AR, MC and Scottish independence.

Scottish independence is an emotive subject and the results of the referendum this coming Thursday will potentially have huge ramifications for the future of Scotland and UK economy. As economists we attempt to remain objective in our analysis and evaluation of events and one could argue that the debate on Scottish independence is awash with normative statements such as  Alex Salmond stating independence would make Scotland better off.

The article below analyses and evaluates the potential pitfalls of an independent Scotland based on the premise that oil will be able to sustain economic development. David Smith argues that the marginal cost of producing a barrel of oil has increased 500% in the last 10 years while revenues have fallen and are predicted to keep falling for the foreseeable future, (A2 students should be able to illustrate this diagrammatically).

What implications does this have on fiscal policy?  Will the Scots be able to continue to spend 14% more per head than the remaining UK population?

Then there is currency.  Will an independent Scotland be able to survive without a ‘lender of last resort’ or will the EU club be too much of a temptation to turn down (if indeed their application is successful)? And if an application is successful what really is the difference in being governed from London or Brussels?

Scottish Independence

Price floors & alcohol.

The introduction of a minimum price for alcohol is a contentious issue and allows for some great analysis and evaluation.

Here are some notable advantages and disadvantages to the plans:

Advantages:
* it is argued that the increase would dissuade consumption of cheap alcohol, thereby reducing the social costs associated with drunken anti-social behaviour amongst young people.
* it is argued the the policy is well targeted in tackling the types of alcohol that lie at the heart of the anti-social behaviour and demands upon emergency services, since these issues largely come about through younger people drinking cheap strong cider and lager.
* Ministers believe the policy could be good for pubs, by encouraging those who might otherwise buy cheaply priced alcohol from supermarkets to go to the pub to drink.

Disadvantages:
* Alcohol is clearly highly addictive and highly price and income inelastic. Therefore drinkers will still find a way to consume and this may lead to increased crime or less consumption of other goods (including merit goods perhaps) in order to pay for it. However, advocates of the policy may point to a wider range of measures being introduced including flexibility for local authorities to restrict licensing hours and use sobriety enforcement orders to police this problem.
* There is little prospect of tax revenue being raised from this policy to tackle the ongoing negative externalities of binge drinking, including health costs as well as social costs.
* Some argue this policy is unfair on responsible drinkers who will suffer through seeing prices rise when consumers have hard pressed budgets already. I wonder whether it would enable wine retailers to put up prices of their mid and top end products in order to continue to differentiate them in price from the cheapest products currently beneath the proposed 40p per unit threshold. On the other hand, others claim this policy does nothing to target middle-class people who have been identified as consuming in excess of the guidelines.
* There is concern that this will simply help to boost the profits of retailers, who will be forced to increase prices but will take the opportunity to increase the profits they make on the price they purchase the alcohol for from producers.

Here are some links that apply the theory to reality.

cheap booze       a nation of drunks

 

Maximising the welfare of society.

As rational economic agents we all, consciously or unconsciously, undertake a form of cost benefit analysis when deciding on a particular course of action.  As we consume a product we attempt to extract as much marginal utility from it as possible. Generally we will stop consuming when there is a negative impact on our well being.  Think about gulping down that ice cold water after a hot sports day race; the criteria for giving the green light to certain infrastructure projects is similar, the difference is that the social costs and benefits must be considered.  This leads us to the normative and positive aspect of appraising such projects.  Are such projects, as the ones below, given the go ahead based on political persuasion or rational economics, or are these one in the same?

HS2                  HS2 revision                 super sewer                 boris island        edinburgh trams          london gateway        building roads       desalination in Q8           desalination downunder

1800 BAE jobs lost. Has manufacturing given up the ghost?

This article asks ‘is the manufacturing sector of the UK economy in decline as well as the shipbuilding industry’?  The suggestion is that although there is some growth it is still well below that of pre recession times.  As ‘coolhead’ points out even though the service sector is growing much of this growth is reliant on manufacturing.  The article also allows us to consider the opportunity cost of government reducing its spending and the implications of this type of unemployment.

growth but not jobs

Inflation and energy prices.

Subject to this morning’s lesson about why inflation is difficult to forecast.  Volatility in UK energy prices may arise due to obvious external or internal shocks along the supply chain.  This is a bitter pill for the consumer to swallow due to the low PED value of energy.  This adds to the unanticipated increases in inflation and thus the consequences of this ,(a higher opportunity cost for the consumer when deciding about energy use and consumption elsewhere; a shift in of AD and the SRAS).  Basically higher rates of inflation and lower economic activity.  This makes policy decisions at the best of times hard.  However, the article below highlights that there might be an alternative rationale behind these increases and highlights how producers, in an oligopoly market structure, often behave and work against the common good.

Profiteering?

With reference to how inflation can be regressive and how this is manifested with lower income groups.

Heating or food.

Economic Growth, Unemployment and The iPhone!

Producers outsource as a means of reducing average costs and gaining a competitive advantage. Abnormal profit and time saved can be reinvested on increasing innovation. Consumers gain through better quality products at more affordable prices .  However, what is the opportunity cost, of this action, on the macro economy?  Below is a video explaining the concept of the ‘jobs multiplier’ and it intimates how some major economies might benefit from rebalancing.