Mechanism Of Excess Capacity Based On Information Transmission Efficiency

In the session of National People’s Congress held in March, 2015, Chinese premier Li Keqiang gave a Government Report on behalf of the State Council. The problem of excess production capacity has been repeatedly referred to during his report. Actually, excess production capacity has been a chronic illness for our economy in spite of frequent government actions and interference aiming at it. As the side effects of excess production capacity, such as hazy weather, carbon emission and inefficiency of allocation of productive inputs, become sharper in conflict with national interests, it is a clutch time for us to mitigate the seriousness of the problem.“Excess production capacity” and “excess product” are two frequently confused terms. Moreover, people have misunderstanding about excess production capacity, believing in that it can be completely solved by means of certain policies or mechanisms. Unfortunately, this paper shows that in a dynamic Cournot model in which total demand refreshes periodically as an extension of classical Cournot model, with positive transaction costs, maintaining excessive production capacity is always inevitable. What makes us relieved is that the model also pointed out that the capacity utilization rate is partly controllable. As we accelerate the improvement of market mechanism and enforce a planned project, the coordination between the “invisible hand” and “visible hand” could boost the utilization of productive inputs.After the explanation on the source of excess capacity and emphasizing its inevitability, this paper further pointing out the important relation between the efficiency of information transmission and utilization rate based on an so-called “transaction cost----government interference equivalence principle”. In the case of no transaction cost in market, information transmits in an awesome velocity, and the signal of “it is lucrative entering in this industry” will lead innumerable firms swarming into the given industry, which causes “wave phenomenon” and results in a massive of excess capacity. Once there exists significant fraction in transmission of information, market price will no longer be a good signal for market participants. The time of arriving in an equilibrium state will be prolonged, bringing about a fall in capacity utilization rate because of the competition from emerging firms. In light of transaction cost in reality would always be neither too great nor too small; this paper makes the conclusion that there is an positive relationship between the capacity utilization rate and the information transmission efficiency. This is an original idea of the author. To simulate the ideas, we introduce two stochastic models based on Markov chain. The simulation will give readers direct impression.In order to test the theoretical relationship between information transmission efficiency and excess production capacity, this paper provided an empirical test based on the status of steel industry. We encountered many difficulties, such as choosing proxy indices, insufficient data. After we have conquered these problems, we made the conclusion that there exists a positive relationship between information transmission efficiency and excess production capacity. This conclusion strongly supports our theoretical model. At last, the author proposed many relative suggestions point to the problems based on what the models’ implication.