For prices to fall significantly output must be such as to achieve economies of scale and in highly competitive markets this is often seen as a barrier to entry. The UK energy market has seen an increase of competition over the last fifteen years, but as the most recent report and video below highlight 95% of UK households are supplied by six producers. The concern is that the ‘big six’ are playing less than fairly. Inertia exists within the market resulting in less and less consumers switching energy suppliers and this can be attributed to asymmetrical information and collusion. Solutions range from breaking up the ‘big six’ to introducing price controls but with demand forever increasing where will the large amounts of finance come from to invest into producing such an important commodity?
It is frequently concluded that GDP is the most consummate indicator there is for measuring standard of living. It is the simplest to calculate and the most internationally recognised form of gauging our economic well being. We realise the limitations of this measure such as income distribution and negative externatilities and have therefore developed alternative indicators that give a more reflective measure of well being such as the HDI. Compared with GDP, HDI is more informative, and it is interesting reading to note the top 10 economies of each. However, even though this index builds on the GDP indicator its omissions (eg gender equality) are amongst its evaluation points. Economics is striving to build on existing models that reflect a more realistic view of the world so that, ultimately social and economic welfare can be maximised through policy. The HDI is a start but before real progress can be made indicators must begin to fully take into account what ‘really makes life worthwhile’. Before you read the links or watch the video make a list the five most important variables that make your life ‘worthwhile’.
As you may or may not know, the pollution levels in Paris have been above safety levels for the past week now. The air pollution is a result of heavy industry and excessive usage of motor vehicles. This is a classic example of market failure where we’d have the Marginal Social Costs being greater than the Marginal Private Costs, creating a welfare loss to society, an undesirable equilibrium and therefore, market failure.
What does the Parisian government do? That’s right, they ban cars. The policy states that on one day of the week, if the car driven has its licence plate ending with an even number, it will be allowed to drive on the road. On the other day (the next day), they won’t be allowed and it will be time for the ones with odd numbers to go out on the roads. At the same time the Parisian government has cut the price to consumers of public transport to 0 (yes, it was free of charge). An interesting move by the government, as economic theory would suggest that the ban, and a reduced price of a close substitute should lower the demand for people wanting use motor travel, and the government would pat themselves on the back for a job well done.
You’ve probably realized by now that it’s a pretty stupid policy, and if you haven’t, here are a few reasons why it’s bad:
1) The fine for those who break the law is 18 euros. Since behavioral economics is on the spec, this seems like a good time to consider it. Some drivers do not want to opt for the free public transport offered by the government, and are prepared to pay the 18 euro fine because they value the solitude and comfort of their car to be worth the fine. (I’m also curious as to how the government can actually track which people are in violation of this law. It would require a lot of police officers and street cameras that’s for sure, and it wouldn’t be cheap to supply them)
2) Many companies heavily rely on delivering items via motor travel. By only allowing people to drive on alternate days, the businesses are losing revenue and therefore losing profits every day this policy is in effect, since they won’t be able to make as many deliveries per day as usual.
3) From a political point of view, to implement such a policy (which annoyed the majority of the Parisian population), with mayoral elections only a week away, is not a wise way to try to get voters on your side.
This is isn’t the first time this has happened though in Paris. The BBC article below mentions that the policy was tried before in 1997. So perhaps the Parisian government should consider focusing on reducing long-term air pollution levels, as opposed to the quick fixes it’s opting for now:
1) The government could pass regulatory laws on pollution from heavy industry since they also contributed to this mess. The laws would have to push the companies down a green-energy path, and reduce the levels of pollution they emit,
2) They could opt for the ‘London’ approach. London has a slightly different policy with cars, in the sense only heavy vehicles are banned during certain time periods of the day (last I heard, I’m not sure if this is still enforced or has been altered slightly). It keeps the average population happy, whilst it encourages people who drive these massive lorries to find better environmentally-friendly ways to transport their goods/services. The city also has tight laws on the roads, and heavy fines to back them up (not just pollution violations of course, it covers all types of road violations like passing red lights). This has significantly reduced congestion on the roads as consumers have switched to the more appealing London Underground system which is a highly efficient and relatively cheap way of getting around the city.
3) An official mentioned that a day of rain would be a better quick fix than a day of banning cars (Of all policies that could have been suggested, waiting for it to rain is what’s recommended (Y) . In all seriousness, the government should focus on long-run investment rather than short-term. Not only will it reduce pollution levels in the future, but it will keep the population happy, and improve standards of living).
That’s all I have to say on that really, it’s no surprise that the ban was stopped after 1 day lol. Both are excellent articles as they highlight market failure and government intervention.
If you have ever been in Darwin, Australia between the months of September and December you would have heard of and experienced ‘the build up’. It refers to the intense humidity that increases daily, to often intolerable degrees, and only abates when the rains come to signal the beginning of the wet season. I am by no means suggesting that you are or will be experiencing the same kind of pressure in ‘the build up’ to your exams but just in case below are some recent articles to practise your chains of analysis and evaluation skills.
Behavioural economics is gathering pace particularly in light of The Great Recession. How can we summarise behavioural economics? If we use the start point that traditional economic theory assumes people always maximise their utility by making rational decisions, we can say that behavioural economics uses psychology to criticise this assumption. This field of economics believes that ‘we’ do not react like robots on pure logic alone but have considerable emotional influences on our decision making. We have all experienced the feeling we get when we over eat yet how many times have we subjected ourselves to this feeling? Have you ever succumbed to an emotive advertisement or an appealing offer only to realise after that maybe you shouldn’t have purchased that product OR after realising this, you still justify the purchase knowing that it was an emotional purchase and not a rational one? Take the classical assumption, of rationality, further and see how markets ultimately clearing to the desired equilibrium is inherently incorrect, according to behavioural economists. Not from the social cost/benefit perspective but from the consumer behaving in an irrational manner one. Below are some links for you to peruse and get a taste of what this branch of economics is about. Also go the to Behavioural Economics page of Mark Johnston’s indispensable blog, email@example.com and you will find some fascinating reading including the ílliquid cow’ article below.
Democracy is a form of government in which all eligible citizens participate equally—either directly or indirectly through elected representatives—in the proposal, development, and creation of laws. It encompasses social, economic and cultural conditions that enable the free and equal practice of political self-determination. It allows parents to shape their children’s futures. It was the most successful political idea of the 20th century. But its rate of increase of nations adopting democracy is beginning to slow down dramatically, and may even be headed in the opposite direction.
What could have caused this?
The crash of the world economy in 2007-08 is the main reason. It exposed the West’s weaknesses, such as debt-led economy growth. The governments in the West ran themselves into debt for short-term success, and neglected long-term investments. Confidence in Western countries has fallen significantly, with people starting to turn their attention to China.
As a communist nation, China is arguably operating far more efficiently than the US of A. An extension on pension plans took 2 years to pass in China. The same thing could take decades to pass through Congress. China have displayed to the world that you don’t need democracy and freedom to achieve sustainable, high-economic growth.
Corruption in governments is another reason. I mean, you only have to be clever with your speeches and debates to win an election, even though your intentions are ‘pure evil’. How many times have people said they ‘do not believe in governments’ and refuse to vote? Conspiracy theorists (and possibly enemies of the US) argue that democracy is America’s way of establishing its imperialism over the world.
What can be done to fix it?
The essay (yes, essay) from The Economist goes into these reasons in a lot more detail, and presents more reasons to why democracy has gone wrong. It presents possible solutions to bring back democracy. It’s long (about 6 pages in the print edition), but it’s something worthwhile having a go at. Economic concepts are also in here, try and find them 🙂