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Posts Tagged ‘deadweight loss’

A 3p delay?

Increases in the cost of living over the past few years have put many families under financial pressure. One of the main factors that has been hurting households is the price of petrol and diesel. Road fuel duty was due to be increased last August, but the Chancellor delayed it in June. However, a planned 3p rise in duty by the Coalition, which has faced rebellion from numerous MPs may now be delayed further, following a hint from the Treasury.

The government has said that it will do everything it can to support struggling families with the cost of living and this has led many to conclude that in the Autumn Statement, the Chancellor will delay the planned 3p rise. Labour was defeated in its efforts to force a delay of the proposed 3p duty rise, as Tory bankbenchers were given this hint that the Treasury would decide to delay the increase anyway. The Economic Secretary to the Treasury said that fuel duty is part of the government’s strategy to help cut the cost of living. He commented that fuel duty was 20% lower in real terms compared to March 2000, when it was at its peak.

If we had continued with the policies of the previous government, quite simply prices would be higher, fuel would be 10p more expensive per litre. I know some will call for a further freeze in fuel duty today. I can assure them this government understands the financial pressures hard-working families are facing. Subject to the constraints of the public finances, this government is determined to help families with the cost of living.

A key economic question to consider is why is fuel one of the products that is frequently taxed? When a tax is imposed on a product, its price will rise and as the law of demand tells us, this will cause people to purchase less of it. But, what is so special about petrol? Why do people continue to purchase petrol even when its price rises? The following articles consider the concerns surrounding the 3p fuel duty rise.

Treasury to defer planned increase in fuel duty The Guardian, Nicholas Watt (13/11/12)
Asda chief Andy Clarke urges scrapping fuel duty rise BBC News (15/11/12)
Fuel Duty: Labour to force vote to delay 3p rise The Guardian, Helene Mulholland (12/11/12)
Fuel duty delay called for by Which? BBC News (11/11/12)
Fuel Duty: Government may still axe increase Sky News (13/11/12)
Chancellor heads off fuel duty rebellion Financial Times, George Parker (12/11/12)
Osborne pressed to shelve fuel duty rise Financial Times, George Parker (8/11/12)
Planned 3p petrol increase could be abandonedThe Telegraph, Christopher Hope (11/11/12)

Questions

  1. Why is petrol a good that is taxed so heavily?
  2. Illustrate the impact of a tax on petrol using a demand and supply diagram. Explain what happens to the equilibrium price and quantity.
  3. Which factors will make the change in price and quantity relatively larger or smaller? Think about how elasticity is relevant here.
  4. What other factors have contributed towards the increased cost of living over the past few years?
  5. Which factors in particular would make a January rise in fuel duty especially painful for many families?
  6. What are the arguments both for and against delaying the 3p rise in duty?
  7. According to the Economic Secretary to the Treasury, fuel duty is 20% lower in real terms. What does this actually mean?
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The deadweight loss of giving

In a recently published book, Scroogenomics, Joel Waldfogel, Professor of Business and Public Policy at the University of Pennsylvania, examines the economics of giving presents and considers whether we would be better off being Scrooges. This book brings to a general audience some of Professor Waldfogel’s work on giving. In a 1993 paper, he argued that holiday gift-giving involves a deadweight welfare loss. “I find that holiday gift-giving destroys between 10 per cent and a third of the value of gifts.” (See The Deadweight Welfare Loss of Christmas. Note: you should be able to access this from a UK university site if you are logged on.)

The core of his argument is that many gifts we give are not really what the person receiving it would have chosen. If you give someone a gift costing £10 for which the person would not have paid more than £6, then that is £4 wasted – a deadweight loss of £4.

So should we all be Scrooges and stop giving? Think of all money that would be saved and which could be spent on things that were more wanted. But wait a minute. What about the pleasure (i.e. utility) of giving? And what about the pure pleasure of receiving a gift, irrespective of the gift itself? Should these be added in to arrive at the total utility? Then there is the pleasure (or hassle) of shopping for the gift. Shouldn’t this be taken into account too? In other words, to establish deadweight loss, we need to take into account all the pleasures and displeasures of the process of giving and receiving.

Finally there is the question of whether better research on the part of the giver into the tastes of the receiver would enable them to choose more wanted gifts. Or should we simply give cash or gift tokens: at least these can be used by the recipient for whatever they choose?

Interview with Joel Waldfogel Princeton University Press, on YouTube

See also the following articles:
It’s not just Scrooge who wants Christmas abolished Financial Times, Tim Harford (20/11/09)
Stop blaming Grandma for cruddy Christmas presents Seattle Times, Joel Waldfogel (20/11/09)
It may not be the thought that counts Washington Post (22/11/09)
Economics of gift vouchers BBC News Magazine, Ruth Alexander (17/12/07)
The high cost of ugly, useless Christmas gifts Globe and Mail (Canada), Erin Anderssen (13/11/09)
Author’s argument that unappreciated gifts drag down economy isn’t Scroogish, it’s foolish Mlive.com, Nancy Crawley (8/11/09)
Give gold, not myrrh The Economist (21/12/09)

Questions

  1. What factors would need to be taken into account in attempting to measure the true deadweight loss of giving? Would this involve inter-personal comparisons of utility and, if so, what problems might arise from this?
  2. Examine whether it is better to give cash or gift tokens rather than a physical gift?
  3. Consider whether charitable donations would be the best form of gift to a friend or relative?
  4. One practice used in many families is the ‘secret Santa’. This is where everyone in the family secretly draws the name of another family member at random. They then buy a gift for this person and put the gift under the tree (or in a box). Thus each person gives just one gift and receives one gift and nobody knows who has given them their gift. Normally a maximum value of the gift is determined in advance. Consider the advantages and disadvantages of such as system. Is it a more efficient way of giving?
  5. What are the macroeconomic arguments for giving presents at Christmas time or at other festivals?
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