The government have recently announced that a tax on sugary drinks should be introduced in England & Wales. The aim being to try to tackle growing obesity levels. Click here for the article.
Questions for discussions:
1. How will a tax work (you should be able to draw a diagram for this)
2. How effective will it be (reasons why it will work and why it might not)
3. Are there any other implications of this tax?
4. Will the other policies be more successful & how will they effect demand? (again, a diagram would be helpful here)
This clip, from Sesame St, is a super example that can be used to illustrate a number of Behavioural Economics and Market Failure principles:
The Edexcel A-level Economics specification requires students to understand the concepts of bounded self-control and cognitive biases. In this clip, Cookie Monster knows that he needs to have more self-control about eating cookies and must learn to "self-regulate" - difficult, though, with his habitual consumption of cookies! A relevant cognitive bias here would be the notion of hyperbolic discounting. In technical terms, this means "time inconsistent discounting", or in plain English, we don't value the future as much as we should, placing too much emphasis on current consumption. It's also easy to link this concept with the market failure associated with demerit goods - why do people continue to consume items that are "bad" for them?
Here is another Sesame St clip, again with Cookie Monster:
This time, Cookie Monster has to wait for his cookie - and if he can wait, he gets two cookies instead of the one cookie he gets to wait if he can't wait. One cognitive bias shown here is the Rhyme As Reason effect, in which rhymes are perceived as more "truthful". In this case, Cookie Monster is distracted by a song containing lots of rhymes that tell him to wait.
And finally, here is Cookie Monster and Sir Ian McKellen learning about the word "resist":
A report from the Bank of England and the Financial Services Authority has suggested that up to 10 executives that worked for HBOS should be banned from working in the City in the future. The named executives include Andy Hornby, HBOS's former chief executive, and Lord Stevenson, its former chairman.
The report suggests that the executives did not take enough action to ensure against any possible collapse in the financial markets which led to HBOS requiring a Government bailout at the start of the financial crisis in 2008.
Moreover, the report suggests that the Bank of England's own regulatory body at the time did not investigate the issues with enough stringency and relied too heavily on information from senior managers within organisations like HBOS.
For students of A Level Economics, this report offers examples of both market failure in the financial markets and the impact of regulatory capture (where the regulatory body of a market are too closely linked to the decision making of the management and ownership of the firms within that industry and therefore unlikely to act fully in the public interest).
In most cases, it can be argued that increased competition in a market will lead to an increase in efficiency, benefiting society and consumers. More competition, it can be argued, puts downward pressure on prices and forces firms to use their resources in a more efficient manner, encouraging firms to reduce their average total costs.
But what if the total demand for a good in a particular market is not high enough to necessitate more than one firm producing the good in question? In other words, what if having more than one firm means that each individual producer will have higher average total costs than a single firm would have? Such a scenario exists if the market demand curve intersects a monopolist's average total cost curve in the range in which economies of scale are experienced, in other words where ATC it still decreasing. This is known as a natural monopoly.
Such industries exist, particularly in the case of large utilities such as water, electricity, natural gas, sewage and garbage collection. Think about the town you live in: how many firms can you choose to buy your electricity from? The answer is most likely ONE. Would you be better off if the answer were 100? Probably not. Here's why: If 100 firms competed to provide electricity to your city, no single firm would achieve the economies of scale needed to lower its average total cost to a level that would allow it to provide electricity at the low, desirable rates that you currently pay. With 100 firms providing electricity, each firm would have much higher average costs and therefore would have to charge higher prices to their consumers! Competition would drive the price UP, instead of DOWN, like it is supposed to do, due to the significant economies of scale, namely the huge fixed costs of capital and infrastructure, needed to provide a utility such as electricity.
The problem with natural monopolies is that if they are left unregulated, they will produce much less and charge a price much higher than what is socially optimal (where marginal benefit equals marginal cost). Thus arises the need for regulation. This lesson will explain the theory of natural monopolies and examine the use of subsidies and price controls to promote a more socially optimal outcome in such industries.
Thanks to Arjun who found this article on the UK's record current account deficit. Really useful when discussing the following:
The state of the UK economy
The impact on ADS/AS
The short run implications for the UK
The long run implications for the UK
How can the UK reduce this deficit
This article from the Guardian is an excellent, recent example of the economics of price discrimination.
Now more than ever businesses have the potential to harness information contained in digital profiles of customers to offer bespoke, personalised prices for different goods and services.
The costs of market and consumer segmentation are coming down and this type of pricing behaviour is likely to become a more frequent occurrence in our daily lives. Please do have a read and consider some of the efficiency and welfare implications of digital dynamic pricing.
Also think about the benefits to society, both in terms of the consumer & the producer.
The issue of rising football ticket prices has been getting increasing coverage in the media lately. Tickets for top flight football matches in England have risen at an exponential rate since the old Football League First Division was revamped in 1992. We are constantly told by pundits and clever advertisements that the Barclays Premier League is the best (it’s not) and the most exciting (it might be) league in the world; but even if these two claims were proved correct the reason why fans continue to pay increasing prices can be explained to some extent by simple economic theory.
In 1990 you could buy a ticket to see the then league champions Liverpool for £4. If you wanted a season ticket these could be bought via the ticket office over the counter. Fast forward twenty years and the price of the same ticket had increased by an eye watering 975%! If you want a season ticket at Liverpool today you will have to join the waiting list – behind 28,000 other fans. This isn’t an isolated example – demand has been increasing in line with prices pretty much across the country. It’s safe to say that demand for top flight tickets is price inelastic. There are a number of potential reasons for this:
Lack of close substitutes – match going fans will argue that there is no feeling quite like going to the match. Despite the dominance of Sky and BT and various other not-so-legal ways of watching football on the internet it still can’t replicate being at the match. As well as this the majority of match going fans would be highly unlikely to swap football for a different sport (although this does happen in a small number of cases).
Habitual consumption – going to the football is a weekly ritual for most fans. It’s an event that is attended by families and groups of friends alike. In some cases the match is a secondary event to the other social aspects of the match going experience!
Emotional attachment – Eric Cantona once said that “You can change your wife, your politics, your religion, but never, never can you change your favourite football team.” Football fans often build up an unbreakable emotional attachment to their team which inevitably has an influence of their responsiveness to ticket price changes.
Price discrimination
Football clubs have inevitably exploited this situation to increase their revenues by engaging in price discrimination which is defined as when a firm charges a different price to different groups of consumers for an identical good or service, for reasons not associated with costs.
This has particularly been the case for away fans that travel up and down the country following their football teams. In April of this year Liverpool fans were charged £50 each for an away ticket at Hull. In August of the same season Stoke fans were only charged £16 each by Hull. Same stadium, same seats……same dull affair!
This is a classic example of third degree price discrimination where fans of bigger clubs are being exploited because they are part of a larger fan base and have more inelastic demand. An added factor that contributes to this inelastic demand for fans of the bigger clubs is that if they want to go to the more prestigious away matches e.g. Chelsea or Man Utd then fans need to build credits up on their season tickets by purchasing tickets for “lower tier” games. Clubs like Hull know this and ramp the prices up.
Away fans from northern clubs are also discriminated on price by location. Manchester City fans were charged £62 for an away ticket at North London club Arsenal in 2013 – nearly twice as much as the £35 they were being charged by Southampton the following month.
This particular incident sparked the Football Supporters Federation to launch theTwenty’s Plenty for Away Tickets campaign which had its national weekend of action just a couple of weeks ago. This excellent article in the Guardian touches on a number of issues that I’ve discussed and also puts forward some innovative pricing strategies that could be employed by clubs.
In evaluation to this analysis clubs will argue that the extra revenue they have been generating from ticket prices has been ploughed back into the clubs which has seen safer all seater stadiums, better facilities, more inclusive fanbases, higher wages, better players and better football. In reality though match day revenue now makes up a much smaller percentage of total revenue when you compare it to huge sponsorship deals and particularly the new TV deal which would allow clubs to lower prices and still leave them with more money than they have had before.
