Unit 1 Micro: Winning the War on Deforestation
Justin Rowlatt from the BBC has been investigating some of the remarkable progress being made in controlling deforestation in Brazil. The battle focuses on an area known as the “arc of destruction” and the video reports here show the impact of a government making a clear commitment to tackling the issue and backing it up with force and with incentives.
read more...»Externalities Cartoon
KAL, The Economist’s cartoonist, has produced an excellent cartoon in the latest issue perfect for a discussion of a very topical externalities issue in North America. And one that has also been ‘causing tremors’ in the news over here too!
read more...»Unit 1 Micro: Prezi on the Economics of Negative Externalities
This blog provides a link to a constantly updated revision Prezi on negative externalities and market failure - designed for students taking AS Microeconomics Unit 1 and those studying externalities for the IB Diploma. The Prezi contains lots of short news videos on examples of externalities. Click on the link below to access the Prezi.
read more...»What is the socially optimal level of concerts in Hyde Park?
It seems those fortunate enough to live next to Hyde Park are increasingly bothered by the negative externalities arising from the concerts put on there. This BBC article is a good illustration of the difficulties involved at arriving at a socially-optimal level of production.
Prezi on Information Failures
Click below to open a new Prezi on aspects of information failures / gaps and market failure together with some of the interventions that might be used to address imfornation imperfections in many markets.
read more...»Unit 3 Micro: Patent Wars- A Touchy Subject for Apple
This excellent news piece from Ben Cohen at Channel 4 looks at the increasingly aggressive patent war being fought by the manufacturers of the world’s leading mobile phone and tablet devices - the most profitable products in the digital economy. “Where once the giants (Google and Apple) competed on features, they now compete on patents.”
The news feature looks in particular at the intellectual property surrounding the slide-screen technology used by millions to unlock a device. Apple claims the IP to this but a video tracked back to twenty years ago suggests that developers were already thinking of something remarkably similar long before the iPhone came into existence. Can the makers of Android defend legal claims from Apple that their IP has been infringed? And who will end up paying for the enormous legal fees and possible extra licencing costs?
read more...»
Unit 1 Micro: Empty Housing and Economic Efficiency
Channel 4 recently focused on the causes and effects of the hundreds of thousands of empty homes in the United Kingdom. Why is it given persistent shortages of affordable housing that perhaps a million homes lie empty and unused whilst an estimated two million families are in severe housing needs. New housebuilding has collapsed and in Britain we are building 100,000 fewer new houses every year than we need just to keep up with the changing mix of households and demographic change.
An interesting exercise is to show students some of the Channel 4 Campaign videos and then get them to put together policy ideas as to how to reduce the volume of empty homes and reduce the length of housing waiting lists.
Links to some of the Channel 4 videos can be accessed below:
read more...»Government Plans to boost the Housing Market
The Government has announced today a scheme to help first time buyers on to the property ladder. It has been reported widely in the press with mixed reactions. The BBC article outlines the main proposals (here is the link to The Daily Telegraph). It is interesting from a political point of view that this government should chose to intervene in this market, though perhaps we should not be too surprised as it was the Conservatives that brought in the ‘Right to Buy’ legislation in 1980.
read more...»Unit 3 Micro: Ofcom gives stamp of approval for flexible pricing in mail
Changes are afoot for the UK household mail industry - a sector that is often used by teachers as an example of a near monopoly in the UK. In 2010, 16bn letters were delivered to 28.2m addresses. Royal Mail was responsible for delivering over 99% of these. The total UK household and business mail market comprises around 16bn items and £6bn to £7bn per annum of revenue. Royal Mail has a market share by revenue of over 90%.
Just a few years after deregulation of the sector, the industry regulator Ofcom has produced a consultation document that is likely to give the Royal Mail more freedom in setting the prices of stamps. At present, the Royal Mail loses more than £2 million a week operating its letters business. Increasing competition from new entrants for bulk mail sorting allied to a shift towards email and text have contributed to a 25% decline in postal volumes since 2006. Household spending in Britain on postal services has fallen to just 40p a week. The 2010 Hooper Report on the postal sector, mail volumes are expected to continue to decline globally by between 25% and 40% in the next five years
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...»Unit 1 Micro: Coast Guard Protection and Moral Hazard
A hat tip to Mark Seccombe for spotting this fine piece of economics writing from the New York Times economics blog.
Casey Mulligan explores the question of whether the US coast guard should enforce that boats install safety beacons as a way of cutting the number of incidents they are required to attend. Does providing a safety-net regardless of whether participants have covered the cost of providing themselves with basic safety equipment lead to a problem of moral hazard? Has mandatory safety belts in cars led to a reduction in the quality of driving? Would compulsory air bags do the same? When is the state justified in applying and enforcing stringent safety requirements on people and businesses as they go about their daily lives?
Unit 1 Micro: Drink Driving and Government Intervention
A culture of drink-driving has been a scourge in many countries for decades. The human and economic cost of lives lost and wrecked by motorists driving under the influence of alcohol is huge and most governments have introduced a range of interventions designed to change the incentives facing drivers. But which ones have most impact?
read more...»Information failure - what does a ‘sell-by’ date really mean?
According to the Food Standards Agency and the government, the sell-by or display-until labels on food have little to do with whether the food remains edible, but are only to there to help retailers with their stock rotation. But DEFRA say that five million tonnes of edible food is discarded by UK households annually - the equivalent to £680 for a household with children - because of confusion over the date labelling. They would like to see the use-by dates on packaging used only for foods which actually become unsafe to eat, like meat, fish and prepared foods, and all stock rotation dates removed completely. They believe that this would help to avoid confusing shoppers with unnecessary information.
However, the Food Director of the British Retail Consortium says that a better solution to the problem of food waste lies in better education for consumers. “Helping consumers understand that food past its best-before date can still be eaten or cooked could contribute to reducing food waste and saving people money,” he said. Retaining the display-until labelling on foods which don’t actually go off, such as crisps and biscuits, helps consumers to know how long they have been on the shelf, and pick out those that are more recently made and so may have lost some quality, even though they are quite edible.
There is a little more on the report here.
Is Cost Benefit Analysis of our natural environment ‘a slippery slope’?
Helpful revision notes provided by a new government report yesterday, attempting to put a financial value on Britain’s ecology. The ‘National Ecosystem Assessment’ attempts to give a standard valuation on ‘ecosystem services’ like pollination by insects, water and air purification by soils and plants, the flood alleviation provided by woods and marshes upstream of towns and cities, and the value of living close to a green space; for example the value of living near a green space is calculated as £300 in terms of savings to the NHS. The first of 6 key findings of the NEA is:
“The natural world, its biodiversity and its constituent ecosystems are critically important to our well-being and economic prosperity, but are consistently undervalued in conventional economic analyses and decision making.”
read more...»
A2 Micro: The Importance of Profit
Profit measures the return to risk when committing scarce resources to a market or industry. Entrepreneurs take risks for which they require an adequate rate of return. The higher the market risk and the longer they expect to have to wait to earn a positive return, the greater will be the minimum required return that an entrepreneur is likely to demand. Economists distinguish between different types of profit – explained below:
read more...»Electric cars: government failure?
There was a great in-depth look at activity in the car market in the Sunday Times yesterday with regards to electric powered vehicles.
Some light relief from revision - this week’s economics TV
Here is a selection of this week’s TV (and a bit of radio) that seems to have some good economics content and might provide a welcome, yet useful, break from revision.
Sunday 15th May: BBC4 8pm, ‘The Secret Life of the National Grid’ - could be worth a look in terms of economies of scale, network externalities, economic growth and the importance of infrastructure
Sunday 15th May: Radio 4 8pm, ‘The Bankers and the Bottom Billion’ - possibly some useful bits in terms of development economics
Monday 16th May: BBC1 8.30pm, ‘Panorama’ - this week’s investigative documentary looks at the illegal trade in waste electronic products following the introduction of regulations governing how we can dispose of such things - probably very good in terms of analysing a type of government failure
Monday 16th May: BBC1 9pm, ‘The Street That Cut Everything’ - looks rather entertaining as well as providing a bit of an insight into topics such as government spending on public goods and goods that generate positive externalities
Monday 16th May: BBC4 9pm, ‘The Golden Age of Canals’ - whilst at first glance this may not seem too appealing, I suspect there are some interesting nuggets in terms of networks and infrastructure spending, as well as a look at why canals fell into obsolence due to the invention of the combustion engine (some creative destruction here!)
Tuesday 17th May: BBC3 9pm, ‘Secrets of the Superbrands: Technology’ - a good look at how monopolies put up strategic barriers to entry in terms of branding and smart use of technology to achieve consumer loyalty
Thursday 19th May: ITV1 7.30pm, ‘The True Cost of a Car’ - a look at the impact on motorists of rising fuel prices and insurance premiums, which will bring in cross-elasticity of demand in a roundabout way
Thursday 19th May: Radio 4, 8pm, ‘The Report’ - a closer look at the operation of supermarkets and why there is opposition to their expansion (useful for looking at the impact of rising market power)
Friday 20th May: BBC2 7pm, ‘Wind Farm Wars’ - probably very useful for those sitting AS Unit 1 this summer in terms of negative and positive externalities of production, and the ins and outs of cost-benefit analysis
Hopefully there’s some light relief in there for everyone! All of the BBC programmes will be available on iPlayer for several days after they’ve been broadcast.
Regulation, legislation and competitiveness - The Bribery Act
From the first of July, businesses will have another piece of legislation to deal with when the Bribery Act comes into law. This was proposed and passed in 2010 just before the election last May, and in the last year the government have been determining the precise way in which it should be put into practice. There are good reasons for it, to establish the country’s position as a global leader in the fight against business corruption – the UK currently holds a strong position in the World Bank’s rankings of economies for their ease of doing business.
read more...»AS Micro Revision: Market Power
A revision note on aspects of industries in which there is strong market power among one or a few businesses. Most markets are competitive with a number of suppliers (producers) competing for the demand of consumers. Some are more competitive than others. At AS level it is important to understand some of the factors that lead to market (monopoly) power and to evaluate the costs and benefits of markets where monopoly power exists together with the effects of different types of government intervention. The revision note is available to download here: Revision_Market_Power.doc
Externalities of Nitrogen Pollution in Europe
Roger Harrabin reports on fresh research on the impact of air pollution on Europe’s natural habitats. A classic example of negative externality effects - already targeted by the EU natural habitat directive, but a regulation that appears to be ineffective.
“Earlier this week, the European Nitrogen Assessment - the first of its kind - estimated nitrogen damage to health and the environment at between £55bn and £280bn a year in Europe, even though nitrogen pollution from vehicles and industry had dropped 30% over recent decades.”
More here: Nitrogen pollution ‘costs EU up to £280bn a year’
The report can be accessed here
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?
Information Failures: Tesco and Second Hand Cars
An updated article here on Tesco’s entry into the used car market
Supermarket giant Tesco has announced plans to launch its own used motors website teaming up with one of the UK’s biggest ex-fleet car provider – Motability which is said to have access to 560,000 cars per year, with about 200,000 popular makes such as Ford and Vauxhall coming onto the market at the end of their lease life - sold through a network of 5,000 registered car dealerships. Industry analysts believe that Tesco will sell cars online and to overcome some of the asymmetric information issues in the market it will offer customers warranties, insurance and breakdown cover, as well as part exchange on vehicles. Finance for car purchases could be arranged through Tesco’s own personal finance business.
Tommy Seagull writes here on the information failure issues connected to the second hand car market
read more...»Gender Pricing in Insurance
The European Court of Justice has ruled that gender “can’t be used as a factor” when working out the cost of insuring someone.
“The use of actuarial factors related to sex is widespread in the provision of insurance and other related financial services. In order to ensure equal treatment between men and women, the use of sex as an actuarial factor should not result in differences in individuals’ premiums and benefits.”
Lots of coverage about this today most focusing on the risks that insurance premiums for women drivers who are by-and-large safer drivers on our crowded roads will now go up. But my instinct is that insurance companies for far too long have been discriminating against younger male drivers, many of whom have a higher disposable income that women of the same age (and the insurance companies know this).
Instead of getting worked up about this EU ruling more attention should be given to the much bigger problem of the millions of people in the UK who decide (for one reason or another) to drive uninsured vehicles - that is a danger and a risk that affects us all.
Guardian: Discrimination ruling: Fast cars, sex and insurance
Telegraph: UK insurers criticise European ban on gender-based pricing
EU ruling on sex equality: price differentiation, price discrimination or an Unintended Consequence?
If it can be statistically proved that women have fewer car accidents than men, is it fair that they should pay the same for their vehicle insurance? And if a man and a woman have paid the same contributions to a private pension scheme during their working lives, but after they both retire at 65 the man is statistically likely to live for a shorter time that the woman, is it reasonable that the man receives the same monthly pension payment as the woman for the rest of his life?
read more...»The rise of the consumer regulator
Regulatory failure and government failure often figure prominently when we teach introductory market failure economics and the impact of government intervention. Could the open web be the stimulus for a new powerful form of regulation on the activities of businesses - namely the consumer regulator? Don Tapscott (who I had the pleasure of hearing on his visit to London last October) thinks so in this comment piece that draws on his new book MacroWikinomics.
“During the 1980s and ’90s, many governments dismantled large regulatory bodies and asked industries to police themselves. The public was told that self-regulation would be more efficient. Governments were to be the “regulators of last resort” – stepping in only after self-regulation was deemed to have failed. The problem, in practice, is that most industry self-regulators have lax rules or inadequate enforcement…...Just about every domain of regulation today – from air and water quality to food safety and financial services – could benefit from vigilant citizens helping to protect the public interest.”
More here And more of his articles from the Globe and Mail here
Regulatory failure - 10 scandals the FSA failed to prevent
Colleagues with an interest in examples of financial regulatory failure might be interested in this selection of 10 financial scandals the FSA could have prevented. Some of them seem quite specific and technical but they include the Equitable Life scandal.
Regulation and the banking industry: reflections from Davos
If, like my school, you haven’t entered students for Unit 3 in January but are teaching both A2 units side-by-side for June examination, you might be looking for examples of competition policy and regulation to offer your students in the coming weeks. The report of the Independent Commission on Banking and the focus on regulation at last week’s Davos meeting are very well timed; this report filed today by Tim Weber of the BBC gives a neat summary of the time leading up to Lehman’s collapse, and offers a rather chilling conclusion from informal dinner-table discussions with the world’s top bankers that it is unlikely that regulators can, in practice, untangle the systemic risks in the financial system that make it imperative for government’s to step in and support failing banks.
If you would like to follow this up as an example with students, you might try some of the following links. There are numerous articles assessing the report of the ICB - just a couple are given here.
read more...»Heard the one about the £250,000 fish?
I was browsing some back copies of the Guardian today, and came across a good example of markets in action. Last week a tuna fish fetched over 32 million yen at an auction in Tokyo.
Google investigation
The European Commission has launched an investigation into Google after other search engines complained that the firm had abused its dominant position.
The EC will examine whether the world’s largest search engine penalised competing services in its results…
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?
