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Posts Tagged ‘discount factor’

Getting burnt by VAT

Skin cancer is on the increase in the UK. Calls are thus being made by both retailers and cancer charities for a cut in VAT on sun cream.

At present the VAT rate on sun cream in the UK is the standard rate of 17.5%, which is due to increase to 20% in January 2011. But would cutting the rate to 5%, as is being proposed, be effective in cutting skin cancer rates? What information would you, as an economist, need to assess this claim?

Articles
Government urged to cut VAT on sun cream amid skin cancer fears Guardian, Rebecca Smithers (27/7/10)
Brits Get Burned By Vat Rise On Suncream PRLog (7/7/10)
Why we still think bronzing is tan-tastic Irish Independent, Susan Daly (27/7/10)

Evidence on sun creams
Sunscreen Wikipedia
Sun creams Cancer Research UK

Questions

  1. What would determine the incidence of a cut in VAT on sun creams between consumers and retailiers?
  2. If there were a 50:50 incidence of a VAT cut between consumers and retailers and the VAT was cut from 17.5% to 5%, what percentage fall in the retail price would you expect?
  3. Assume that the price elasticity of demand for sun cream is –1 and price elasticity of supply is +1, how much would sales of sun cream rise if the VAT rate fell from 17.5% to 5%? Are these realistic values for the price elasticity of demand and supply?
  4. Under what circumstances may promoting the use of sun creams encourage the development of skin cancer?
  5. Are people being rational if they choose to expose themselves to the sun for long periods in order to receive a ‘fashionable’ tan? How are time preference rates (personal discount rates) relevant here?
  6. What market failures are involved in the tanning industry? If the use of sunbeds contributes towards skin cancer, should they be banned?
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High-speed rail link is on track

Transport issues in the UK are always newsworthy topics, whether it is train delays, cancelled flights, the quality and frequency of service or damage to the environment. Here’s another one that’s been around for some time – high-speed rail-links. Countries such as France and Germany have had high-speed rail links for years, but the UK has lagged behind. Could this be about to change?

The proposal is for a £30bn 250mph high-speed rail link between London and Birmingham, with the possibility of a future extension to Northern England and Scotland. This idea has been on the cards for some years and there remains political disagreement about the routes, the funding and the environmental impact. Undoubtedly, such a rail-link would provide significant benefits: opening up job opportunities to more people; reducing the time taken to commute and hence reducing the opportunity cost of living further away from work. It could also affect house prices. Despite the economic advantages of such a development, there are also countless problems, not least to those who would be forced to leave their homes.

People in the surrounding areas would suffer from noise pollution and their views of the countryside would be changed to a view of a train line, with trains appearing several times an hour at peak times and travelling at about 250mph. Furthermore, those who will be the most adversely affected are unlikely to reap the benefits. Perhaps the residents of the Chilterns would be appeased if they were to benefit from a quicker journey to work, but the rail-link will not stop in their village. In fact, it’s unlikely that they would ever need to use it. There are significant external costs to both the residents in the affected areas and to the environment and these must be considered alongside the potential benefits to individuals, firms and the economy. Given the much needed cuts in public spending and the cost of such an investment, it will be interesting to see how this story develops over the next 10 years.

Podcasts and videos
£30bn high-speed rail plans unveiled Guardian, Jon Dennis (12/3/10)
Can we afford a ticket on new London-Birmingham rail line? Daily Politics (11/3/10)
All aboard? Parties disagree over high-speed rail route BBC Newsnight (11/3/10)

Articles
The opportunities and challenges of high speed rail BBC News, David Miller (11/3/10)
Beauty of Chilterns may be put at risk by fast rail link, say critics Guardian, Peter Walker (11/3/10)
High-speed rail is the right investment for Britain’s future Independent (12/3/10)
Hundreds of homes will go for new high-speed rail line Telegraph, David Milward (12/3/10)

Questions

  1. Make a list of the private costs and benefits of a high-speed rail link.
  2. Now, think about the external costs and benefits. Try using this to conduct a Cost-Benefit Analysis. Think about the likelihood of each cost/benefit arising and when it will arise. What discount factor will you use?
  3. There are likely to be various external costs to the residents of the Chilterns. Illustrate this concept on a diagram. Why does this represent a market failure?
  4. How would you propose compensating the residents of the Chilterns? Are there any problems with your proposal?
  5. Will such a rail link benefit everyone? How are the concepts of Pareto efficiency and opportunity cost relevant here?
  6. To what extent would this rail link solve the transport problems we face in the UK. Think about the impact on congestion.
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