Managerial and

Legal Economics
SUBMITTED TO: AKSHI DUTTA

Debarchana Shandilya
BBA.LLB[HONS.], 4TH SEMESTER | ROLL NO. 164
1. What is the scope for Managerial Economics? Write a note on “Economics as a
basis for social welfare”.
Answer:
The science of Managerial Economics has emerged only recently. With the
growing variability and unpredictability of the business environment, business managers
have become increasingly concerned with finding rational and ways of adjusting to an
exploiting environmental change. Managerial economics generally refers to the
integration of economic theory with business practice. Economics provides tools
managerial economics applies these tools to the management of business. In simple terms,
managerial economics means the application of economic theory to the problem of
management. Managerial economics may be viewed as economics applied to problem
solving at the level of the firm.

Definitions:
 According to E.F. Brigham and J. L. Pappar, Managerial Economics is “the
application of economic theory and methodology to business administration practice.”
 To Christopher Savage and John R. Small: “Managerial Economics is concerned
with business efficiency”.
 Milton H. Spencer and Lonis Siegelman define Managerial Economics as “the
integration of economic theory with business practice for the purpose of facilitating
decision making and forward planning by management.”
 D.C. Hague describes Managerial Economics as “a fundamental academic subject
which seeks to understand and analyse the problems of business decision making.”
 In the opinion of W.W. Haynes “Managerial Economics is the study of the allocation
of resources available to a firm of other unit of management among the activities of
that unit.”

Scope of Managerial Economics:

 Demand analysis and forecasting: A firm is an economic organisation which

transforms inputs into output that is to be sold in a market. Accurate estimation of
demand, by analysing the forces acting on demand of the product produced by the
firm, forms the vital issue in taking effective decision at the firm level. A major part
of managerial decision making depends on accurate estimates of demand. When
demand is estimated, the manager does not stop at the stage of assessing the current
demand but estimates future demand as well. This is what is meant by demand
forecasting. This forecast can also serve as a guide to management for maintaining or
strengthening market position and enlarging profit. Demand analysis helps in
identifying the various factors influencing the demand for a firm’s product and thus
provides guidelines to manipulate demand. The main topics covered are: Demand
Determinants, Demand Distinctions and Demand Forecasting.
 Cost and production analysis: Cost analysis is yet another function of managerial
economics. In decision making, cost estimates are very essential. The factors causing
variation in costs must be recognised and allowed for if management is to arrive at
cost estimates which are significant for planning purposes. The determinants of
estimating costs, the relationship between cost and output, the forecast of cost and
profit are very vital to a firm. An element of cost uncertainty exists because all the
factors determining costs are not always known or controllable. Managerial
economics touches these aspects of cost analysis as an effective knowledge and the
application of which is corner stone for the success of a firm.

Cost analysis is yet another function of managerial economics. In decision making,

cost estimates are very essential. The factors causing variation in costs must be
recognised and allowed for if management is to arrive at cost estimates which are
significant for planning purposes.
The determinants of estimating costs, the relationship between cost and output, the
forecast of cost and profit are very vital to a firm. An element of cost uncertainty
exists because all the factors determining costs are not always known or controllable.
Managerial economics touches these aspects of cost analysis as an effective
knowledge and the application of which is corner stone for the success of a firm.

 Inventory Management: An inventory refers to a stock of raw materials which a

firm keeps. Now the problem is how much of the inventory is the ideal stock. If it is
high, capital is unproductively tied up. If the level of inventory is low, production will
be affected.
Therefore, managerial economics will use such methods as Economic Order Quantity
(EOQ) approach, ABC analysis with a view to minimising the inventory cost. It also
goes deeper into such aspects as motives of holding inventory, cost of holding
inventory, inventory control, and main methods of inventory control and
management.

 Advertising: To produce a commodity is one thing and to market it is another. Yet

the message about the product should reach the consumer before he thinks of buying
it. Therefore, advertising forms an integral part of decision making and forward
planning. Expenditure on advertising and related types of promotional activities is
called selling costs by economists.
There are different methods for setting advertising budget: Percentage of Sales
Approach, All You can Afford Approach, Competitive Parity Approach, Objective
and Task Approach and Return on Investment Approach.

 Pricing decisions, policies and practices: Pricing is very important area of

managerial economics. The control functions of an enterprise are not only productions
but pricing as well. When pricing a commodity, the cost of production must be
considered. Business decisions are greatly influenced by pervading market structure
and the structure of markets that has been evolved by the nature of competition
existing in the market.
Pricing is guided by consideration of cost plan pricing and the policies of public
enterprises. The knowledge of the pricing of a product under conditions of oligopoly
is also essential. The price system guides the manager to take valid and profitable
decision.

 Profit Management: A business firm is an organisation designed to make profits.

Profits are acid test of the individual firm’s performance. In appraising a company, we
must first understand how profit arises. The concept of profit maximisation is very
useful in selecting the alternatives in deciding at the firm level. Profit forecasting is an
essential function of any management. It relates to projection of future earnings and
involves the analysis of actual and expected behaviour of firms, the sales volume,
prices and competitor’s strategies, etc. The main aspects covered under this area are
the nature and measurement of profit, and profit policies of special significance to
managerial decision making.

 Capital Management: Planning and control of capital expenditures is the basic

executive function. The managerial problem of planning and control of capital is
examined from an economic standpoint. The capital budgeting process takes different
forms in different industries. It involves the equi-marginal principle. The objective is
to assure the most profitable use of funds, which means that funds must not be applied
when the managerial returns are less than in other uses. The main topics dealt with
are: Cost of Capital, Rate of Return and Selection of Projects.

Economics as a basis for Social Welfare:

Economics is to study human activities which are conductive to human welfare in its
material aspect. Wealth furnishes man with material means of satisfying his wants and
of promoting his welfare. Economists, in so far as they study wealth, can be legitimately
regarded as studying causes of material welfare. Economic growth is defined as the
increase in an economy’s real level of output overtime such as gross national product,
per capita income etc. Economic development implies the reduction or elimination of
poverty, inequality and unemployment within the context of a growing economy.
Social development includes human welfare directly reducing poverty and ensuring
environmental sustainability. Development depends on both social and economic
factors. Accordingly, development indicators are distinguished between social indicators
and economic indicators. Social indicators of development include health, education,
housing, employment and so on. The factors responsible for overall improvement of
equality of life are taken as social indicators.
Social development implies that the basic needs of a human being are met through the
implementation and realisation of human rights. Social development promotes
democracy to bring about the participation of the public in determining policies as well
as creating an environment for accountable governance.
Development should be defined as economic growth combined with progress and social
fairness. The trade off between economic growth and social welfare has been a much-
debated issue. Some studies say that economic growth and social development are
highly inter-development.
The goal of economic growth is to achieve human development with an increased per
capita income. Many counties experience dynamic social policies that create conditions
for maintaining political stability, reducing conflict and boosting economic growth.
Economic growth needs to specify total welfare of the people. If there is inequality, it
adversely affects people’s quality of life, leading to a higher incidence of poverty
contributing to crime and so on. Welfare can be divided as ‘Individual Welfare’ and
‘Social Welfare’ and again as ‘General Welfare’ and ‘Economic Welfare’.

Individual welfare and Social welfare: Individual welfare refers to the sum-total of
satisfaction derived by an individual from the consumption of economic goods.
Individual satisfaction is linked with individual choice. He chooses the combination
which gives him the maximum satisfaction. Social welfare is an aggregate of the utilities
or satisfaction of all the individuals in the society. The welfare of all the individuals is
synonymous with the welfare of the society. The object of social welfare is to secure for
each human being the economic necessities, a decent standard of health and living
conditions, equal opportunities with his fellow citizens, and the highest possible degree
of self-respect and freedom of thought and action without interfering with same rights of
others.

General welfare and Economic welfare: General welfare of an individual refers to the
state of mind or happiness which an individual enjoys due to number of factors such as
economic and various other factors such as friendship, health, religious beliefs,
philosophical outlook on life and so on. Thus, general welfare refers to the satisfaction
derived by an individual from both economic and non-economic factors.

Economic welfare is a function of the satisfaction derived from the use of exchangeable
material goods and services almost confine with real national income of the community.
Economics confines itself to social welfare of all persons alone. The subject of
economics is the well-being of persons as consumers and producers and the possible
ways of improving that well-being or welfare.

We can conclude that appropriate policies are the hope for sustainable socio-economic
development. The implementation of social policy is a must for human welfare. The
implementation of policies supporting education, health, housing, employment and so on
will help improve the living standards of the people, stimulate demand and strengthen
the liquidity position of an organisation. Thus, the world will achieve a better standard
of living for all walks of people over the globe.
2. What is Public finance? What is the scope of public finance? Explain the
different sources of public revenue.
Answer:
In simple layman terms, public finance is the study of finance related to
government entities. It revolves around the role of government income and expenditure in
the economy.
Prof. Dalton in his book Principles of Public Finance states that “Public Finance is
concerned with income and expenditure of public authorities and with the adjustment of
one to the other.”
By this definition, we can understand that public finance deals with income and
expenditure of government entity at any level be it central, state or local. However, in the
modern-day context, public finance has a wider scope – it studies the impact of
government policies on the economy.
Thus, we can say that public finance deals with the finance of the public body at national,
state and local levels for the performance of the various obligatory and optional functions.
It deals with the income and expenditure of public bodies or the government of the nation
and the principles, policies and problems relating to this matter.

Nature of Public Finance:

Public Finance as Science: Science is the systematic study of any subject which studies
relationship between facts. Public finance has been held as science which deals with the
income and expenditure of the government’s finance. It studies the relationship between
facts relating to revenue and expenditure of the government. Arguments in support of
Public Finance as Science:

a. It is systematic study of the facts and principles relating to government expenditure

and revenue.
b. Principles of public finance are empirical.
c. It is studied using scientific methods.
d. It is concerned with definite and limited field of human knowledge.

Public Finance as Art: Art is application of knowledge for achieving definite objectives.
Fiscal Policy which is an important instrument of public finance makes use of the
knowledge of government’s revenue and expenditure to achieve the objectives of full
employment, economic development and equality. To achieve economic equality taxes
are levied which are likely to be opposed. Therefore, it is important to plan their timing
and volume. The process of levying tax is therefore an art. Study of public finance is
helpful in solving many practical problems. Public finance is therefore also an art.

Definitions:

a. According to Findlay Shirras, “Public finance is the study of principles underlying

the spending and raising of funds by public authorities.”
b. According to H.L. Lutz, “Public finance deals with the provision, custody and
disbursement of resources needed for conduct of public or government function.”
c. According to Hugh Dalton, “Public finance is concerned with the income and
expenditure of public authorities, and with the adjustment of the one to the other.”

Scope of Public Finance:

Public finance not only includes the income and expenditure of the government but also
the sources of income and the way of expenditure of various government corporations,
public companies and quasi government ventures. Thus, the scope of public finance
extends to the study of independent bodies acting under the government’s direct and
indirect control. The Scope of public finance includes:

a. Public Revenue: As the name suggests, public revenue refers to the income of the
government. The government earns income in two ways – tax revenue and non-tax
revenue. Tax revenue is easy to recognize, it’s the tax paid by people of the country in
the form of income tax, sales tax, duties, etc. On the other hand, non-tax revenue
includes interest income from lending money to other countries, rent & income from
government properties, donations from world organizations, etc. Non- tax revenue has
two heads namely:

Administrative Revenue- Administrative revenues are those receipts which arise

because of the administrative function of the government. Receipts from fees, licenses,
special assessment, fines, forfeitures, escheats, are included under administrative
revenue.

Commercial Revenue- Commercial revenue is called earned revenue. Income from

state domain like revenue from mines, minerals, forests, rivers, mountains etc. in the
form of royalty and duties, revenues received from railways, post and telegraph, oil
and gas supply, water supply, civil aviation, etc. called commercial revenues. 

This area studies methods of taxation, revenue classification, methods of increasing

government revenue and its impact on the economy, etc.

b. Public Expenditure: Public expenditure is the money spent by government entities.

The government spends money on infrastructure, defence, education, healthcare, etc.
for the growth and welfare of the country. This area studies the objectives and
classification of public expenditure, effects of expenditure in different areas, effects of
public expenditure on various factors such as employment, production, growth, etc.
c. Public Debt: When public expenditure exceeds public income, the gap is filled by
borrowing money from the public, or from other countries or world organizations such
as The World Bank. These borrowed funds are public debt. Like individuals, the
government borrows money from the public to meet its obligations during certain
abnormal situations like war, flood, famine, or any such or man-made calamities.
However, under normal situations the government borrows funds for its promotional
function that is the economic development of the country. This area of public finance
explains the burden of public debt, why it is necessary and its effect on the economy.
It also suggests methods to manage public debt.
d. Public or Financial Administration: As the name suggests this area of public finance
is all about the administration of all public finance i.e. public income, public
expenditure, and public debt. Financial administration includes preparation, passing,
and implementation of government budget and various government policies,
preparation of books of account, audit of government accounts etc. It also studies the
policy impact on the social-economic environment, inter-governmental relationships,
foreign relationships, etc.

e. Economic Stabilization and Growth: In the present times, public finance is mainly
concerned with the economic stability and other related problems of the country. For
the attainment of these objectives, the government formulates its fiscal policy
comprising of various fiscal instruments directed towards the economic stability of the
nation.

f. Federal Finance: Distribution of the sources of income and expenditure between the
central and state governments in the federal system of government is also studied as
the subject matter of the public finance. This branch of public finance is popularly
known as Federal Finance.

Sources of Public Revenue:

The sources of public revenue can be gauged under the following heads:

a. Direct Revenue: Direct revenue includes postal charges, railway fares, tax on water
supply, land revenue, income from shares and other government investments etc.
These revenues come directly from government properties.
b. Derived Revenue: Derived revenue includes taxes and fees. In fact, taxes constitute
the main source of public revenue. Tax is a compulsory contribution that is paid to the
government by the people for which there is no quid pro quo. In other words, the
taxpayer cannot claim any direct benefit against the taxes paid to the government.
Apart from being a means of collecting revenue taxes are used to maintain economic
stability, to promote economic growth and to remove economic disparity. However,
fees are different from taxes. Against the fee paid the person can claim a direct benefit
from the government. Taxes can be broadly classified into the following two types:
Direct Tax: The taxes that are imposed on the property and income of an individual
and a company are known as direct taxes. Direct taxes are paid directly to the
government by the companies and the individuals. The income level, as well as the
purchasing power of the people, are affected by direct taxes. It also helps in changing
the level of aggregate demand of the economy. Direct Tax Systems can be
progressive, regressive or proportional.

Indirect Tax: The taxes that affect the income and property of an individual and a
company through their consumption expenditure are called indirect taxes. Indirect
taxes are imposed on goods and services and are known to be compulsory payments.

c. Expected Revenue: Public debt is an example of expected revenue. The public debt
is how much a country owes to lenders outside of itself. These can include
individuals, businesses, and even other governments. It is often expressed as a ratio of
Gross Domestic Product (GDP). Public debt can be raised both externally and
internally, where external debt is the debt owed to lenders outside the country and
internal debt represents the government’s obligations to domestic lenders. To promote
economic development, to initiate a process of economic recovery after depression or
to raise additional resources to fight war or to face natural calamities like floods,
earthquakes etc. the government may resort to public debt.

d. Miscellaneous Revenue: Miscellaneous revenue includes the following sources-

Special Assessment: Special assessment tax is a surtax imposed on individuals when

they are benefitted because of certain steps taken by the government. For example, tax
levied on property owners to pay for specific local infrastructure projects such as the
construction or maintenance of roads or sewer lines. The tax is charged only to the
owners of property in the neighbourhood that will benefit from the project. That
neighbourhood is called the special assessment district. However special assessment
is not a compulsory contribution.

Fine: A fine is a monetary punishment imposed by the government for the violation of
law and order by its citizens. Apart from fines imposed upon the breaking of laws like
traffic rules, the additional amount charged on the delay of paying telephone bills,
water fees, license renewal fees within fixed time are examples of such fine.
Escheats: Escheat refers to the right of a government to take ownership of estate
assets or unclaimed property. It most commonly occurs when an individual die with
no will and no heirs. Escheat rights can also be granted when assets are unclaimed for
a prolonged period. These situations can also be referred to as bona vacantia or simply
just unclaimed property. Escheat rights can be granted by a court of law or given
following a standard time period. In the case of death with no will or heirs, escheat
rights may be granted to a state in a probate decision.
Deficit Financing: Deficit financing is the budgetary situation where
expenditure is higher than the revenue. It is a practice adopted for financing
the excess expenditure with outside resources. The expenditure revenue gap
is financed by either printing of currency or through borrowing.

Gift: As per the law as it stands today which was amended in 2017, gift received by
any person by any person or persons are taxed in the hands of recipient under the head
‘Income from other sources’ at normal tax rates. We have discussed below what kind
of gifts are covered and its quantum to be taxed.

Fees, fine, escheats and special assessment constitute administrative revenue.

Revenue earned through the sale of public goods and services constitute commercial
revenue for the government. Commercial revenue and a few sources of administrative
revenue like fees and special assessment are also called nontax revenue.

3. Write a comprehensive note on the role of fiscal policy and monetary policy in a
developing country.

Answer:

Fiscal policy:
Fiscal policy refers to the use of government expenditure and tax policies to
influence economic conditions, especially macroeconomic conditions, including
aggregate demand for goods and services, employment, inflation, and economic growth.
According to Culbarston, “By fiscal policy we refer to government actions affecting its
receipts and expenditures which ordinarily as measured by the government’s receipts, its
surplus or deficit.” The government may change undesirable variations in private
consumption and investment by compensatory variations of public expenditures and
taxes.

Fiscal policy also feeds into economic trends and influences monetary policy. When the
government receives more than it spends, it has a surplus. If the government spends more
than it receives it runs a deficit. To meet the additional expenditures, it needs to borrow
from domestic or foreign sources, draw upon its foreign exchange reserves or print an
equivalent amount of money. This tends to influence other economic variables.

On a broad generalization, excessive printing of money leads to inflation. If the

government borrows too much from abroad it leads to a debt crisis. Excessive domestic
borrowing by the government may lead to higher real interest rates and the domestic
private sector being unable to access funds resulting in the “crowding out” of private
investment. So, it can be said that the fiscal deficit can be like a double edge sword,
which need to be tackled very carefully.

Role of Fiscal Policy in a developing country:

The fiscal policy in developing countries should apparently be conducive to rapid
economic development.  It has a tough role to play in a developing economy and must
face the problem of growth-cum-stability. The main goal of fiscal policy in a newly
developing economy is the promotion of the highest possible rate of capital formation.
Underdeveloped countries are encompassed by a vicious circle of poverty on account of
capital deficiency. In order to break this vicious circle, a balanced growth is needed. It
needs accelerated rate of capital formation.

To accelerate the rate of capital formation, the fiscal policy must be designed to raise the
level of aggregate savings and to reduce the actual and potential consumption of the
people.

Another objective of fiscal policy, in a poor country is to divert existing resources from
unproductive to productive and socially more desirable uses. Hence, fiscal policy must be
blended with planning for development.

An important aim of fiscal policy in a developing economy is to create an equitable

distribution of income and wealth in the society. Here, however, a difficulty arises. The
aims of rapid growth and attainment of equality in income are two paradoxical goals
because growth needs more savings and equitable distribution causes reduction of
aggregate savings as the propensity to save of the richer section is always high and that of
the poor income group is low.
Furthermore, fiscal policy in a poor country has an additional role of protecting the
economy from high inflation domestically and unhealthy developments abroad. Though
inflation to some extent is inevitable in the process of growth, fiscal measures must be
designed to curb inflationary forces. Relative price stability constitutes an important
objective.

The approach to fiscal policy in an economy which is developing must be aggregative as

well as segmental. The former may lead to overall economic expansion and reduce the
general pressure of unemployment; but due to the existence of bottlenecks though general
price stability may be maintained, sectoral price rise may inevitably be found.

These sectoral imbalances are to be corrected by appropriate segmental fiscal measures

which would remove frictions and immobility’s turn demands into proper directions, seek
to eliminate bottlenecks and other obstacles to growth.

For the purpose of development, not only an expansionary budget but a deficit is
desirable too in a developing country. The government expenditure on developmental
planning projects must be increased.

For less developed countries such as India the following main objectives of fiscal
policy may be restated as:

a. To increase the rate of investment and capital formation, so as to accelerate the rate of
economic growth.
b. To increase the rate of savings and discourage actual and potential consumption.
c. To diversify the flow of investments and spending from unproductive uses to socially
most desirable channels.
d. To check sectoral imbalances.
e. To reduce widespread inequalities of income and wealth.
f. To improve the standard of living of the masses by providing social goods on a large
scale.

Monetary Policy:
Monetary policy may be defined as the use of money supply by the appropriate authority
(i.e. central bank) to achieve certain economic goals. Whenever there is a change in
money supply there occurs a change in the rate of interest. Thus, monetary policy
influences interest rate or cost and availability of credit. When the Central bank attempts
to contract money supply through various credit control instruments so as to restrain the
economy, the situation is then called tight monetary policy. On the other hand, an easy
monetary policy is employed to boost the economy by increasing money supply through
its credit control instruments. Though the monetary policy influences other variables,
control of quality of money is considered to be the key variable in the monetary policy.
Thus, the monetary policy is defined as the Central bank’s use of control of money supply
or interest rates (i.e. the price of money) or the rationing of credit sanctioned by banks to
influence the level of economic activity.
Monetary authority employs monetary policy to influence aggregate demand in order to
achieve higher levels of income and employment. The mechanism called money
transmission mechanism that influences aggregate demand follows the following course-

An increase in money supply by the Central bank will mean more money in the pockets
of firms and households. Faced with more money, people will buy more financial assets,
such as bonds. Consequently, bond prices will go up and interest rates will decline. This
will stimulate consumption and investment spending, thereby raising aggregate demand
and, hence, level of income and employment.

Thus, the monetary policy, according to G.K. Shaw, refers to any deliberate and
conscious action undertaken by the Central Monetary Authority “to change the quantity,
availability or cost (interest rate) of money.

A broader definition must also take into account action designed to influence the
composition and age profile of the national debt, as, for example, open market operations
geared to the purchase of short term dated securities and sale of long-term bonds.

Role of Monetary Policy in a developing country:

The monetary policy in a developing economy will have to be quite different from that of
a developed economy mainly due to different economic conditions and requirements of
the two types of economies. A developed country may adopt full employment or price
stabilisation or exchange stability as a goal of the monetary policy.
But in a developing or underdeveloped country, economic growth is the primary
necessity. Thus, in a developing economy the monetary policy should aim at promoting
economic growth. The monetary authority of a developing economy can play a vital role
by adopting such a monetary policy which creates conditions necessary for rapid
economic growth.

Monetary policy can serve the following developmental requirements of developing

economies:

a. Developmental Role: In a developing economy, the monetary policy can play a

significant role in accelerating economic development by influencing the supply and
uses of credit, controlling inflation, and maintaining balance of payment. Once
development gains momentum, effective monetary policy can help in meeting the
requirements of expanding trade and population by providing elastic supply of credit.

b. Creation and expansion of Financial Institutions: The primary aim of the monetary
policy in a developing economy must be to improve its currency and credit system.
More banks and financial institutions should be set up, particularly in those areas
which lack these facilities. The extension of commercial banks and setting up of other
financial institutions like saving banks, cooperative saving societies, mutual societies
etc will help in increasing credit facilities, mobilising voluntary savings of the people,
and channelizing them into productive uses. It is also the responsibility of the
monetary authority to ensure that the funds of the institutions are diverted into priority
sectors or industries as per requirements of the development plan of the country.

c. Effective Central Banking: To meet the developmental needs the central bank of an
underdeveloped country must function effectively to control and regulate the volume
of credit through various monetary instruments, like bank rate, open market
operations, cash reserve ratio etc. Greater and more effective credit controls will
influence the allocation of resources by diverting savings from speculative and
unproductive activities to productive uses.

d. Integration of Organised and Unorganised Money Market: Most underdeveloped

countries are characterised by dual monetary system in which a small but highly
organised money market on the one hand and large but unorganised money market on
the other hand operate simultaneously. The unorganised money market remains
outside the control of the Central Bank. By adopting effective measures, the monetary
authority should integrate the unorganised and organised sectors of the money market.

e. Developing Banking habits: The monetary authority of a less developed country

should take appropriate measures to increase the proportion of bank money in the total
money supply of the country. This requires increase in the bank deposits by
developing the banking habits of the people and popularising the use of credit
instruments (e.g. cheques, drafts, etc.)

f. Monetisation of the Economy: An underdeveloped country is also marked by the

existence of large non monetised sector. In this sector, all transactions are made
through barter system and changes in money supply and the rate of interest do not
influence the economic activity at all. The monetary authority should take measures to
monetise this non monetised sector and bring it under its control.

g. Integrated Interest Rate Structure: In an underdeveloped economy, there is absence

of an integrated interest rate structure. There is wide disparity of interest rates
prevailing in the different sectors of the economy and these rates do not respond to the
changes in the bank rate, thus making the monetary policy ineffective. The monetary
authority should take effective steps to integrate the interest rate structure of the
economy. Moreover, a suitable interest rate structure should be developed which not
only encourages savings and investment in the country but also discourages
speculative and unproductive loans.
h. Debt Management: Debt management is another function of the monetary policy in a
developing country. Debt management aims at –

1. Deciding proper timing and issuing of government bonds.

2. Stabilising their prices.
3. Minimising the cost of servicing public debt.

The monetary authority should conduct the debt management in such a manner that
conditions are created “in which public borrowing can increase from year to year and
on a big scale without giving any jolt to the system. And this must be on cheap rates
to keep the burden of the debt low.” However, the success of debt management
requires the existence of a well-developed money and capital market along with a
variety of short term and long-term securities.

i. Maintaining Equilibrium in Balance of Payments: The monetary policy in a

developing country should also solve the problem of adverse balance of payments.
Such a problem generally arises in the initial stages of economic development when
the import of machinery, raw materials, etc. increase considerably, but the export may
not increase to the same extent. The monetary authority should adopt direct foreign
exchange controls and other measures to correct the adverse balance of payments.

j. Controlling Inflationary Pressures: Developing economies are highly sensitive to

inflationary pressures. Large expenditures on developmental schemes increase
aggregate demand. But, output of consumer’s goods does not increase in the same
proportion. This leads to inflationary rise in prices. Thus, the monetary policy in a
developing economy should serve to control inflationary tendencies by increasing
savings by the people, checking expansion of credit by the banking system, and
discouraging deficit financing by the government.

k. Long term loans for Industrial development: Monetary policy can promote
industrial development in the underdeveloped countries by promoting facilities of
medium term and long term loans to tire manufacturing units. The monetary authority
should induce these banks to grant long term loans to the industrial units by providing
rediscounting facilities. Other development financial institutions also provide long
term productive loans.

l. Reforming Rural Credit System: Rural credit system is defective and rural credit
facilities are deficit in the underdeveloped countries. Small cultivators are poor, have
no finance of their own, and are largely dependent on loans from village money
lenders and traders who generally exploit the helplessness, ignorance and necessity of
these poor borrowers. The monetary authority can play an important role in providing
both short term and long-term credit to the small arrangements, such as the
establishment of cooperative credit societies, agricultural banks etc.
Conclusion:
Thus, we can conclude that in a country like India both the Fiscal policy as well as the
Monetary policy play vital roles in the economic development cum stability of this
vast and diverse nation. The fiscal policy plays a key role in elevating the rate of
capital formation both in the public as well as the private sectors. Through taxation,
the fiscal policy helps mobilise considerable amount of resources for financing its
numerous projects. On the other hand, Monetary policy is concerned with changing the
supply of money stock and rate of interest for the purpose of stabilising the economy at
full-employment or potential output level by influencing the level of aggregate
demand. Thus, both monetary and fiscal policies are used to regulate economic activity
over time. They can be used to accelerate growth when an economy starts to slow or to
moderate growth and activity when an economy starts to overheat.

4. Write five nexuses between Law and Economics. Write a note on the concept
of crime market with reference to demand and supply of crime.

Answer:
Law and Economics meshes together two of society's fundamental social
constructs into one subject, allowing a multi-faceted study of significant problems
which exist in each field. Law and economics, with its positive economic analysis,
seek to explain the behaviour of legislators, prosecutors, judges and the people. The
model of rational choice, which underlines much of modern economics, proved to be
very useful for explaining how people act under various legal constraints. The nature
of country’s law, and the reliability of its legal system, also has a direct impact on
economic performance. The relationship between the legal system and the economy is
definitely a two-way link. Thus, the nexuses between Law and Economics can be
understood under the following heads-

a. Main focus on Man: Both Economist and Jurist have given main focus on the
study of man. Law studies human behaviour and find ways and means to regulate
this behaviour in relation to their rights and personal liberty. Similarly, economics
also studies human behaviour as a relationship between ends and scarce means
which have alternative uses for production and distribution of goods and services
for achieving the goals of social welfare and development.

b. Rational behaviour of Man: Both law and economics are based on the
assumption that that behaviour of man is rational. An economist assumes that man
behave rationally to maximise his satisfaction and thereby his welfare is increased.
Such assumption of rational behaviour of man also finds an important place in
law. For e.g. in case of contract of sales of goods both the seller and the buyer
make a bargain to benefit themselves and accordingly the price is determined
which in legal terms is called consideration for the said contract of sale. Likewise,
it is also assumed that more the fear of punishment, the less is the amount of crime
committed in the society.

c. Wealth and scarce means: A man without means is found to commit the offence
of theft. A wealthy man is not expected to commit this offence unless he is tainted
with irrational instinct. Similarly, there would have been no economic disorder
provided wealth and resources are equally available for the use of all man.

d. Normative and positive science: Law and economics are considered to be

positive as well as normative science. Law is positive when it deals with law as it
exists i.e. law as it is. This kind of law is found in the form of legislation enacted
by the legislature. On the other hand, normative law deals with law that is made of
perceptions, ideals, and traditions. It provides scope to judge what is good law for
the society.
Positive economics deals with “what economics is” and normative economics
deals with “what economics should be”. Positive economics tries to set concepts,
rules, principles for analysing human behaviour towards production and
consumption. Normative economics tries to find out ways and means for optimum
utilization and allocation of resources for welfare and social development.
e. Emphasis on Incentives: Law and economics emphasise on incentives and
people’s responses to these incentives. For example, the purpose of damage
payments in accident (tort) law is not to compensate injured parties, but rather to
provide an incentive for potential injurers to take efficient (cost-justified)
precautions to avoid causing the accident. Law and economics share the
assumption that individuals are rational and respond to incentives. When penalties
for an action increase, people will undertake less of that action. Law and
economics are more likely to use empirical or statistical methods to measure these
responses to incentives.

Crime Market:
A market is any place where two or more parties can meet to engage in an economic
transaction even those that don't involve legal tender. A market transaction may
involve goods, information, currency, or any combination of these that pass from
one party to another.
Markets may be represented by physical locations where transactions are made.
These include retail stores and other similar businesses that sell individual items to
wholesale markets selling goods to other distributors. Or they may be virtual.
Internet-based stores and auction sites such as Amazon and eBay are examples of
markets where transactions can take place entirely online and the parties involved
never connect physically.

Crime market is a category of transnational, national, or local groupings of highly

centralized enterprises run by criminals to engage in illegal activity, most
commonly for profit. Some criminal organizations, such as terrorist groups, are
politically motivated. Sometimes criminal organizations force people to do business
with them, such as when a gang extorts money from shopkeepers for
"protection". Gangs may become disciplined enough to be considered organized.
A criminal organization or gang can also be referred to as
a mafia, mob, ring, or syndicate; the network, subculture and community of
criminals may be referred to as the underworld.

Crime Possibility Schedule:

We assume that only two crimes X and Y are committed in an economy. Here a CP
schedule records the various combination of the two crimes that can be committed
with the fixed resources assuming that the resources are fully and efficiently
employed. Suppose the combinations which can be produced are as follows:

CP Schedule
Combinations Crime Y(unit) Crime X(unit) Rate of sacrifice of
Y (marginal
opportunity cost)
A 0 + 10 -
B 1 + 9 1Y:1X
C 2 + 7 2Y:1X
D 3 + 4 3Y:1X
E 4 + 0 4Y:1X

There are five combination in the above schedule.

a. In combination A, nothing of X is produced and all resources are used to

produce Y

b. In combination B, one unit of X is produced and for this one unit of Y is

sacrificed.

c. In combination C, one more unit of X is produced but now two units of Y is

sacrificed.

d. In this way, in combination D and E the rate of sacrifice of Y is three and four
units respectively. These rates of sacrifice are called marginal rate of
transportation or marginal opportunity cost.

Market for Murder:

A large percentage of murders are committed within a family, between lovers

between business and political rivals etc. But all these murders are not murders of
passion i.e. emotion charged crime which occur in the heat of the moment. Some
of them are intentional and rational in the sense that such crimes are committed
for monetary and psychic gain. These gains from the crime are compared with the
cost in deciding whether the crime is to be committed or not.

Under this situation the economic model of criminal behaviour can be fitted to
explain the market for murder. It is assumed that most of the criminals involved in
this activity would consume (demand) and or produce (supply) at least one murder
in a lifetime. If we combine all the potential buyers and sellers of murder, we have
a market for murder.
In the above figure, the demand curve DD simply indicates that some criminal
value murder for either the monetary or psychic gain that can be derived from it.
The DD curve slopes downward from left to right indicating that at relatively high
prices few murders will be demanded. As price goes down the quantity demanded
increases, as such, less lucrative murders also become feasible. The supply curve
SS depicts the supply of crime function and has a positive slope. At low prices
few murders will be supplied, whereas, as the price increases quantity supplied
also increases. This is either because the existing producers increase output or
because additional producers enter the industry. The equilibrium price and the
equilibrium quantity of murders are indicated by the interaction of the supply and
demand curves at point E. The equilibrium price in the murder market is OP and
the quantity of murder produced is OQ per time period.

Market for Irrational Murder:

By irrational murder we mean those instances in which the potential criminal does
not consider the gains of committing the crime compared with the cost involved.
These are the murders of passion in which the crime is committed almost
impulsively in the heat of intense anger or any other emotion.
The above figure shows that the demand curve is a straight vertical line, indicating
that the demand for irrational murder committed in a moment of passion is
completely price inelastic i.e. regardless of the price to be paid for such murders,
buyers demand a constant amount per time period.

The supply curve is also perfectly price inelastic and is drawn as a straight vertical
line. This shows that regardless of the price, the market is willing and able to
commit a constant number of murders per time period. Again, the market supply
is the summation of each individual supply curve. For each person or supplier, the
supply curve is perfectly inelastic.

The figure above indicates demand by the market as a whole, which is the
summation of the amount that each buyer demands at every price. The individual
demand curve too would be perfectly inelastic. The demand and supply curve are
shown to be the same line i.e. D=S which indicates that at the moment of
irrationality each person simultaneously demands and supplies a certain number of
murders and the price to be paid and received is irrelevant. The person wants the
crime and commits it himself or herself. The perfectly price inelastic demand and
supply curve also indicates that no rational comparison between price or cost and
gain are made by the demander and supplier in the market for irrational murder.

Demand for Crime:

Demand is an economic principle referring to a consumer's desire to purchase
goods and services and willingness to pay a price for a specific good or service.
Holding all other factors constant, an increase in the price of a good or service will
decrease the quantity demanded, and vice versa. Market demand is the total
quantity demanded across all consumers in a market for a given good. Aggregate
demand is the total demand for all goods and services in an economy.
Multiple stocking strategies are often required to handle demand.

There is an inverse relationship between the price and quantity demanded of a

product. Higher the price of the product, lower would be its demand. Therefore,
the demand curve has a negative slope. It slopes downward from left to right. The
demand curve for crime may be of different shapes. It may be elastic, more
elastic, perfectly inelastic depending on the nature of crime committed. For e.g.
the demand for murder is somewhat different from that of the demand for drugs in
the drugs market.

We may estimate a price-quantity relationship in case of crimes also. The demand

curve for crime shares shows the number of crimes per time period demanded at
various level of average price or gain. Remaining other things like taste, income
and price of related goods, etc. remain constant.

At price OP1, the quantity of crime demanded is OQ1. As the price falls from
OP1 to OP, the quantity demanded increases from OQ1 to OQ. It is to be noted
that the demand curve will shift if any of the determinants change i.e. if there is a
change in taste, income, price of substitute goods and price of complementary
goods.
Demand for Murder:

The demand for murder function will shift with a change in any of the
determinants of demand like taste, income and price of related goods. Thus, for
e.g. a change in the taste for murders would cause the entire demand curve DD to
shift. Again, a decrease in the taste would cause the demand curve DD to shift
downward.

The market is willing and able to buy fewer murder at each price along demand
curve DD than along demand curve D1D1.

Demand for Stolen Goods:

The demand for stolen goods is the relationship between price and quantity
demanded which an inverse one i.e. at higher piece the quantity demanded for
stolen goods will be low. This will result in a downward slopping demand curve
for stolen goods indicating that at the lower price, quantity demanded for the
stolen goods will be more.
At price OP, the quantity demanded is OQ, i.e. at this price, the criminals demand
OQ quantity pf stolen property. If the price falls to OP1, there will be an increase
in quantity demanded by QQ1 i.e. OQ1.

Supply of Crime:

The supply curve shows the relationship between the price of a good or service
and the quantity that producers are willing to supply per time period. The supply
curve for crime will show the number of crimes (quantity) per time period that
criminals (producers) are willing to commit (produce) at various levels of average
gain (price).

We have argued that criminals behave rationally, i.e. they compare the gains from
criminal activity with the cost involved before choosing whether or not to commit
a crime. The economy model for crime describe how an individual decides
whether or not to be a criminal. Once an individual has decided to work in an
illegal sector, the number of crimes he or she commits depends on what economic
refers to as the work-leisure choice. This will determine how many crimes the
person commits as well as his or her annual illegal income.

A typical supply curve shows a positive relationship between price and quantity
supply. As price increases quantity supply also increases and therefore such a
supply curve has a positive slope.
However, for an individual criminal, the direction of the relationship between
price and quantity is not immediately clear. As average gain (price) increases the
individual may commit more or less crime because it depends on the work leisure
choice of the criminal. Under this assumption it is possible that when a criminal
commits more crime per time period, the probability of punishment may increase.
If this happens the criminal would have to be able to realise a larger gain from the
crime to be induced to commit more crime per time period. This means that the
criminal would supply more crime only if the gain increases. Thus, the individual
supply curve for crime SS will be upward slopping from left to right.

Now if we consider criminals as a group i.e. when we take the supply curve for
the industry as a whole, the supply curve will slope positively even stronger as the
gain from crime increases. More individuals and firms will be induced to enter the
illegal industry and as a result more crimes will be committed. This means as the
average gain from crime increases, additional firms are encouraged to enter the
industry and produce crime. As the price goes up, the quantity that the suppliers
are willing to produce per time period increases.
The average gain from a crime is equal to OP, then OQ will be committed per
time period. If the average gain from a crime increases to OP1, then the quantity
of crime committed will increase to OQ1 i.e. by QQ1.