Government Interventions
Chapter 7 Externalities
7.4 Tradable Permits and Auctions
CONTENTS 1.0 Introduction 2.0 Objectives 3.0 Main Content
3.1 Planning System Concepts 3.1.1 Systems Approach 3.1.2 Types of System
3.1.3 System relationship with the Environment 3.1.4 Sub-Optimization
3.1.5 Planning and Control 4.0 Conclusion
5.0 Summary
6.0 Tutor-Marked Assignment 7.0 References/Further Readings
1.0 INTRODUCTION
Systems exist in very facet of life. There are mechanical system, biological systems, information systems, social systems, organizational systems and innumerable others; In this unit, we will discuss system as it relates to planning.
2.0 OBJECTIVES
By the end of this unit you should be able to:
E x p l a i n the relevance of systems theory to planning;
Describe open and close system;
Discuss sub-optimality;
Explain that planning and control are related.
3.0 MAIN CONTENT 3.1 Planning System Concept 3.1.1 Systems Approach
The systems approach avoids taking a piecemeal approach to problems and directs the activities of the components or sub systems of the total system towards meeting overall objectives. The systems approach recognizes that changes cannot be made to some parts of the system without considering the effect on the system as a whole and that
the overall system characteristics are greater than the sun of the separate parts. This later is known as the synergy or the 2 + 2 = 5 effect.
In relation to a particular organization the systems approach would require consideration of the following factors:
a ) the system must be define. This requires establishing the boundaries (real or arbitrary) which encompass the system must be specified.
b) The real objectives of the system must be specified.
c) The environment in which the system operates, the interactions with the environment, and the constraints which it imposes.
(d) The indicators which will be used to measure the performance of the system as a whole.
e) The current and anticipated resources available to operate the system.
f) The parts of the system (i.e the sub systems) their relationships, activities and objectives must be studied to ensure conformity with overall system objectives.
g) The way that the system managed, ie the planning and controlling of the system through information networks.
Note: It will be seen how the systems approach aligns closely to good management practice. It is objective oriented, an overall view is taken and the effect of the environment are considered.
3.1.2 Types of Systems
For our purpose, the three most relevant types of systems are deterministic, stochastic and adaptive.
Deterministic or mechanistic system
These are the simplest systems which are perfectly predictable. ie given the inputs, the outputs can be predicted accurately. Machines and computer programs are examples of deterministic systems.
Stochastic or probabilistic systems
In these systems some states can be predicted from a previous state but only in terms of probable behaviour. Predictions will always have a certain degree of error because of the existence or random variations in the values of the systems components caused by internal and external influences. For example, in an inventory control system the average stock or average demand can be predicted buy the exact value of these factors at a future time cannot be predicted. Various control
systems (e.g inventory control, production control, quality control) are installed to detect and c o n t r o l t h e v a r ia t i on s i n or d e r t h a t t h ey d o n o t b e c o me of s u c h ma g n i t u d e a s t o e nd a n g e r the fulfillment of the system objectives.
Adaptive or self-organizing or cybernetic systems
These are highly complex systems which adapt to the environment by altering their structure and/or parts and/or behaviour. This adaption is of the system and not merely the alteration of some parameter (eg a stock level) within the system. This class of system includes all living systems- animals, plants. social groups and organizations. It is a primary task of management to ensure that organization continually adapt to changes in the environment to ensure survival and development. It is essence of long-term planning that recognition is given to the fact the organizations are adaptive systems and that environmental influences are all important.
3.3 System relationship with the environment
The environment of a system is all other systems outside its own boundaries. Thus the environment of an organiation are the systems (i.e the markets, suppliers, competitors, distribution and so on) in the sector of the economy in which it operates. The environment of a production system in an organization is the other interacting systems which the organization.
SYSTEM MAY BE CLOSED OR OPEN Closed system
These are systems which are self contained and do not exchange material, information or energy with the environment. In the strict sense no business or organization system can be a closed system but for many planning and control purposes, systems are designed to be relatively closed with only minimal interactions with their environment. This greatly aids the prediction and monitoring of system performance.
Open systems
These are system which interact and exchange information, energy and materials with their environment. To ensure survival (the primary organizational objective) adaption to changes in the environment is vital and only open systems have this capability.
Inputs
These various types of systems are shown below;
Closed system No exchanges
with environment
Relatively closed system
Knonw & Known &
Prescribed inputs——→ ———→ prescribed
Outputs
Known Unknown Disturbance
Open system Subject to known
and unknown inputs and environmental
disturbance
Output
Relationship with environment
Thus, it will all be seen that an organization is an open, adaptive system containing within 'it a number of sub-system which may be adaptive, probabilistic or deterministic.
3.1.4 Sub-optimization
This is where the objectives of sub-systems are pursued to the detriment of the overall system goals. Each sub-system may be working at peak efficiency but this does not necessarily mean that the system as a whole is acting optimally. Sub-optimizations is probably more common than is realized and may be caused by departmental pressures and rivalries, poor communications, lack of co-ordination, poor information systems, or lack of centralized direction and control. The avoidance of sub- optimization is an optimization is to ensure that the overall objectives of the organization dominate eh objectives of each of the sub systems. This factor must he borne in mind when planning, controlling and monitoring performance.
3.5 Planning and control
Planning precedes control and planning without consideration of the type, frequency and method of control will largely be a waste of time. It follows from this, that part of the planning process involves the design of an appropriate control system. control is an important element of the work of the management accountant.
SELF-ASSESSMENT EXERCISE i. What is a system?
ii. List the various types of system
4.0 CONCLUSION
Various definitions exist of a system but all contain the essential elements of parts and relationships. The systems approach directs attention to overall objectives and thus attempts to avoid sub- optimality.
5.0 SUMMARY
Open system interact with the environment, while close systems which are self contained parts of the planning process, includes consideration of an appropriate control system.
6.0 TUTOR-MARKED ASSIGNMENT
Distinguish between open system and close systems?
7.0 REFERENCES/FURTHER READINGS
Ola, C. S. (2003). Management Accounting Theory and Application, Claverianum press Ibadan
Walker. C.J. (1982). Principles of Cost Accounting (3rd Edition) Macdonald and Evans London