A world without OPEC and a halt to global warming?

The recent drop in oil prices lends itself to fascinating analysis.  OPEC members are finding it difficult to agree on a strategy to increase price and are more inclined to ‘cheat’ and sell more for less to protect revenues and market share.  High expenditure projects in Venezuela and some Middle Eastern countries  have placed greater emphasis on generating revenues to balance the books and, with the falling price of oil, they are perilously close to fiscal deficits.  As an aside one of the articles below questions the motives for such spending and  thus begs the question as to what may occur when such spending ceases?

The increase in US shale oil appears to exacerbate the situation further as supply is outstripping demand and on the face of it would signal the beginning of the end of OPEC.   Combined with the latest UN backed report stating that the use of fossil fuels should be fazed out by the end of this century if irreversible damage to the planet is to be avoided, countries like Kuwait need to restructure their economies sooner rather than later.

Great opportunity for development of chains of analysis and evaluation with diagrams.

A World Without OPEC?

Fossil fuels to go!


Trust the French to start banning cars.

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.

Paris start car ban

Paris end car ban

How long is the Long Run Mr Keynes?

It is not a course for debate that markets will not clear but rather how best to facilitate this clearing.  It is erroneous to conclude that all demand-side enthusiasts are against all forms of supply-side policies and vice versa.  In fact there is a consensus today that supply-side policies indeed increase the LRAS, however, it is in the choice of policy that the disagreements can be found.  What do you favour; the policy based on free market and incentives such as lower taxes and privatisation or the interventionist type of  policy such as government funding of education and re-training centres? You know the drill – pen and paper at the ready and start your engines!

wear the cap      private sector involvement          shifting AS        a supermodel       it’s only a dyson      trade union reform?        playschool      pointless    don’t laff               get to work     more competition

Minimum Prices.

There is a significant body of economists who are skeptical about the benefits a minimum wage brings to an economy, let alone real increases in it.  However the  US, Germany and the UK governments have recently signalled that they are in favour of minimum wage increases. Below is some interesting reading as you will discover it is not the relatively poor who may benefit from increases in the minimum wage rate.

occupy         thank you george            germany           more germany

Buffer stock schemes employ a minimum price for agricultural produce to guarantee a stable supply of food stuffs and a minimum income for farmers, and thus aid planning.  The scheme is a mixed bag of success and failure and has some great chains of analysis and evaluation points for you to sink your teeth into.

no buffer scheme           too much wheat          reform         coffee?

Has Economics failed?

Back in the early 20th century, everyone around the world was suffering from the Great Depression. Thanks to Economics and Keynes, politicians were able to implement policies and lift their countries out of the depression. When you come to think about it, without Economics, we’d probably still be living in the depression. Time and time again Economics has saved countries, but on how many occasions has it gotten countries into trouble? Could it be that without Economics, the majority of these events such as the crash in ’08, we’d be better off?

the failure of economics            the next keynes

The link below highlights the output gaps for developing countries in 2010,2013 and 2014. I don’t think there’s a better indicator out there highlighting the deceleration in Chinese economics growth.

output gaps

Finally, the last link takes a look at how the Bank of England. The unemployment rate in the UK has fallen to 7.1% since May last year, and with IMF forecasting UK growth for the year at 2.4%, will Mark Carney decide to raise interest rates?

uk labour market

Government Intervention.

Here are some examples to practise your chains of analysis and evaluation skills with regards to government policy and market failure.  Do not forget that intervention can result in government failure.

  • subsidies e.g. the bio-fuel debate or subsidies for industries affected by globalisation
  •  indirect taxes e.g. environmental taxes or taxes designed to curb demand for / consumption of de-merit goods
  • the introduction of competition into a market e.g. postal market liberalisation
  • an increase in government spending on public goods and merit goods such as flood defence schemes, free entry to museums and galleries
  • different strategies designed to reduce income and wealth inequality e.g. the national minimum wage or a rise in the top rate of income tax
  • the introduction of carbon trading as a way of reducing CO2 emissions
  • different policies designed to reduce unemployment e.g. comparing the effectiveness of investment in training with an employment subsidy for the long term unemployed
  • major infrastructural projects such as new motorways, London 2012
  • a decision to relax planning controls on new house-building

Australia’s Carbon Tax

The carbon tax was introduced in July 2012 on about 300 of the largest polluters. Australia’s carbon emissions make up 1.5% of the world’s total. The tax was seen as a remedy to correcting market failure and a more effective method than the carbon trading scheme in Europe. However, it has caused a significant increase in the costs of production causing a loss of jobs and an increase in energy prices for the consumer. Is this an example of the’ polluter pays’ principle and internalising the costs thus establishing a more desirable equilibrium? Abbot, the Australian prime minister is now looking to scrap the tax. Will he replace it with anything? Will this be an example of government failure?

introducing the tax        scrapping the tax