World cocaine market ‘in retreat’?
According to this BBC report, years of government intervention by the Serious Organised Crime Agency to cut supplies of cocaine has been successful in reducing supply and so raising the price of the drug.
SOCA have followed a strategy of working in South America, the Caribbean, across the Atlantic and with European partners to intercept the suppliers. Wholesale prices have risen from £39,000 per kilo at the end of last year to £45,000, which would indicate a shortage of supply causing the equilibrium price for a demerit good to rise, reflecting some of the negative externalities and moving closer to the social cost.
However, unfortunately there may also be a case of government failure in the form of unintended consequences: data collected by the Forensic Science Service suggests that almost a third of police seizures are now less than 9% pure, the lowest recorded purity level.
The implication is that drug gangs are maintaining their supernormal profit by using increasing amounts of chemicals - so-called cutting agents - to dilute cocaine powder sold on the streets of Britain. They include the cancer-causing drug phenacetin, cockroach insecticide and pet worming powder. As a result, street prices are remaining fairly stable says Drugscope director Martin Barnes. “What is happening is that dealers are maximising their profits by selling a product that is potentially more harmful and much less pure and a lot of people buying it probably don’t realise that’s what’s going on.”
Sunlight is a great disinfectant
Who to blame? Who to target in the search for the culprits behind the great banking crisis which has mutated from a calamity in private sector credit and derivatives markets into a broader, damaging economic and social disaster. Playing the blame game is easier armed with the benefit of hindsight. But with each passing day it becomes clear that what we have seen is a multi-tiered case study in market and governing failure. Ordinary citizens — whose pensions and living standards are now threatened and blighted by the folly of financiers blinded by their own hubris and greed — will not easily accept that the current generation of leaders are the people to lead us out of this mess.
read more...»First hints of the brain drain effect
The government’s decision to increase the top rate of income tax from 40% to 50% is pure political opportunism from a party that has given up any realistic hope of power at the next election. Cue a chance to stick a few poorly aimed knives into the body of up and coming entrepreneurs for a measure that will raise a little extra revenue but which will also do huge long term damage to enterprise in the British economy. From next year anyone earning more than £150,000 a year will pay 50% income tax. The move replaced the 45% tax bracket threatened in the pre-budget report last November. Here are the first signs of a brain drain effect taking hold. And even more worrying is the threat of a brain blockade - as highly skilled people in industries such as technology, medicine, industrial research and so son may now shun coming to the UK in favour of competing locations. Those with a cushion of wealth are best placed to relocate, in a digital age the barriers to conducting business off-shore are so much lower. The Telegraph provides a handy guide for those searching for an atlas and airline timetable this weekend.
Fishing for a problem for the tragedy of the commons
A new report from the European Commission finds that further sizeable reductions are needed in the size of the EU fishing fleet in order to bring about a more sustainable future for the deep sea fishing industry. The long term and possibly permanent and irreversible decline in fish stocks is an example of the tragedy of the commons - a form of market failure. The Common Fisheries Policy has been wildy condemned for failing to address the issue of over-fishing - not least the stupidity of fishing quotas that prompt many fishing vessels to dump unwanted fish overboard before reaching port. This new report argues that the capacity of the industry needs to be culled and this raises important issues about resource allocation andjobs and living standards in regions dependent on fishing.
“Across the EU, fleet capacity has come down, the commission says, but only about 2-3% per year. Meanwhile, technological improvements are making boats 2-3% more efficient every year - so the capacity reductions are having little effect.”
More here from the BBC web site
Images from a planned economy
This link might be useful for colleagues wanting to add to their image library when teaching economic systems. Most of these images seem to hark back to the days of state planned output, rigid price controls, long queues and a distinct lack of choice! I love the image of a shelf of soviet astronauts - light years before Buzz came along!
Cash Incentives for Healthy Options
I often use Stephen Landsburg’s famous quote which claims that the whole of Economics can be summed up in four words “people respond to incentives” - so it was interesting to read in my morning newspaper that the Department of Health is considering rolling out a wider programme of cash incentives for people who can demonstrably show that they are making progress towards a healthier lifestyle.
Nicholas Timmins writes in the Financial Times that
“In Dundee, smokers are being offered £12.50 a week by the NHS if carbon monoxide testing shows they have quit. In Essex, pregnant women can claim a £20 food voucher from the NHS after stopping smoking for one week, £40 after four weeks and another £40 at the end of a year if they have still quit. Brighton offers children £15 for quitting smoking for 28 days, while overweight patients in Kent are also being offered incentives for losing weight.”
This short paragraph could form the basis of an excellent discussion about different forms of government intervention designed to affect health outcomes. I try to focus on three key words when teaching the impact of government intervention. Policies tend to work best when they are EFFECTIVE, EFFICIENT and EQUITABLE.
So what roles can direct financial incentives from the taxpayer for people to quit smoking, lose weight or eat better have both in the short term and over a longer time horizon?
If such incentives work what will be the longer term benefits for the health service and for the tax payer?
Are they better than regulations, taxation and attempts to improve information?
Is it fair to appear to reward unhealthy behaviour? What of those tax payers who do not smoke, maintain a healthy diet and weight and who make few if any claims on the health and welfare system?
Can the law of unintended consequences come into play? If you pay teenagers to stop smoking, will more of them start in the first place?
How will the cash payments be used?
Economic slump cuts EU carbon emissions
First the good news - greenhouse-gas emissions from heavy industry and utilities in the European Union fell 6% last year raising hopes that the EU will be able to meet and possible exceed their targets for cutting emissions as part of the Kyoto protocol. Cement factories, steel works and power stations are among over 10,000 industrial installations that are covered by the EU carbon emissions trading scheme which was launched in January 2005.
But how much of this welcome decline in emissions is down to the working of the carbon market is open to question. The price of carbon permits has slumped as the EU economy has nose dived into a deep recession. Indeed the price for a 2009 carbon permit is currently hovering just above Euro 12 a tonne - hardly the short of price that will give businesses the incentive to spend big sums of money on adoption of low-carbon technologies in factories and power plants. Putting a price on carbon is designed to change behaviour - but the price needs to make a difference and be sustained over a long enough period of time.
UK emissions decreased 6.8% to 254 million tonnes, while German emissions dropped 3.2% to 457 million tonnes - German industry is suffering greatly from the collapse in world trade and decline in demand for manufactured goods and capital equipment.
A quick extra point - under Phase 2 of the EU ETS, up to 10 per cent of carbon emission allocations can be auctioned off. The UK Debt Management Office has this responsibility for the UK and this section of their web site might be a useful port of call for teachers and students wanting to know more.
Skills crisis in curry restaurants
An evening out at a good curry house could be a reward for lots of hours spent revising during the Easter holidays, but could be under threat. Surely another example of the Law of Unintended Consequences – the tightening of the immigration rules last year has caused a shortage of skilled chefs entering the UK, and the government is holding an “ethnic chef summit” on Thursday to meet Indian, Bengali and other restaurateurs and to discuss a serious skills shortage in the industry. Enam Ali, chairman of the Guild of Bangladeshi Restaurateurs, says 150 curry houses have closed this year, in an industry worth £3.5bn each year.
The Law of Unintended Consequences at Staffordshire hospitals
Government intervention is carried out with the best of intentions, but can result in unintended consequences with resulting government failure (a deepening of the market failure or even worse a new failure which may arise). The case of the failures at the Staffordshire General Hospital reported yesterday gives a tragic example of this. A report by the Healthcare Commission, which is a regulator for the NHS, said there were deficiencies at “virtually every stage” of emergency care at the hospital, and up to 400 patients died as a result. This BBC report highlights a dreadful list of errors at the hospital’s Accident and Emergency department from the use of receptionists to carry out initial checks on patients to heart monitors being turned off on wards because nurses did not know how to use them. Various factors are identified as having led to this failure, the government’s target for patients to be seen within four hours at A&E which meant patients could be taken to “dumping grounds” to avoid breaching the target. The situation was only recognised after complaints from residents were backed up by statistics showing a high death rate.
read more...»A nudge towards a lecture?
A heads up on a lecture by the co-author of one of the most talked about books in behavioural economics, at the LSE on Monday 23rd March.
read more...»Trade-offs in the off trade
Proposals to tackle alcohol-fuelled violence and health related problems in Scotland were announced yesterday. This is government intervention to tackle the market failures that result from alcohol, which has been a regular issue discussed in England and Wales as well. Some of the statistics given in this video report spell out the reasons for the concern north of the border; there has been a 20% increase in the number of people being discharged from hospital following alcohol-related treatment, Scots drink the equivalent of two litres more pure alcohol each per year than the English, and alcohol-related liver disease has overtaken heart disease as one of the top three killers there.
read more...»Is this how EU grants should be allocated?
The European Commission for Agriculture and Rural Development has made grants of up to £5,000 available to farmers in Northern Ireland to help modernise their farms, improving animal welfare and farm efficiency. But with just £6m available, many farmers are set to lose out. The farmers whose grant applications are successful will be able to buy from a government-approved list of items such as cow mattresses, creep feeders and computerised livestock identification systems, and must add to the amount of money they are allocated from their own funds. Michelle Gildernew, the Minister for Agriculture and Rural Development, says that this is an “important boost to the economy”, because many of the items on the approved list have been made in Northern Ireland.
read more...»Paying tax at 90% - the poverty trap
The Independent carries an article today which flags up the disincentives facing thousands of households on low incomes. According to the piece, “A total of 60,000 households receiving income-related benefits or tax credits will face handing 90p of every extra pound they earn to the Treasury next year, twice this year’s total…. and the number of low-income households with a marginal tax rate of more than 60 per cent will grow by 85,000 to more than 1.9 million next year.”
The reason is the complex working of the tax credit and benefit system where working a few extra hours a week causes benefit recipients to lose means-tested (income related) benefits as well as having to pay more in income tax and national insurance contributions. Single mothers returning to work are thought to be especially at risk of the povert ytrap effect - currently, anyone working more than 16 hours a week loses their right to benefits.
This is an important issue - the effective tax rate paid by many thousands of people towards the lower end of the pay ladder can be twice that paid by the richest in society - raising questions not just about economic efficiency and incentives to work (key supply side issues) but basic fairness / equity.
Diseconomies of scale are human
One of John Kay’s phrases in his piece in the Financial Times yesterday will stay with me for the remainder of my teaching career. In a piece which focuses on the malign influences of political lobbying by huge economies of scale businesses that have been in relative decline for many a long year, John writes:
“That is true of the carmakers, whose problems are of much longer standing than the current downturn. In automobiles as in many industries, economies of scale are technological, the diseconomies of scale human. Human factors in business are generally more influential than technological ones in determining the long run fate of a company.”
This is a terrific article to use when discussing the root causes of government failures that can result from subsidies and bail-outs given to companies deemed “too large to fail.”
The remainder of John’s article can be found at his excellent web site
Some companies are too powerful to fail
Louis Theroux - Crime and Economics in Action
The Louis Theroux documentary on law and disorder in Johannesberg is a fantastic documentary to demonstrate just a few economic concepts to students as a christmas treat.
Before the lesson lead a discussion - ‘to what extent is policing a public good?’
Then another discussion leading from,‘to what extent do you think policing should be a public good, i.e. provided by governments?’
Then introduce or perhaps revise the concept of government failure and how governments may fail to provide policing to a desired quantity.
The programme demonstrates how there may be a demand for private police agencies run by the free market in South Africa, because the government fails to provide adequate policing to a desired quantity.
Other points for discussion included in the programme may include; income inequality, the costs of unemployment, external costs associated with slum housing. Also note other government failures the S.A. government are guilty of e.g. failure of information provision for AIDS HIV Virus.
A discussion on the paternal role of governments may also be considered.
The show also raises all sorts of other ethical debates which Louis questions. Try to avoid getting bogged down in these those, keep it to economics!
Marcus
Cheap drinks and government intervention
This BBC clip covers an announcement in the Queen’s Speech about policy proposals contained within a new Crime and Policing Bill to curb the flood of cheap drinks promotions offered by pubs and clubs which the government believes contributes to binge drinking. The Telegraph reports that
“Retailers will not be able to sell any alcohol cheaper than the price of buying one item of it, no matter how many more a customer buys. It means there will be a ban on offers such as two for ones, three bottles of wine for £10, or discounted multipacks of beer where the overall cost is cheaper than the sum of the individual bottles or cans contained.”
A seasonal hat tip to Ben White for spotting the article and for suggesting a number of economic concepts and policy issues that the article might be used to illustrate in a group discussion:
Pricing Incentives and price discrimination
Importance of price elasticity of demand e.g. if minimum drinks prices are imposed
Market Failure - externalities from consumption, alcohol disorders and de-merit goods
Regulation and Legislation - effectiveness and costs of regulatory policies
Risks of government failure including the law of unintended consequences
Social Issues
Back to the cave or a brave new world?
I popped over to a meeting of Eton’s Geography Society tonight to hear a talk from Mike Mason, the climate change entrepreneur and founder of Climate Care the carbon offsetting business which has recently been swallowed up by JP Morgan Chase to form part of their JPMorgan’s Environmental Markets group.
read more...»
Windfall gains for the biggest polluters
The Guardian has been critical of the EU carbon trading system in the past and a new report available here claims that some of Britain’s biggest polluters are set to reap a windfall gain because of an over-allocation of C02 permits in the first phase of the EU-ETS. The early fault-lines in the EU_ETS system are tantamount to government failure. The Guardian’s special reports on emissions trading provide a good point of reference for students and teachers.
Economic cost of fuel subsidies
The Economic Naturalist Robert Frank - writing in the New York Times - criticises the use of explicit fuel subsidies (common in many emerging market countries) and also takes a stab at the hidden subsidies that occur when a government does not tax products that create pollution sufficiently highly to reflect the external costs. Many countries are now reining back on such subsidies - a recent example was Vietnam - where the subsidy cut prompted a spike in oil prices for consumers. It is a well written piece and one that could be used when discussing government intervention, allocative efficiency and possible government failure.
“By one estimate, countries with fuel subsidies accounted for virtually the entire increase in worldwide oil consumption last year. Without this artificial demand stimulus, world oil prices would have been significantly lower. Earlier this summer, for example, world oil prices fell by $4 a barrel on news that reduced subsidies would increase Chinese domestic fuel prices by about 17 percent.”
The rest of his article can be found here
How Fuel Subsidies Drag Down a Nation
Anguished of Edinburgh
The BBC’ Business Editor Robert Peston offered a rapid fire tutorial in the credit crunch in his address to the Edinburgh Book Festival today. Some people have perhaps unfairly labelled him as “Pessimistic Peston”, the man who first revealed the state of the liquidity crisis at the Northern Rock in early September 2007. But he delivered an engaging and witty talk to a large group of the well heeled of Edinburgh who clearly have weighty financial issues on their minds.
read more...»Peston quizzes Sants
BBC business editor Robert Peston speaks to Hector Sants, the chief executive of City watchdog, the Financial Services Authority in this edition of Leading Questions available on the BBC web site. I am enjoying reading Alex Brummer’s new book on the credit crunch and I have just got to the chapter which looks at the regulatory failures of the FSA. My review will be posted on the blog in a few days.
Poverty Trap worsens
The soaring cost of child care is worsening the poverty trap according to a new report commissioned for the save the Children Fund in Scotland. More than one quarter of Scots parents on low incomes cannot work full time because of the cost of registered childcare which has risen by more than 10 per cent this year across most of the country. The average cost of child care in Britain during the holiday season is nearly £90 per week.
The Times has this article
“Joanne Brady, a single mother of two children from Glasgow, is unable to work because she loses more in means-tested child tax credits than she gains in income. “They take 20 per cent off for each child when you go to work. You still have to pay your housing, travel and lunches and it’s just not adequate.” Ms Brady, 27, is among the 28 per cent of parents with children under 18 and an income of less than £15,000.”
And the BBC also covers the report.
...Now I know my ABCs!
But does Jacqui Smith? Today she announced the reclassification of cannabis up to a Class B drug – against the advice of the government’s drug council and undoing the reclassification to Class C under Tony Blair’s reign. Legislature on drugs is an infamously contestable topic with each political party throwing their respective hats into the ring. The Conservatives certainly want cannabis at Class B, the Lib Dems want to listen to the scientific advice which means that they want it at Class C, while the Greens were daring enough to declare in their recent manifesto that they want a legalised, regulated market for cannabis, much like in Holland. Personally, I don’t even know my own stance on this, but here’s the story so far:
Tim Harford takes a dig at green taxes
VAT on gas and electricity too low? Excise duty on petrol and diesel too high? Yes says Tim Harford in his Undercover Economist slot this week. “Green taxes have been fussy and poorly-targeted, by turns too stringent and too lax ... This government – like most governments – likes to use the tax system as a way of expressing its moral views: hooray for pensioners, down with Jeremy Clarkson. Cheap politics for them, less so for the taxpayer.”
The rest of the article is here
The Rock and his Millions
Geoff’s entry today here prompted me to write something topical for once, so I’m going to follow up on this enlightening review. Despite everyone clamouring for change (from more staffing to a rehaul of the entire system), nobody actually knows what actual reforms are going to be implemented, aside from how we’re promised that things will be “better”. Somehow it reminds me of a certain someone’s campaign, but let’s not get into that. Instead, I’m going to discuss the theoretical side of how this discovery may affect the future.
read more...»Government failure and the Rock
Well here is one for the file on classic examples of regulatory (aka government) failure in the market. The Financial Services Authority (FSA) has admitted that it gave too few resources over to monitoring the problems building up at Northern Rock - covered in this BBC article and also this piece in the Financial Times. The FSA seems to have been assuming that the Bank of England stood ready to bale out the Northern Rock and there were failings in the oversight of the Rock by supervisory teams sent to look at the Rock’s flawed business model. None of this will be any comfort to the shareholders and also to the thousands of Rock employees who will lose their job. Robert Peston is brilliant on this issue - here is his latest blog which lays bare the blundering at the FSA and the shocking incompetence of their senior management.
What shall we do with the drunken nation? Volumen Dos
[This is the concluding half of my two-parter on combating alcohol abuse in Britain. The first half, focusing on the price policies the government can use can be read here.]
read more...»Jackoby on Government Failure
How government makes things worse - Jeff Jacoby writes about the law of unintended consequences and government failure in today’s Boston Globe. There are spooky parallels with failed government policies here at home.
“WHAT DO ethanol and the subprime mortgage meltdown have in common? Each is a good reminder of that most powerful of unwritten decrees, the Law of Unintended Consequences - and of the all-too-frequent tendency of solutions imposed by the state to exacerbate the harms they were meant to solve.”
Read the remainder of the article here
24 hour drinking - a case of government failure?
Last week one of our bloggers carried a story about taxation and the demand for alcohol. And today the Independent reports that a Home Office study is likely to report that the liberalising of the licencing laws in 2003 has not (as yet) led to a reduction in alcolhol related crime or a change in our drinking patterns towards a European-style culture. The Indy report claims that ‘Serious violent crime has been displaced, with a steep rise in offences committed between 3am and 6am and, despite the millions spent on police crackdowns on drunken disorder, alcohol-fuelled crime hot spots have become worse.’
You can barely walk into a supermarket these days without facing a barrage of deep discounts on cans of lager, boxes of Chilian wine and bulky dispensers of Heineken. It is cheaper to buy a can of lager than a bottle of mineral water. Online shoppers receive regular emails alerting them to the latest 3 for 2 offers on cheap alcohol. The supermarkets have a social responsibility but one retailer on their own is unlikely to make the first move for fear of putting itself at a competitive disadvantage. Is it time for a law banning the deep discounting of alcohol products.
BBC news audio-video on Tesco and alcohol prices
A Licence To Print Money?
An innovative method of internalising the externality of smoking? The introduction of a £10 permit to purchase tobacco products has been proposed in an attempt to increase the cost and inconvenience of buying cigarettes and similar goods.
The ban on smoking in enclosed public spaces which began in England in July 2007 has been touted as a considerable success, contributing to a 7% drop in cigarette sales compared with the year before. But this has not been without unintended consequences, highlighted already on these blog pages. And with approximately one third of imported cigarettes already arriving in the country illegally (at a cost of £2bn per year to the UK Treasury), won’t any attempt to drive up the price of legal tobacco products - and the inconvenience of buying them - simply result in greater demand for smuggled goods?
Perhaps more radical and shocking methods to reduce demand for cigarettes are needed (this link shows some of the campaigns that have been used in various countries.)
