When attempting to improve supply side conditions in the Australian economy, the government will work on an industry by industry basis. As such, macroeconomic policies such as the fiscal and monetary options are not considered appropriate tools with which to fight inefficiency. Although the government does aim to allocate some resources efficiently through the use of the budget, the decentralisation of many services previously provided by the various levels of government has resulted in a more focused approach. You will study the microeconomic reform process in detail during Unit 4 – for now an example will be sufficient to illustrate the point.
In October 1990 the federal government deregulated the airline industry by abolishing the “two airline” policy. This was a set of laws that mandated that only two airlines were allowed to carry passengers who only wanted to travel within Australia. As a result, these airlines were now forced to compete with the many international carriers that were already moving between Australian cities as “first steps” for an international flight. In addition, new carriers were permitted to enter the market.
The ensuing decade was a turbulent one for the airline industry. Several new airlines were started, including two incarnations of Compass and another called Impulse. Towards the end of the decade, Richard Branson started Virgin Blue, and Ansett collapsed due to the ongoing pressure of competition.
Despite this instability, the ultimate goal of efficient resource allocation does seem to have been achieved. Australian consumers now use airline travel more each year. This can be measured – there are more flights than previously, and carrying rates within those flights are higher. Despite this, prices for travel on airlines between cities in Australia have fallen during this period. With lower prices and higher levels of use, we can conclude that resources in the airline sector are being used more efficiently. (Think about it this way - when the supply curve moves to the right, we would expect to see both higher quantities and lower prices. That is exactly what has happened in the airline industry.)
Another way of looking at the efficiency of the sector is to consider the attractiveness of investment in that area. During the second half of 2006, a private equity group approached QANTAS with a takeover bid. This suggests that the airline has been profitable despite the many challenges that it has faced (in recent years we have seen high petrol prices, the threat of terrorism and SARS). The fact that QANTAS is able to remain profitable when many airlines around the world have not is a tribute to the efficiency of the airline industry in this country. We now know that this buy-out attempt did not go ahead, but it does not change the fact that the airline was considered attractive enough for the investment, and as such it might become the subject of further takeover bids in the future.
During your study of this topic in Unit 4, you will discover that the government has also reformed many other sectors, such as the financial sector, the ports, telecommunications and postal services. In each case, improvements in resource allocation can be seen.