Q&A: What is the productivity gap?
The productivity gap is a phrase to describe a sustained difference in measured output per worker (or GDP per person employed) between one country and another.
read more...»Revision: Short Note on Government Intervention
A short two pager on evaluation when discussing different forms of government intervention in markets - designed for AS micro
AS_Micro_Govt_Intervention_Evaluation.pdf
Revision: Contestable Markets
Understanding the nature of contestable markets is crucial to answering theory of the firm questions for the AQA Unit 5 paper. Many students confuse contestable markets with perfect competition - they are different and this revision note attempts to focus on some of the key aspects of contestability.
read more...»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?
Pay cuts in a recession
Pay cuts and pay freezes are being flagged up as an increasingly common option by businesses struggling to survive in the early stages of the recession. Formula 1 drivers are being asked to consider cuts in their earnings as teams look to control costs ahead of the 2009 season; staff working for the publisher Penguin who earn over £30,000 have had their salaries frozen. Premier Rugby in Britain will agree, next month, on a reduction in the salary cap from £4m to £3.5m. And a new survey from the British Chambers of Commerce covering 300 member firms has found that 43% plan to freeze wages and salaries in the coming year. Nearly one business in ten will go a step further and attempt to cut basic pay and salaries – a measure described in this article from the Sunday Times as “almost unprecedented in the experience of today’s workers.”
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.
Contestable Markets – The Market for Smart-Phones
In AS microeconomics the examiner may set you a question about the effects of a new supplier entering a market. There are also frequent questions on the costs and benefits of competitive markets compared to industries dominated by a monopolist or a handful of new firms. In A2 economics, contestable markets form an important part of your study of the theory of market structures, economic welfare and efficiency.
Tim Weber, Business editor of the BBC News website has written a superb article on the competitive pressures building inside the mobile phone market – “as the market for high-end mobiles gets ever more crowded, which should you pick?” – this is a classic tale of a market space become evermore congested as the likes of Apple, Microsoft, Research in Motion and Symbian (developers of the software that run most of Nokia’s smart-phones) compete with each other for a share of the lucrative corporate and personal sector market.
It is a market where performance, functionality, speed and reliability of access, look and feel of the hardware and the length of battery life are all important non-price factors influencing consumer preferences. Price is significant – and the article makes reference to the need to attract heat-seekers or ‘early adopters’ – consumers who are willing to pay a premium price for being among the first to be seen using a new piece of kit.
Despite the obvious barriers to entry for new participants, the smart-phone market is increasingly contestable even though it is dominated by a handful of major players. The increasing use of open-source software has helped to make the battle for market dominance a more intense affair.
Far from being geeky, this is an article that gives you a super case study in how the existing operators are competing with each other. How will the market for smart-phones be affected by the recession?
The article is available here:
Regular articles on the economics of contestable markets appear on my blog here:
SPEW
A hat tip to a fellow presenter on our revision workshops in London whose acronym to remember some of the effects of monopoly power in markets struck a chord with me
SPEW
Service - does the lack of competition affect the quality of service to consumers?
Prices - how high are prices compared to competitive / contestable market
Efficiency - productive, allocative and dynamic
Welfare - what are the overall welfare outcomes? Is there a net loss of welfare in markets dominated by businesses with monopoly power?
Are there anymore useful revision acronyms out there that you use? Please share them via the blog!
Cathartic recessions
Governments and their agents in central banks are pulling feverishly on the policy levers in a bid to lessen the impact of the downturn. Interest rates are being slashed, temporary tax cuts seem to be all the rage and governments spending on capital projects are being fast-forwarded in an attempt to pump prime demand and stabilize confidence, output and jobs. Within a year we may find that such measures have been effective in moderating the depth of the recession, or that the impacts of asset-price deflation in property and shares together with a closing of the arteries of credit caused by the crunch have made traditional macroeconomic policy instruments impotent.
But should there be this manic policy response in the first place? Painful as recessions are, they do serve a purpose. Hamish McRae writes in the Independent today about some of the benefits that can flow from a period of retrenchment and reflection.
“Recessions, slowdowns, squeezes, however you describe them, do serve a purpose. They force efficiency. They force our whole society to figure out simpler and more effective ways of doing things. Increasing efficiency is the only way our whole society – not just a few talented or cunning individuals – gets richer. Why is Germany the world’s largest goods exporter? Because its companies have lived through the fire, first of a high deutschemark and then joining the euro at too high a rate. Again and again the pressure on them has forced them to lift their game.”
It is inevitable that many good businesses go under during a recession whilst shadier rivals unearth a strategy to survive. But we shouldn’t automatically try every trick in the book to prevent recessions. They are part of macroeconomic cycles; they can sort out some of the wheat from the chaff. And they serve as a sober reminder of the need to avoid excessive borrowing and irrational confidence in the first place. The danger is that short term palliatives serve only to delay the inevitable. Britain is not alone in having an unbalanced economy with too little saving, a dependence on highly priced debt and not enough investment in creaking infrastructure. A recession can help to rebalance and its benefits should not be underestimated.
Maintaining profitability in the airline industry
My students have been tackling this assignment this week as part of their microeconomics course.
(a) Many airlines have reported heavy losses and several have already gone into administration or filed for bankruptcy. Using cost and revenue diagrams, explain why airlines have been experiencing such losses (15)
(b) Discuss the ways in which airlines can control their losses and continue to operate profitably in an industry where costs and revenues are unpredictable (15 marks)
Answers to part (b) sort the wheat out from the chaff!
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