IEA Conference Tuesday 2nd February

All 6th form economists are to attend the Institute of Economic Affairs conference to be held at Brentwood School on Tuesday 2nd February in the Wessex Auditorium.

Timings are as follows:

10.45-11.45 – Session 1

11.45-12 – Break

12-1pm   – Session 2

1-2pm – Lunch

2-3pm – Session 3

3pm – 3.30pm – Careers in Economics

You are to attend lessons as normal until Period 2, take an early break during Chapel before making your way to the Auditorium for 10:40am. Please also attend PM registration, but ask to be excused so that we can make a prompt start for session 3.

Bring pen and paper.


The UK & Japan

Forty years ago, Japan was hailed as a model economy, achieving low unemployment, fast, steady growth (10% pa in the 1960s, 5% pa in the 1970s, and 4% pa in the 1980s), and an enormous balance of payments surplus. Its companies were at the cutting edge of technology, particularly in the field of cars and electrical goods. However over the last 25 years, things changed. Japan has endured decades of low growth, starting with the 1990s, in which it averaged 1.7%, and slipping into recession four times since 2008. Inflation has been low or negative and unemployment has risen. Only the balance of payments has continued to do well and this is partly because incomes in Japan have been so low that their demand for imports has been low. Indeed the average salary in Japan is lower than it was 25 years ago. It also currently has huge government debt, which amounts to more than 230% of GDP; compared with 20 years ago average retail prices are at the same level and house prices have dropped 43%. It also has the problem of a low birthrate and an aging, shrinking population, which means an increasing burden on those working to support those retired.

Even though the UK economy is doing better than most other developed countries there is concern among some economists that we are heading for the same problems as the Japanese.

There is still high consumer debt and a recent report in the UK suggested that 40% of households will be in financial difficulty if interest rates rise. In some ways it is therefore fortunate that the weakness of the recovery means that their rise might not occur until next year. These low interest rates help zombie firms survive. (Zombie companies are those not viable but able to keep going because their borrowing is so cheap). When interest rates increase a number of these will collapse, increasing unemployment.

There is little prospect of increased injections stimulating the economy. The government is committed to reducing its deficit and this therefore limits its ability to stimulate the economy by raising government spending or cutting taxes, the world recovery is still slow and therefore demand for UK exports has not increased as the Chancellor of the Exchequer hoped and business investment continues to disappoint, with a number of businesses probably waiting for the outcome of the EU referendum, before considering investment. Therefore the outlook is gloomy and our recovery is very much dependent upon what happens elsewhere in the world.

Paying for flood defences – an example of the public good problem?

At some point during each year everyone studying microeconomics will come across the idea of public goods, usually in connection with market failure.  The concept is pretty simple; a public good is non-excludable.  This means that people can benefit from the product or service whether they have paid for it or not.  This means that nobody pays for it as they will wait for everyone else to do so, allowing them to benefit for free.  This is known as the free-rider effect and means that the product or service is never provided.

So much for the theory.  Examples of public goods tend to revolve around things such as national defence, lighthouses and flood defence.  As you may have noticed, flooding is very much in the news and large numbers of people have recently been adversely affected by flooding, in some cases very adversely.  Understandably they are keen that more flood defences are provided, but who should pay for them?

As a public good it is clear that taxes need to have a key role in this.  If individual households are asked to voluntarily pay then each will refuse, reasoning that if all the other households in the flood risk area agree to pay then they can benefit from the defences for nothing as the defences are non-excludable.  As everyone thinks this then no money will be collected and no defences will be built.  Some kind of tax is needed, but who should it be extended to?  Just the people in the flood risk area?  Everyone in the country?  The government has considered this problem and come up with an idea related to council tax, which is a tax paid to local authorities by residents of an area based, very roughly, on the value of their houses.  This article from the Daily Telegraph explains:

The question which the government needs to consider is simple.  Who pays for the flood defences and how much?  It will be interesting to see how this develops.



Long Term Growth Prospects

As oil prices continue to fall, stock markets collapse and the world economic recovery falters, it is worth thinking occasionally about what is in store over the next thirty years rather than the next thirty months.

Some economists suggest that continuous, rapid world economic growth is a thing of the past since we will never again experience the waves of technological change which boosted growth over the last 150 years. In the late 19th and early 20th centuries life changed out of all recognition. The basic tasks of living, for example collecting water and washing clothes took much effort; speed and travel were totally different – journeys considered normal today, such as travelling from London to Birmingham or from London to New York were major expeditions. Communication  relied largely on the delivery of mail. It is difficult for us to understand how the gradual spread throughout the population of things today considered commonplace, such as the telephone, railways,  washing machines and the motor car transformed everyday living in developed countries.

Recently there has been concern that the world is not going to get the same positive external shocks from technology to boost economic growth that it has previously experienced. Some believe that information technology will provide the stimulus while others suggest that such things as driverless cars will provide less of a stimulus than the original invention of the car itself. To quote Peter Thiel, a major venture capitalist “We wanted flying cars but instead we got 140 characters”.

Possibly we should not be worrying about the long and focus on ensuring that the world does not head into another major recession. As Keynes said “In the long run, we are all dead.”

Women pay more than men for similar items: an example of price discrimination?

A flurry of news items today in the wake of an analysis of a number of high street retailers which demonstrates that women pay more than men for similar items.  Examples include razors, toys and jeans.  It seems unlikely that this is due to increased costs of production for the women’s version so as economists we should be analyzing the situation using the idea of price discrimination.

As you may recall in order to be successful a price discriminating firm must be able to split the market into groups of consumers with different price elasticities of demand and charge those with inelastic demand more than those with elastic demand.  This would suggest that women have more inelastic demand for a wide range of products than men.

Is there a solution to this?  Price discriminators rely on the fact that those paying a higher price cannot choose the cheaper alternative, perhaps for geographical reasons or reasons of time.  Therefore, the commuter cannot buy the cheaper off-peak railway ticket because it will mean arriving late for work.  However, women may be able to circumvent this.  If the ladies’ version of the razor really is the same as the mens’ version, simply made with pink plastic, ladies may be able to dodge the price discrimination by buying the mens’ version.

Read the full story here: