Question

1. This month Sprint and T-Mobile announced to merge into one $146 billion company. The two companies argued that the merger will lower costs, “create competition and lower prices across wireless, video, and broadband” as well as other 5G technologies.

a) List all, and describe two of, the steps you will take to examine whether or not such a merger should be allowed to go ahead.

b) How would an economist justify (defend) government involvement in the economy?

c) Give two broad economic reasons to justify why the US government should to fight Ebola in West Africa or international terrorism in far-away places. [To say Americans are kind people alone is not the answer!]

Answer 1

a) The general broader steps to be taken to examine whether this merger should be allowed or not are as follows:

1. Analysis of the company - Initial evaluation involves detailed analysis of the companies.

Issues to consider:

• Restructuring needs
• Risks associated
• Capital and equity structure
• Potential synergies

2. Analysis of pricing mechanism

The primary concern of the step is determining how the company will be financed

Issues to consider:

• Cash or equity
• Pricing mechanism
• Terms and conditions

3. Analysis of the deal structure

4. Analysis of share data

Along with these steps, there are some questions which should be asked to clarify the instances of whether a merger should be allowed or not

1. Does the merger cause a significant increase in concentration and produce concentrated markets?

2. Does the merger appear likely to cause an adverse effect to the competitions?

3. Will any of the company fail if the merger won't be done?

4. Will the merger generate efficiencies which would otherwise not be achieved by the individual parties?

b) The main aspects to justify the intervention of Government in economy lies in following points:

• Ensuring equality
• Overcoming market failures
• Overcoming prolonged recession
• Producing employment  

Ensuring Equality

In a free market, through privilege and monopoly power, the unfairness can be created between people. Without government intervention, the firms can exploit monopoly power to provide low wages to the workers and along with that, charging high prices to the customers. The government intervention ensures that these types of inequality don't prevail in the market.

According to Rawl's social contract, the ideal society is that in which you will be happy to be born in any situation, not knowing where you'll end up. In that case, people won't prefer to be born in a free market situation, since that means the profit goes to a small number of hands. The role of government in this case, as you can see is to ensure this type of crisis doesn't occur among people.

Overcoming market failures

Regulation of externalities (positive or negative) and regulation of monopoly power are some of the aspects of these. Government intervention to save declining industries to save the market from employment crisis seems to be one of the most important reasons to an economist.

Overcoming prolonged recession and producing employment

In a recession, there is obviously a sharp fall in the industrial sector and investment spending, leading to lower economic growth. The role of government in this type of duration is to save the doomed economy and try to boost up the economy by increasing spending from their side. A government can possibly affect an economy on a very large scale through their fiscal policies.

c) To understand the cause and effect of the two examples listed in the question, we have to focus on physical as well as the psychological effect of an event on the economy. The very first activity getting affected by these turn of events is travel. In a chaotic condition, people may choose not to travel, either internationally or domestically, hitting the industry hard. When the effects of something is severe, people think them to happen more likely and same is the case with the Ebola.

There are obvious industries getting directly affected by the terrorism, no matter whether it takes place in near places of any far-away places. Those are insurance and tourism. Terrorism is a risky business and the insurance companies hate the risk the most. Also, the kind of situations an epidemic or terrorism creates further creates uncertainty in the markets and the worst friend of any stock market is the uncertainty, hence affecting the economy and finance of a country very much in a negative way.

These are some of the broader economic reasons so as to why the US should fight an epidemic or the terrorism in a far-away place.