Revision Presentation - Public Goods
This updated and extended revision presentation examines the core concept of public goods.
Launch interactive presentation on public goods
Bangernomics and asymmetric information
Another item from the Today programme relating to information was about MOT failure rates for cars and small vans, which have been published for the first time following a Freedom of Information (FoI) request by the BBC. Martin Rosenbaum, the BBC’s Freedom of Information expert, and James Ruppert, special correspondent for Autocar magazine and author of ‘Bangernomics’ discussed the data reluctantly published by the Vehicle and Operator Services Agency (VOSA). The agency had previously resisted publishing the data, saying it might be misleading – and I should think that it is likely to have an effect on the second-hand values of those models appearing at the top and bottom of the list. It may go some way toward balancing out asymmetric information in the market for second-hand vehicles, where the seller has more information than the buyer, thus distorting the price that they might arrive at between them for the vehicle.
Green gold in Tanzania
Lots of examples of opportunity cost and market failure in this video report from Africa about jatropha, a crop that can be used to produce biofuels. It has a number of advantages; it can’t be used for food, so avoids the dilemma of competing demand or supply suffered by crops like maize and soya, it grows naturally in tough conditions and is fairly drought resisitant so can be cultivated in areas which won’t support other crops, and is poisonous to animals so crops are unlikely to be spoiled by animals looking for food. On the other hand it takes some years to reach productive maturity, so requires investment, and time and money put into producing it could be used to grow food crops for people and livestock in exceptionally poor areas of Africa. There are a number of small scale european businesses trying to invest in this part of the world by setting up plantations on a commercial scale, but they face a long timescale to receive any payback on that investment, once they have negotiated with government and local tribes for access to the land and local labour supply and developed the infrastructure to support transport power and irrigation. How should the government intervene, in order to ensure short term provision of food and facilities for local people living on a dollar a day, and also long term potential for inward investment in infrastructure and jobs? What are the advantages and disadvantages of allowing this to be developed by outside investors rather than by local co-operatives?
Lessons from an Ad Man - Superb microeconomics!
The wonderful Rory Sutherland wows the audience at the TED conference in Oxford with a superb sixteen minute talk on advertising and aspects of behavioural economics. It is an immensely watchable video that will allow you to discuss with your students concepts such as perceived value, symbolic value,intangible value, hedonic opportunity cost and some ideas for nudging personal behaviour in socially beneficial ways. We learn of the extraordinary value of placebos, the rebranding of the potato in Prussian Germany. That all value is subjective and that persuasion is better than compulsion. Some super examples too of Veblen Goods, price discrimination and how the framing of the Italian penalty points system for drivers in Italy has a different impact than for motorists in the UK.
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Too much choice is bad for you
At last I have found someone else who only wants to use his mobile phone to call other mobile phones. Adam Shaw, who presents Business news on Radio 4’s Today programme, is writing about choice on his business round-up and suggesting that too much of it is a bad thing.
The one option he seeks in a phone – that it should simply allow him to communicate with other people’s phones – is the only choice that is unavailable to him.
He also bemoans the fact that, amongst a range of hundreds of different shirt styles available, he can’t find one that is just what he is looking for, and he suggests that the problem is that too much choice makes it hard to feel confident that the selection we make is the best option available, so that the opportunity cost of getting that choice wrong is higher.
Look at the example from behavioural economics of the supermarket which finds that it sells ten times as much jam when it only gives consumers six varieties to choose from, compared with very low sales when twenty four different pots are on offer, making a great display that attracts lots of attention but few sales, as buyers are confused by the risk of getting the choice wrong. He ponders whether we would be happier if we returned to a simpler economic model, with fewer choices and lower expectations of the utility we would gain from each decision that we make.
Perhaps Stelios has a point when he told Adam Shaw that his objective was to lower customer expectations so that they would be content with lower customer service levels!
The Price of Life
What is a year of your life worth? The Appraisals Board at the National Institute for Health and Clinical Excellence (NICE) is charged with evaluating the benefits of a variety of drugs and treatments before they are provided on the NHS. This BBC documentary investigates the issues involved in the provision of a treatment for Myeloma, Revlimid.
read more...»The Opportunity Cost of Debt
A phrase that often comes appears in essays on government borrowing is that ‘higher interest repayments on borrowing has an opportunity cost, the money could have been spent on other areas of government spending.’ Of course much of the borrowing itself is being used to fund public sector spending in areas such as education, health care, transport infrastructure or to finance a tax cut! But the phrase does have a resonance at the moment given just how much the UK government is scheduled to borrow this year and for the foreseeable future.
Attention turns to the handling of the many billions of pounds worth of new debt issue that will be released onto the bond markets in the weeks and months to come. For the moment, bond yields on longer-dated government debt remain low mainly due to the financial market’s appetite for relatively low-risk Treasury Bonds of different duration. Whether this can last is open to considerable doubt - is there the pent-up demand for £148bn worth of gilts that the UK Debt Management Office will issue this year. With further bail-outs likely, the debt issue might scale up to £220bn or higher.
Back to the idea of opportunity cost! I was struck by a comment made in the Lex column this morning which highlighted the financial cost of minute changes in bond yields.
100 basis points equates to 1 per cent. With that in mind, Lex reports that every 5 basis points (0.05%) saved on £220bn of new debt pays one year’s salary for 46,000 teachers.
The UK economy is fortunate in that we retain - for the moment - sufficient credibility in global financial markets that our budget deficit can be financed without a sharp spike in bond yields. Other European Union countries are not so fortunate - just ask the Hungarians (in receipt of one of the biggest IMF support packages) and also the Irish whose troubles I blogged about yesterday.
Snow ploughs and The Economic Problem
It was no surprise to get the text telling me that school is closed today, as I am in the area of Surrey that has 12 inches of snow so far, and it hasn’t stopped falling yet. Watching the news on TV, I can’t believe the number of people claiming that local councils should have the facilities to deal with ‘a bit of snow’ and drawing comparisons with Sweden and central Germany. But those countries have this sort of weather routinely and expect to deal with it several times each winter – the opportunity cost of using local taxes to provide the number of snow ploughs, gritters and road clearing equipment that might be needed to cover such rare events would be immense. This must be a classic example of resource scarcity and choice – the basic Economic Problem!
Darling’s Tough Love
Alister Darling’s interview in the Times today was revealing on several different levels. First for confirming that the Treasury is actively looking at altering the government’s own fiscal rules in time for the Pre-Budget statement in November. Second that Darling did not appreciate the extent of the negative fall-out on the real economy from the credit crunch - a crunch which has now reached Crunch 2.0 as it moves from the financial sector to manufacturing and services. And third that, given the parlous state of the government’s own finances - this year will be a particularly difficult one and tough choices will have to be made on spending priorities
“"So every chancellor has to be conscious of the fact that there’s a balance to be struck between how much you can spend, and how much people will say, ‘OK, if you’ve another pound to spend, remember me as well.”
A classic example of opportunity cost to use when the new term starts in September.
The dreadful public borrowing figures are reported here: public borrowing surges
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