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Posts Tagged ‘positive externalities’

The engine of global productivity stuck in first gear

According to Christine Lagarde, Managing Director of the IMF, the slow growth in global productivity is acting as a brake on the growth in potential income and is thus holding back the growth in living standards. In a recent speech in Washington she said that:

Over the past decade, there have been sharp slowdowns in measured output per worker and total factor productivity – which can be seen as a measure of innovation. In advanced economies, for example, productivity growth has dropped to 0.3 per cent, down from a pre-crisis average of about 1 per cent. This trend has also affected many emerging and developing countries, including China.

We estimate that, if total factor productivity growth had followed its pre-crisis trend, overall GDP in advanced economies would be about 5 percent higher today. That would be the equivalent of adding another Japan – and more – to the global economy.

So why has productivity growth slowed to well below pre-crisis rates? One reason is an ageing working population, with older workers acquiring new skills less quickly. A second is the slowdown in world trade and, with it, the competitive pressure for firms to invest in the latest technologies.

A third is the continuing effect of the financial crisis, with many highly indebted firms forced to make deep cuts in investment and many others being cautious about innovating. The crisis has dampened risk taking – a key component of innovation.

What is clear, said Lagarde, is that more innovation is needed to restore productivity growth. But markets alone cannot achieve this, as the benefits of invention and innovation are, to some extent, public goods. They have considerable positive externalities.

She thus called on governments to give high priority to stimulating productivity growth and unleashing entrepreneurial energy. There are several things governments can do. These include market-orientated supply-side policies, such as removing unnecessary barriers to competition, driving forward international free trade and cutting red tape. They also include direct intervention through greater investment in education and training, infrastructure and public-sector R&D. They also include giving subsidies and/or tax relief for private-sector R&D.

Banks too have a role in chanelling finance away from low-productivity firms and towards ‘young and vibrant companies’.

It is important to recognise, she concluded, that innovation and structural change can lead to some people losing out, with job losses, low wages and social deprivation. Support should be given to such people through better education, retraining and employment incentives.

Articles
IMF chief warns slowing productivity risks living standards drop Reuters, David Lawder (3/4/17)
Global productivity slowdown risks social turmoil, IMF warns Financial Times, Shawn Donnan (3/4/17)
Global productivity slowdown risks creating instability, warns IMF The Guardian, Katie Allen (3/4/17)
The Guardian view on productivity: Britain must solve the puzzle The Guardian (9/4/17)

Speech
Reinvigorating Productivity Growth IMF Speeches, Christine Lagarde, Managing Director, IMF(3/4/17)

Paper
Gone with the Headwinds: Global Productivity IMF Staff Discussion Note, Gustavo Adler, Romain Duval, Davide Furceri, Sinem Kiliç Çelik, Ksenia Koloskova and Marcos Poplawski-Ribeiro (April 2017)

Questions

  1. What is the relationship between actual and potential economic growth?
  2. Distinguish between labour productivity and total factor productivity.
  3. Why has total factor productivity growth been considerably slower since the financial crisis than before?
  4. Is sustained productivity growth (a) a necessary and/or (b) a sufficient condition for a sustained growth in living standards?
  5. Give some examples of technological developments that could feed through into significant growth in productivity.
  6. What is the relationship between immigration and productivity growth?
  7. What policies would you advocate for increasing productivity? Explain why.
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A windfall for electricity producers?

When an industry produces positive externalities, there is an argument for granting subsidies. To achieve the socially efficient output in an otherwise competitive market, the marginal subsidy should be equal to the marginal externality. This is the main argument for subsidising wind power. It helps in the switch to renewable energy away from fossil fuels. There is also the secondary argument that subsidies help encourage the development of technologies that would be too uncertain to fund at market rates.

If subsidies are to be granted, it is important that they are carefully designed. Not only does their rate need to reflect the size of the positive externalities, but also they should not entail any perverse incentive effects. But this is the claim about subsidies given to wind turbines: that they create an undesirable side effect.

Small-scale operators are encouraged to build small turbines by offering them a higher subsidy per kilowatt generated (through higher ‘feed-in’ tariffs). But according to a report by the Institute for Public Policy Research (IPPR), this is encouraging builders and operators of large turbines to ‘derate’ them. This involves operating them below capacity in order to get the higher tariff. As the IPPR overview states:

The scheme is designed to support small-scale providers, but the practice of under-reporting or ‘derating’ turbines’ generating capacity to earn a higher subsidy is costing the taxpayer dearly and undermining the competitiveness of Britain’s clean energy sector.

The loophole sees developers installing ‘derated’ turbines – that is, turbines which are ‘capped’ so that they generate less energy. Turbines are derated in this way so that developers and investors are able to qualify for the more generous subsidy offered to lower-capacity turbines, generating 100–500kW. By installing derated turbines, developers are making larger profits off a feature of the scheme that was designed to support small-scale projects. Currently, the rating of a turbine is declared by the manufacturer and installer, resulting in a lack of external scrutiny of the system.

The subsidies are funded by consumers through higher electricity prices. As much as £400 million could be paid in excess subsidies. The lack of scrutiny means that operators could be receiving as much as £100 000 per year per turbine in excess subsidies.

However, as the articles below make clear, the facts are disputed by the wind industry body, RenewableUK. Nevertheless, the report is likely to stimulate debate and hopefully a closing of the loophole.

Video
Turbine power: the cost of wind power to taxpayers Channel 4 News, Tom Clarke (10/2/15)

Articles
Wind subsidy loophole boosts spread of bigger turbines Financial Times, Pilita Clark (10/2/15)
Call to Close Wind Power ‘Loophole’ Herald Scotland, Emily Beament (10/2/15)
Wind farm developers hit back at ‘excessive subsidy’ claims Business Green, Will Nichols (10/2/15)
The £400million feed-in frenzy: Green energy firms accused of making wind turbines LESS efficient so they appear weak enough to win small business fund Mail Online, Ben Spencer (10/2/15)
Wind power subsidy ‘loophole’ identified by new report Engineering Technology Magazine, Jonathan Wilson (11/2/15)

Report
Feed-in Frenzy Institute for Public Policy Research, Joss Garman and Charles Ogilvie (February 2015)

Questions

  1. Draw a diagram to demonstrate the optimum marginal rate of a subsidy and the effect of the subsidy on output.
  2. Who should pay for subsidies: consumers, the government (i.e. taxpayers generally), electricity companies through taxes on profits made from electricity generation using fossil fuels, some other source? Explain your thinking.
  3. What is the argument for giving a higher subsidy to operators of small wind turbines?
  4. If wind power is to be subsidised, is it better to subsidise each unit of output of electricity, or the construction of wind turbines or both? Explain.
  5. What could Ofgem do (or the government require Ofgem to do) to improve the regulation of the wind turbine industry?
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The London magnet

While much of the UK is struggling to recover from recession, the London economy is growing strongly. This is reflected in strong investment, a growth in jobs and rapidly rising house prices.

There are considerable external economies of scale for businesses locating in London. There is a pool of trained labour and complementary companies providing inputs and services are located in close proximity. Firms create positive externalities to the benefit of other firms in the same industry or allied industries.

London is a magnet for entrepreneurs and highly qualified people. Innovative ideas and business opportunities flow from both business dealings and social interactions. As Boris Johnson says in the podcast, “It’s like a cyclotron on bright people… People who meet each other and spark off each other, and that’s when you get the explosion of innovation.”

Then there is a regional multiplier effect. As the London economy grows, so people move to London, thereby increasing consumption and stimulating further production and further employment. Firms may choose to relocate to London to take advantage of its buoyant economy. There is also an accelerator effect as a booming London encourages increased investment in the capital, further stimulating economic growth.

But the movement of labour and capital to London can dampen recovery in other parts of the economy and create a growing divide between London and other parts of the UK, such as the north of England.

The podcast examines ‘agglomeration‘ in London and how company success breeds success of other companies. It also looks at some of the downsides.

Podcast
Boris Johnson: London is cyclotron on bright people BBC Today Programme, Evan Davis (3/3/14)

Articles
London will always win over the rest of the UK The Telegraph, Alwyn Turner (2/3/14)
Evan Davis’s Mind The Gap – the view from Manchester The Guardian, Helen Pidd (4/3/14)
London incubating a new economy London Evening Standard, Phil Cooper (Founder of Kippsy.com) (10/2/14)

Reports and data
London Analysis, Small and Large Firms in London, 2001 to 2012 ONS (8/8/13)
Regional Labour Market Statistics, February 2014 ONS (19/2/14)
London Indicators from Labour Market Statistics (11 Excel worksheets) ONS (19/2/14)
Annual Business Survey, 2011 Regional Results ONS (25/7/13)
Economies of agglomeration Wikipedia

Questions

  1. Distinguish between internal and external economies of scale.
  2. Why is London such an attractive location for companies?
  3. Are there any external diseconomies of scale from locating in London?
  4. In what ways does the expansion of London (a) help and (b) hinder growth in the rest of the UK?
  5. Examine the labour statistics (in the links above) for London and the rest of the UK and describe and explain the differences.
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The London Olympics legacy: a cost–benefit analysis

Did the benefits of the London Olympics outweigh the costs? The government’s UK Trade and Industry (part of the Department of Business, Innovation & Skills) has just published a report, London 2012, Delivering the economic legacy, which itemises the economic benefits of the games one year on. It claims that benefits to date are some £9.9 billion.

This compares with costs, estimated to be somewhere between £8.9 billion and £9.3 billion, although this figure does not include certain other costs, such as maintenance of the stadium. Nevertheless, according to the figures, even after just a year, it would seem that the Games had ‘made a profit’ – just.

The £9.9 billion of benefits consist of £5.9 billion of additional sales, £2.5 billion of additional inward investment and £1.5 billion of Olympic-related high value opportunities won overseas. Most of these can be seen as monetary external benefits: in other words, monetary benefits arising from spin-offs from the Games. The ‘internal’ monetary benefits would be largely the revenues from the ticket sales.

In a separate report for the Department of Culture, Media & Sport, Report 5: Post-Games Evaluation, it has been estimated that the total net benefits (net gross value added (GVA)) from 2004 to 2020 will be between £28 billion and £41 billion.

But benefits are not confined just to internal and external monetary benefits: there are also other externalities that are non-monetary. The Culture, Media & Sport report identified a number of these non-monetary externalities. The Summary Report itemises them. They include:

• The health and social benefits of more people participating in sport
• Inspiring a generation of children and young people
• A catalyst for improved elite sporting performance in the UK
• Setting new standards for sustainability
• Improved attitudes to disability and new opportunities for disabled people to participate in society
• Greater social cohesion as communities across the UK engaged with the Games
• Increased enthusiasm for volunteering
• Accelerated physical transformation of East London
• Beneficial socio-economic change in East London
• Important lessons learned for the co-ordination and delivery of other large-scale public and public/private projects

But with any cost–benefit analysis there are important caveats in interpreting the figures. First there may be monetary and non-monetary external costs. For example, will all the effects on social attitudes be positive? Might greater competitiveness in sport generate less tolerance towards non sporty people? Might people expect disabled people to do more than they are able (see)? Second, the costs generally precede the benefits. This then raises the question of what is the appropriate discount rate to reduce future benefits to a present value.

Perhaps the most serious question is that of the quantification of benefits. It is important that only benefits that can be attributed to the Games are counted and not benefits that would have occurred anyway, even if connected to the Games. For example, it is claimed in the UK Trade & Industry report that much of the Olympic park and stadium for the Winter Olympics in Russia was “designed and built by British businesses”. But was this the direct result of the London Olympics, or would this have happened anyway?

Another example is that any inward investment by any company that attended the London Olympics is counted in the £2.5 billion of additional inward investment (part of the £9.9 billion). As the London Evening Standard article below states:

In London, it credited the Games with helping seal the deal for the £1.2 billion investment in the Royal Albert Docks by Chinese developer ABP, the £1 billion investment in Croydon by Australian shopping centre developer Westfield with UK firm Hammerson and the £700 million investment in Battersea Nine Elms by Dalian Wander Group.

It is highly likely that some or all of these would have gone ahead anyway.

Then there are the £5.9 billion of additional sales. These are by companies which engaged with the Olympics. But again, many of these sales could have taken place anyway, or may have displaced other sales.

Many cost–benefit analyses (or simply ‘benefit analyses’) concern projects where there are strong vested interests in demonstrating that a project should or should not go ahead or, in this case, have gone ahead. The more powerful the vested interests, the less likely it is that the analysis can be seen as objective.

Webcasts and Podcasts
Have Olympics and Paralympics really boosted trade? Channel 4 News, Jackie Long (19/7/13)
Economy boosted by Olympics Sky Sports News, Amy Lewis (19/7/13)
Olympic investment boost to last decade – Cable BBC News (19/7/13)
Did the UK gain from the Olympics? BBC Today Programme (19/7/13)

Articles
Government announces almost £10bn economic boost from London 2012 Specification Online (19/7/13)
Olympic Legacy Boosted Economy By £10bn, Government Insists The Huffington Post (19/7/13)
Olympics are delivering economic gold but volunteering legacy is at risk The Telegraph, Tim Ross (19/7/13)
Vince Cable: Case for HS2 still being made The Telegraph, Christopher Hope and Tim Ross (19/7/13)
Olympic legacy ‘gave London a £4bn windfall’ London Evening Standard, Nicholas Cecil and Matthew Beard (19/7/13)
London 2012 Olympics ‘have boosted UK economy by £9.9bn’ BBC News (19/7/13)
The great Olympic stimulus BBC News, Stephanie Flanders (19/7/13)
London Olympics still costing the taxpayer one year on Sky Sports (19/7/13)
Mayor missed long-term London Olympic jobs targets, says report BBC News, Tim Donovan (19/7/13)
Olympics legacy: Have the London 2012 Games helped Team GB develop a winning habit? Independent, Robin Scott-Elliot (19/7/13)
London 2012 added up to more than pounds and pence The Guardian, Zoe Williams (19/7/13)

Government Reports
London 2012 – Delivering the economic legacy UK Trade & Investment (19/7/13)
London 2012: Delivering the economic legacy UK Trade & Investment (19/7/13)
Report 5: Post-Games Evaluation: Summary Report Department for Culture, Media & Sport (July 2013)
Report 5: Post-Games Evaluation: Economy Evidence Base Department for Culture, Media & Sport (July 2013)

Questions

  1. Distinguish between gross and net benefits; monetary and non-monetary externalities; direct costs (or benefits) and external costs (or benefits).
  2. How should the discount rate be chosen for a cost–benefit analysis?
  3. Give some examples of monetary and non-monetary external costs of the Games.
  4. What are the arguments for and against including non-monetary externalities in a cost–benefit analysis?
  5. Why might the £9.9 billion figure for the monetary benefits of the Games up to the present time be questioned?
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The Big Society Bank

A particular issue that has received much attention recently is the difficulty of getting loans. One sector that has found this especially hard is those organisations that are part of the so-called ‘social sector’. Organisations that try to do some good in society while achieving a financial rate of return often find finance impossible to obtain and, as such, the economy is allegedly losing out on billions.

The Big Society is an integral part of the Conservative’s mission and the launch of the Big Society Fund is a key stepping stone in ‘supplying capital to help society expand’. Sir Ronald Cohen, who is Big Society Capital’s Chairman said:

“It will allow an organisation which today is trying to deal for instance with prisoners who are being released and ending up in unemployment then back in prison… to get the capital to increase the size of their organisation and to improve the lives of these prisoners.”

It is hoped that this innovation will help the economy grow through new investment, but will also bring wider benefits to society. One such example is Social Impact Bonds in Peterborough, which aim to help prisoners return to work once they are released from jail. The idea is that rather than being left to their own devices, the scheme helps them integrate back into the community, such that they don’t re-offend, which does tend to be a big problem and creates a big cost for the local community and society at large. In essence, this new bank will simply be providing loans to new social enterprises that demonstrate they can generate an income stream and also provide societal benefits. The financial return will encourage investors, as will the idea of doing some good for society. The following articles consider this new social innovation.

Unclaimed bank cash to fund ‘Big Society’ Sky News (4/4/12)
Big Society Fund launches with £600m to invest BBC News (4/4/12)
’Big Society Bank’ to start providing capital Financial Times, Sarah Neville and Jonathan Moules (4/4/12)
David Cameron unveils Big Society Bank to help savers invest in good causes Telegraph, Rowena Mason (4/4/12)
David Cameron launches £600m ‘big society fund’ Guardian, Nicholas Watt (4/4/12)
The Big Society Promise that has yet to deliver Independent (4/4/12)

Questions

  1. Where is the finance for the big society bank coming from?
  2. Do you think the financial return from investments through the big society bank will have to be equal to the financial return on business investments?
  3. Explain the relevance of externalities to this new social innovation.
  4. To what extent do you think funding through the big society bank is simply a way of replacing direct government funding of the welfare state?
  5. Do you think the amount of money this bank is enough to make any difference?
  6. Why do you think social projects find it difficult to obtain funding through traditional lending?
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Is an education monopoly efficient?

There has always been relatively widespread agreement that the best method to produce and finance education is via the government. Education is such a key service, with huge positive externalities, but information is far from perfect. If left to the individual, many would perhaps choose not to send their children to school. Whether it be because they lack the necessary information, they don’t value education or they need the money their child could earn by going out to work – perhaps they put the welfare of the whole family unit above the welfare of one child. However, with such large external benefits, the government intervenes by making education compulsory and goes a step further in many countries and provides and finances it too.

However, is this the right way to provide education? People like choice and the ability to exercise their consumer sovereignty. The more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price. We see this every day when we buy most goods. Many car salesrooms to visit – all the dealerships trying to offer us a better deal. Innovation in all industries – one phone is developed, only to be trumped by a slightly better one. This is only one of the many benefits of competition. Yet, education sectors are largely monopolies, run by the government. Many countries have a small private sector and there is substantial evidence to suggest that education standards in it are significantly higher. Research from Harvard University academics, covering 220,000 teenagers, suggests that competition from private schools improves achievement for all students. Martin West said:

“The more competition the state schools face for students, the stronger their incentive to perform at high levels…Our results suggest that students in state-run schools profit nearly as much from increased private school competition as do a nation’s students as a whole.”

The study concluded that an increase in the percentage of private school pupils made the education system more competitive and therefore more efficient, with an overall improvement in education standards. With so much evidence in favour of competition in other markets in addition to the above study, what makes education so different?

Or is it different? Should there be more competition in this sector – many economists, including Milton Friedman, say yes. He proposed a voucher scheme, whereby parents were given a voucher to cover the cost of sending their child to school. However, the parents could decide which school they sent their child to – a private one or a state run school. This meant that schools were in direct competition with each other to attract parents, their children and hence their money. Voucher schemes have been trialed in several places, most prominently in Sweden, where the independent sector has significantly expanded and results have improved. Is this a good policy? Should it be expanded and implemented in countries such as the UK and US? The following articles consider this.

Articles
School Competition rescues kids: the government’s virtual monopoly over K-12 education has failed Hawaii Reporter, John Stossel (30/10/11)
Private schools boosts national exam results Guardian, Jessica Shepherd (15/9/10)
Can the private sector play a helpful role in education? Osiris (10/8/11)
Voucher critics are misleading the public Tribune Review, TribLive, Joy Pullmann (30/10/11)
Vouchers beat status quo The Times Tribune (29/10/11)
Why are we allowing kids to be held hostage by a government monopoly? Fox News, John Stossel (26/10/11)
Free Schools – freedom to privatise education The Socialist (26/10/11)
Anyone noticed the Tories are ‘nationalising’ schools? Guardian, Mike Baker (17/10/11)

Publications
School Choice works: The case of Sweden Milton & Rose D Friedman Foundation, Frederick Bergstrom and Mikael Sandstrom (December 2002)

Questions

  1. What are the general benefits of competition?
  2. How does competition in the education market improve efficiency and hence exam results? Think about results in the private sector.
  3. What is the idea of a voucher scheme? How do you think it will affect the efficiency of the sector?
  4. What do you think would happen to equity in if a scheme such as the voucher programme was implemented in the UK?
  5. How do you think UK families would react to the introduction of a voucher scheme?
  6. What other policies have been implemented in the UK to create more competition in the education sector? To what extent have they been effective?
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A watery smile in the South West

Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.

Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.

There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.

P.S. If you hadn’t guessed it, yes I do live in the South West!

Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)

Questions

  1. What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
  2. Does South West Water have a monopoly?
  3. Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
  4. Which proposal would you recommend and why?
  5. Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
  6. Is the concept of market failure relevant in this case? Explain your answer.
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A budget education

The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.

Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.

With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.

Articles
Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)

Data
HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)

Questions

  1. Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
  2. What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
  3. Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
  4. Is the ‘50% participation in higher education’ a good policy?
  5. What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
  6. Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
  7. What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?
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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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Loan delays for students

Most students have a student loan: you need it to live; to buy text books; to survive. So, what do you do if your student loan hasn’t appeared in your bank account? This is a problem that many students have been facing. The Student Loans Company said that even after most courses had started, 175,358 students had still not had their loan application processed. This represented 16% of applications. There are various reasons given for this delay, but one that appears more often is the current economic downturn. This has been a crucial factor in so many students being without the necessary finance to begin university. Another reason is that many documents have been misplaced. On the other hand, a spokesman for the Student Loans Company (SLC) said that actually delays this year were no worse than in previous years, even though this is the first year when students applied directly to the SLC. Does this suggest that actually the whole system of student loans is still inefficient and needs to be overhauled again? Is there a better method?

In order to help students, many universities have made emergency payments to those without their loans. What’s the opportunity cost of this money? Surely it could be used for other purposes. Universities have seen their highest ever number of applications, although there has been a drop in Scottish student numbers and there are suggestions that tuition fees will increase again. What are the implications of the problems with student loans and the massive increase in university applications?

Minister ‘sorry’ for student loan delays ePolitiX (15/10/09)
140,000 miss university places The Press Association (17/10/09)
Student loan firm explains delays BBC News (12/10/09)
Student loan delay hits 175,000 students Telegraph, Graeme Paton (9/10/09)
Enquiry to be held over late payments of student loans Guardian, Jessica Shepherd (13/10/09)
Watchdog fears over poor students BBC News (29/9/09)
Student tuition fees could increase Telegraph, Graeme Patton (14/10/09)
Student debt to soar Daily Express, Alison Little (14/10/09)

Questions

  1. Why has the recession had an impact on university applications?
  2. Should universities be able to set their own fees? What are the advantages and disadvantages of such a system? How could fees be determined?
  3. Primary and Secondary education is a merit good and free in the UK. What do we mean by a merit good and how can we illustrate the positive externalities associated with education? Why is higher education not free to the student? Aren’t there positive externalities associated with it?
  4. If tuition fees increase, student debt levels after graduation will be higher. What is the likely impact of this on the students themselves and on the economy?
  5. What the likely consequences for (a) students (b) universities of the delays in student loans?
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