Unit 1 Micro: Positive and Negative Externalities (AQA)
At an AQA online AS feedback session this afternoon there was a suggestion that demerit goods should only be shown with negative externalities in consumption, i.e. with a divergence between marginal private benefits and marginal social benefits. Whilst the mark scheme currently accepts both this and external costs for explaining a demerit good, it was suggested that this would be changing to only allow the consumption (dis-benefits) issue.
read more...»Unit 1 Micro: Teacher Update on New Regulations
The end of September has brought a raft of new or changed regulations affecting different markets. Here is a summary of some of them for students and teachers wanting to keep up to date:
read more...»Where there’s muck there’s brass
I am cross-posting this from the Business Studies blog, so apologies to those who read both - but I think it is a good story for both subjects. I have changed a few of the terms and themes to cover the different emphasis for an economics student.
On the face of it, this is a good end-of-term case study which is bound to raise a smirk or a grimace from most students, but actually there is a wealth of good solid theory in it. In answer to the question “What to do with 12,000 tonnes of pig poo?” a farm in Gloucestershire has taken advantage of government grants to set up their own biogas generator, which enables them not only to provide their own power for the farm and farmhouse, but also to sell about 2.2 million kilowatts of electricity each year to the National Grid, and even better, to save money on fertiliser as the by-product has been broken down into a form that can be used on the fields. Even better, the process prevents huge amounts of methane from being released into the atmosphere - apparently each year it saves the equivalent of almost 9,000 return flights from London to New York. So lots of good positive externalities there.
read more...»Tackling obesity - some alternative approaches
So far, governments in the developed world seem to have failed in terms of developing and implementing effective policies that might reduce the negative externalities associated with the ‘obesity epidemic’. However, based on various different news reports this weekend, it seems that the private sector may actually have come up with some strategies that could be worth a try. My favourite is the ‘pay what you weigh’ approach in a new style of restaurant in Brazil - the heavier the food on your plate, the higher the price. There’s an interesting short clip on this here. Another approach, this time from Pizza Hut, is to offer unlimited free salad with all meals to all customers - apparently they expect to give away 50m cherry tomatoes and 1.3m million cucumbers over the next year! And, whilst I haven’t yet seen evidence of this, there is, apparently, an agreement by supermarkets to include portions of vegetables in ready meals in order to help consumers to eat their recommended 5 a day. Whether these approaches will actually make the nation healthier is unclear, but getting students to think of possible unintended consequences of this might be a useful pre-exam evaluative exercise.
AS Micro: Fast Food, Fat Profits - Obesity in the USA
Healthcare costs related to obesity-linked illnesses such as diabetes, heart disease and high cholesterol are soaring. Should the government intervene in the market in order to combat the growing costs of obesity? This Fault Lines report from AlJazeeraEnglish provides a stark overview of the obesity crisis in the United States. Two out of every three Americans are overweight, one out of every three is obese. One in three are expected to have diabetes by 2050. Minorities have been even more profoundly affected.
The free market may fail to take into account the negative externalities of consumption because the social cost exceeds the private cost. Consumers too may experience imperfect information about the long term costs to themselves of consuming products deemed to be de-merit goods. There is a huge debate at the moment about the root causes of obesity and the social costs that arise from increasing levels of obesity. A report published in June 2007 said that obesity could be a factor that bankrupted the National Health Service in the years to come.
Nudge? More like a shove for Aussie smokers!
Here is an example of a government prepared to make tough decisions on the marketing of a de-merit good - a strong alternative to the default option of simply raising the duty (tax) on consumption in real terms. The Australian government has introduced what it thinks are the strongest laws controlling the sale and display of cigarettes in the world - it will be fascinating to see how this impacts on consumption among different age groups. Logos are banned, a large area of each packet must show cancerous tumours and the health effects of tobacco. And they are taking nudge to a new level by insisting that the colour of each packet is one that in surveys, smokers have found to be least attractive.
The Sydney Morning Herald reports that smoking kills 15,000 Australians a year and costs the community about $31.5 billion annually. Over the last twenty years the smoking rate in Australia has halved but the government now wants to reduce it still further to 10%. The move is being contested by the multinational cigarette manufacturers who claim that the proposed restrictions infringe international trademark and intellectual property laws.
Read: Australian anti-smoking laws to be ‘toughest in world’
See also The Independent: Australia’s cigarette war over shocking pack rules and David Prosser: When will big tobacco decide to give up?
The Elasticity Classic - Smoking
This has to be the most widely used example in classrooms up and down the country when discussing price elasticity of demand.
How about this little twist on it?
read more...»Demerit good: Gaming
The nature of demerit and merit goods are such that it enters the realm of normative economics. That is, one government or society may deem something to be a demerit good whilst others do not. Cigarettes are undoubtedly a more demerit good these days than they were in 1940.
Last night’s documentary from Panorama highlighted the 21st century demerit good: Gaming.
The Addicted to games? documentary explores the dangerous side to those who play computer games for 16 hours a day.
Pull the other one…...
Obviously, government intervention to correct market failure is a good thing. A new Pyrotechnics Articles (Safety) Regulations introduced this year reinforced laws bans the sale of explosive items to children. One result is that under-16’s cannot buy indoor or outdoor fireworks - and while this may give retailers a headache as they have to check the ID of their younger customers, it is done with the intention of avoiding the negative externalities of teenagers messing about with fireworks and injuring either themselves or others in the run-up to bonfire night.
But is banning sales of Christmas crackers to under-16’s also necessary? Apparently so, according to this article from the Daily Telegraph, so households up and down the land had better review the Health and Safety implications of their Christmas lunch tables, and decide whether the crackers represent a demerit good that they should avoid. Or is this an example of the Law of Unintended Consequences taking effect?
Scotland nudges towards minimum alcohol price
Here is a good 5-minute discussion here of the 45p a unit minimum alcohol price proposed in Scotland.
It offers a good application of some of the main AS micro topics - since it is targeting consumers for whom alcohol is a problem, the highly price inelastic demand for alcohol will probably mean the 45p minimum price is not a huge disincentive.
Paradoxically, since minimum prices only work if the free market equilibrium price is currenly below the minimum price, what it may actually cause is a shift towards higher strength alcohols that are already above the 45p a unit! There’s the law of unintended consequences for you!
Greece smoking ban
A new law has come into force this week in Greece banning smoking in enclosed public spaces and tobacco advertising.
It is estimated that more than 40% of Greek adults smoke - well above the EU’s average of 29% - which is perhaps why at a time of fiscal austerity, it is surprising/impressive that the Greek government have pursued this policy. Cigarettes bring in a significant amount of tax revenue (either via indirect or corporation taxes) which will be lost. But then maybe it will save a lot more money via its health bill. (or maybe they are just hoping people will flaunt the rules and collect fines!).
Having said this, this latest attempt to stop smokers, is its 4th attempt in a decade - following a tobacco ban in public places on July 1 of this year too. The demand for habit-forming goods is too inelastic to go away overnight…
Economics of Gambling
Earlier this month, the Economist did an in-depth special report on gambling with lots of good ideas for discussion:
- is gambling chance or luck?
- game theory and poker - can it be solved?
- The effect of the recession on casinos: When the chips are down
- growth of Asia’s gambling
- Government policy and the Internet - the effects on the gambling industry.
Diagio opposes minimum alcohol price
This is a useful video resource to have up your sleeve when teaching minimum alcohol prices and the view taken by one of the stakeholders - the drinks manufacturers themselves.
Alcohol pricing - an end to loss leaders?
Fresh developments here in the ongoing debate about alcohol pricing and consumption in the UK.
The new coalition government has signalled an intent to ban loss-leading promotions on drinks prices. As its name suggests, with a loss-leader a product or service is sold at a loss (below unit cost) but that is intended to encourage people to buy other, profitable products or services. The corporate affairs department of Tesco has suggested that it now supporters minimum prices for a range of alcohol drinks but that until legislation is introduced, it is compelled to compete on price with the other major retailers.
There are signs too that the new government is re-thinking the 24 hour drinking licences beloved of the Labour government - whose fiscal policies of course drove many to drink heavily too!
Mephedrone: Demerit good
The government announces a ban on mephedrone today. Behind the reason to classify this drugs as a demerit good includes the informational failures that exist - “It is being taken by young people who have never taken drugs before in their lives because they think it is legal and it is safe. It is neither legal nor safe.”
Although David Nutt, ex-head of Advisory Council on the Misuse of Drugs, discusses here why regulation rather than an outright ban should be implemented instead.
Tax revenue goes up in smoke
One of the disadvantages of indirect taxes, particularly the so-called ‘sin taxes’ levied on tobacco and alcohol, is that they can give rise to a black market in the goods in order to avoid the tax, and this is a source of government failure. An article in The Times highlights this in the market for cigarettes. To quote the article “According to estimates by HM Revenue & Customs, up to 54 per cent of handrolling tobacco and 17 per cent of cigarettes consumed in the UK are smuggled, costing the Treasury £3 billion in lost tax revenue in 2007-08 alone.” With the current fiscal deficit, the treasury needs that revenue!
TV Time!
Lots of Economics on TV this weekend:
read more...»Alcohol information failure
Shadow Health Secretary Andrew Lansley was interviewed on radio 4’s Today Programme about the Conservative Party’s call for changes to labelling on alcoholic drinks. They say the current approach of using alcohol units is widely misunderstood, and want it replaced with centilitres. Mr Lansley identified the negative externalities associated with abuse of alcohol as costing £20bn to society, and said that the current system of information, printing the number of units contained in a bottle or can of alcoholic drink, did not allow the public to make decisions about how much to drink, as the implication is that one ‘serving’ of the drink is the equivalent one unit.
However this is often not the case – a typical glass of wine is between 1.5 and 2 units, and a pint of beer or lager can be more than two units, depending on the alcohol content of the brew. Instead the Tories would like to see the number of centilitres of pure alcohol shown on the label, suggesting that this would be easier for consumers to relate to the total amount they are drinking, rather like showing the amount of saturated fats in foods as grams, which are easier to assess as a proportion of the total food weight rather than showing the amount in calories.
read more...»Internalise that externality
Another Pigouvian tax introduced - this time for cigarette litter.
read more...»Price comparison sites…
An interesting discussion out of a random statement at the dinner table last night…
There’s a firm called BetGenius which provides real-time odds comparison services.
Lots of discussion ensued on the effect of perfect information vs imperfect information. Given the surge in price comparison websites in recent years, one would expect the price of bets (or insurance, electricity) to converge to similar levels, as perfect competition predicts.
read more...»Credit card cheques as a demerit good
The government has announced a move to ban credit card cheques addressing the issue of the soaring value of UK consumer debt. The move is part of a broader range of measures that attempts to partly bridge the informational failures (and resultant market failure) that lead to consumers inadvertently taking on debt that is beyond their means; and this recent measure highlights the government’s view on it as a demerit good.
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.”
Calories you can believe in
On first glance it seems like a neat way of giving consumers helpful information on the calorific consequences of their meal choices. By the end of April, 18 national food chains, including Burger King, Prêt A Manger, Pizza Hut , Subway, Sainsbury and Tesco cafes, Wimpey, Marks & Spencer cafes, KFC, Harvester pubs and a number of workplace canteens will print on menus and/or menu-boards the calories contained in many of their most popular dishes.
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...»Chocolate tax - they wouldn’t, would they?
I don’t want to underestimate the dangers of obesity – there are clearly significant social costs associated with it such as extra cost to the NHS of treating conditions caused by it, as well as private costs for the individual – but I know I am not the only person feeling some horror at the idea of a new ‘sin’ tax on chocolate! I do not consider myself a chocaholic, but I admit that I do indulge in chocolate from time to time. Judging from the responses on TV and radio programmes yesterday I’m not alone in thinking this might be a step too far, and I think there could be a need to persuade the government that they should not consider such a move, by making the economic case against tax on chocolate. This is what I have come up with so far – I am sure there are other points that you could add…..
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...»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
Waist Check
I am on the threshold of a new attempt to get fitter and slimmer this summer. I have pre-committed to a two month gym membership close to my holiday home and signed up for a couple of long distance walks .... it ought to make a difference .... but I might still struggle to make the cut in Japan where a new law has come in place stipulating maximum waist sizes for men and women.
read more...»Myopia and alcoholism
This BBC news video reports that the number of hospital admissions linked to alcohol has more than doubled in the last 12 years.
read more...»Demerit goods in action
Two news stories catch the eye today with respect to demerit goods.
Firstly, the government plans to reclassify cannabis as a class B drug - but will this have any impact on its levels of use? Arthur Ma, in a related blog entry, has explored the issue in greater detail here.
Secondly, alcohol abuse is harming the health and productivity of the UK’s workers. According to the BBC, one on three employees admits being hungover at work.
read more...»
