased transparency
of the Council of Australian Governments’ (COAG) activities. In 2007 COAG agreed to adopt
national standards for trades skills, to assist labour mobility in response to the national skills shortage.
Financial Deregulation
This significant area of microeconomic reform was one of the first areas targeted for reform in the
early 1980s. The aim was to ensure that capital resources were allocated in the most efficient way, and
to increase the amount of competition in the financial system. The main reforms were the following:
• Removal of the Reserve Bank of Australia’s (RBA) controls over interest rates and domestic bank lending.
• Granting of bank licences to 16 foreign banks to increase competition in the domestic market.
• The exchange rate was floated in December 1983, so that market forces determined its value
according to economic fundamentals in Australia such as the balance of payments outcome.
• The use of open market operations by the Reserve Bank to conduct monetary policy.
The Wallis Inquiry in 1997 recommended further deregulation of the banking industry by allowing
more competition, especially in the area of mortgage finance. The outcome of this has been lower
interest rates and profit margins, with the entry of mortgage originators such as Aussie Home Loans,
RAMS and Mortgage Choice into the mortgage market. Prudential supervision arrangements were
also reformed with the formation of APRA, ASIC and the Council of Financial Regulators.
Social Security and Welfare
Major changes to the social security and welfare systems in 2000 were based on the McClure Report’s
recommendations. They included tax cuts and increased social security payments for low income
earners in The New Tax System, to offset the price effects of the GST and to encourage greater workforce
participation. This followed the application of the principle of mutual obligation to the receipt of
income support, and the targeting of income support payments to disadvantaged groups. The Rudd
government’s Working Families Support Package in the 2008-09 budget helped working families with
the rising cost of living. In the 2009-10 budget major reforms were undertaken to pensions and
family payments and a Paid Parental Leave scheme was introduced in 2011. In the 2011-12 budget,
the Building Australia’s Future Workforce package included welfare reforms to increase the participation
of low income earners in the workforce. The Clean Energy Future package in the 2012-13 budget
provided assistance to low income households to offset the impact of the carbon tax on energy costs.
REVIEW QUESTIONS
MICROECONOMIC POLICY
1. Discuss the rationale for microeconomic policies including shifts in aggregate supply and
improvements in efficiency. Refer to Figure 16.1 in your answer.
2. Explain how labour, capital and multifactor productivity are measured. How does
microeconomic policy attempt to raise the level of productivity in Australia?
3. Refer to Figure 16.2 and the text and compare Australia’s labour productivity performance with
the United States and the OECD countries between the 1960s and 2000s.
5. What types of market and government induced structural changes have taken place recently in
the Australian economy?
7. Using examples, explain the main difference between product and factor markets.
8. What are the main elements of the national competition policy (refer to Table 16.2)?
9. How can reforms to trade and industry policies assist in raising economic efficiency and exports?
10. How has The New Tax System affected the operation of product markets?
11. How and why have microeconomic reforms been implemented in the labour market?
12. How and why was the financial system deregulated in 1983? What have been the effects of this
policy on Australia’s capital markets?
15. What have been the effects of the deregulation of some Australian factor and product markets?
16. How and why have public trading enterprises been reformed?
Employment 30,000 jobs State, Territory and Local Government Revenue $3b
Source: Industry Commission (1995), The Growth and Revenue Implications of Hilmer and Related Reforms.
Refer to the table above of the estimated long term gains from the national competition
policy reforms in 1995 and answer the questions below. Marks
3. Explain THREE benefits to the Australian economy of the national competition policy reforms. (3)
4. Discuss TWO benefits for the operation of product markets as a result of the national
competition policy reforms. (4)
“The government is addressing the challenge of high inflation by lifting productivity, expanding
participation and investing in infrastructure. Productivity in the market sector has averaged 1.4%
over the past five years, lower than in any other five year period since the early 1990s.
By putting in place education, skills and innovation policies that lift productivity, the government
can help ease the pressure on inflation, lift Australia’s economic growth in the medium term and
sustain prosperity into the future.”
Source: Commonwealth Government (2008), Budget Overview and Economic Outlook 2008-09.
Explain the role of government microeconomic policies in raising labour productivity to promote
sustainable economic growth and higher living standards in Australia.
CHAPTER SUMMARY
MICROECONOMIC POLICY
2. Productivity is a measure of the output produced from a given level of inputs over time. Measurements
of productivity include labour productivity, capital productivity and multifactor productivity.
Australia has generally been able to raise its level of productivity in the 1990s and 2000s due to
improvements in allocative efficiency in markets. However capacity constraints between 2005 and
2008 reduced labour productivity growth to around 1.4% compared to over 2% in the 1990s.
3. Microeconomic policies are closely linked with the promotion of structural change in industry to
achieve improvements in productivity, efficiency and international competitiveness.
4. Some of the key microeconomic reform measures undertaken in Australia since 1983 include:
• The deregulation of financial markets and the floating of the exchange rate in 1983;
• The deregulation of markets such as aviation and telecommunications, and the privatisation
of some PTEs such as the Commonwealth Bank, Qantas and Telstra;
• Reductions in the levels of industry assistance in the 1988 and 1991 Industry Statements;
• The introduction of a national competition policy in 1995;
• Improvements in the efficiency of public trading enterprises (PTEs);
• Improvements in the productivity of labour and capital through reforms to capital and labour
markets, including the use of enterprise bargaining in wage negotiations; and
• Reforms to the taxation system through the introduction of The New Tax System in 2000.
5. Microeconomic reforms have taken place in both product markets (where final goods and services
are sold) and factor markets (where the factors of production are bought and sold).
6. The regulation by government of economic activity and markets has been reduced as part of the
microeconomic reform process. A number of key markets (such as finance, labour, telecommunications
and air transport) have been deregulated to increase the level of competition and efficiency.
8. Privatisation refers to the full or partial sale of public assets, or public service provision rights to the
private sector. Former PTEs that have been fully privatised include Qantas and Telstra.
9. Corporatisation refers to the creation of more efficient management structures for public trading
enterprises such as the adoption of clear managerial objectives and managerial accountability.
10. Commercialisation refers to the use of incentives such as rates of return or dividends paid by
public trading enterprises to their government owners to improve efficiency, profitability and
accountability.
11. Competitive neutrality refers to the policy of subjecting public trading enterprises to the same
commercial environment as their private sector competitors, in terms of paying taxes and commercial
interest rates on debt borrowings. This creates a so called ‘level playing field’ in markets.