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Posts Tagged ‘privatisation’

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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X Factor aXes Lucie

Whether or not you admit it, most people are aware of what’s happening in the X factor. With massive viewing figures, the X Factor remains one the most highly viewed entertainment programmes, so it’s hardly surprising that demand for advertising slots is so high especially when people are waiting for news about the contestants. The X Factor pulls in £8000 per second from TV adverts and it is estimated that the charge for a 30 second advertising slot is a staggering £190,000, expected to rise to £250,000 for the live final. It looks like the recession has had little impact on those wanting to sponsor the X Factor.

Nevertheless, there has been some controversy this week. Every Monday morning we see stories about the contestants and this week was no exception. But, it wasn’t so much about the contestants this week, but rather it concerned the voting. Following the episodes over the weekend of 7th and 8th November 2009, both the ITV and Ofcom, the telecommunications regulator, received thousands of complaints as Simon Cowell gave his support to ‘Jedward’ over Lucie Jones, even though in earlier episodes, he had said he would ‘leave the country if they won’.

However, Ofcom has said that the X Factor won’t be investigated, as the regulator only investigates voting irregularities and the treatment of contestants and not the outcome of the programme. Meanwhile, speculation is rife that Simon Cowell either wants to keep Jedward on the show, because of their viewer ratings, or that by voting Lucie off, the public will rebel and vote Jedward off this week and Simon will avoid looking like the bad guy.

Who knew that the world of entertainment could be analysed using economics!!

Ofcom won’t investigate X Factor ITN (11/11/09)
750 complain to Ofcom over Lucie’s X Factor exit Wales Online (12/11/09)
£8k a second bonanza for X Factor ads as ITV chiefs cash in on Jedward mania Mail Online (11/11/09)
Watchdog rules out X Factor probe BBC News (10/11/09)
Thousands complain to ITV and Ofcom over X Factor ATV Network News, Doug Lambert (10/11/09)
X Factor: Simon Cowell is an evil genius and we love him Telegraph, Liz Hunt (11/11/09)
Simon Cowell’s evil genius rules The X Factor Guardian, Marina Hyde (13/11/09)
Resistance is futile in the face of this master of psychology Independent, Matthew Norman (12/11/09)
Jedward: X Factor twins John and Edward help ITV rake in advertising Telegraph (11/11/09)
The X Factor becomes the ‘British Superbowl’ as advertising fees soar Tines Online, Dan Sabbagh (11/11/09)

The Ofcom site can be found at:
Ofcom (Home Page)

Questions

  1. What is the purpose of regulation? What are the advantages and disadvantages of legal restrictions?
  2. What is the role of Ofcom? How does it regulate telecommunications and what other regulators are there?
  3. Why is the price for an advertising slot during the X Factor so expensive? What does this tell us about price elasticity and income elasticity of demand?
  4. Ofcom is not going to investigate X Factor. What are the main reasons behind this decision? Do you think this was the right decision?
  5. If a judge’s decision can increase advertising revenue, then from a commercial point of view does that make it the ‘right’ decision?
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National Express – Running out of steam on the east coast mainline

The east coast mainline from London to Edinburgh is a ‘premium route’. This means that it is one of the lines in the UK that is profitable. When the franchises come up for renewal on such lines, potential operators bid to pay the government for the franchise. National Express won the eight-year franchise in 2007 for a total of £1.4 billion, paid in annual rising instalments.

Although the east coast mainline is still profitable, the recession has meant that passenger numbers have been insufficient for National Express to make its annual payments to the Department for Transport and still be left with a profit. As a result, the government will take the franchise into public ownership later this year. This specially created nationalised company will then operate trains on the route until a new franchise is awarded to a private company at the end of 2010.

So why has this proved necessary? Is it all down do the depth of the recession? Or was the £1.4 billion cost of the franchise unrealistically expensive? Would the answer be for National Express to merge with another operator, such as the First Group? Or should the government be prepared to waive, or at least reduce, the franchise payments until passenger numbers are growing fast enough? Or is it time to rethink the whole UK model of rail privatisation and perhaps return to a nationalised rail system? The articles below consider the issues.

National Express loses East Coast line Independent (2/7/09)
National Express goes off the rails on east coast line Times Online (4/7/09)
Q&A: the future of National Express and the east coast mainline rail service Guardian (1/7/09)
East Coast main line: Q&A Telegraph (2/7/09)
Runaway train: The crisis in the rail sector Scotsman (5/7/09)
First Group sets sights on East Coast Business7 (3/7/09)
National Express’s decision to quit East Coast franchise is a lose-lose for nearly everyone Telegraph (4/7/09)
Focus turns to rail franchise system Financial Times (2/7/09)
Rail network: red signals ahead Guardian (2/7/09)
Have we reached the end of the line for privatisation? Observer (5/7/09)
Privatisation has been a train wreck: Ken Livingstone Guardian (2/7/09)
New Capitalism: Old Capitalism except taxpayer money is at risk: Iain Macwhirter Sunday Herald (5/7/09)

Questions

  1. Consider the relative merits of temporary nationalisation of the east coast mainline services with providing temporary support for National Express.
  2. Should profitable rail franchises be awarded to the highest bidder? Similarly, should loss-making franchises be awarded to companies bidding for the lowest subsidy?
  3. Discuss the arguments for and against a complete re-nationalisation of the railways.
  4. With reference to the final article above, explain what is meant by a Special Purpose Vehicle and whether it was an appropriate means for National Express to fund its £1.4 billion franchise. What dangers are associated with this and other new forms of ‘no-risk capitalism’? Is there a ‘moral hazard’ in this form of capitalism?
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Between a rock and a hard place?

The Chancellor Alistair Darling announced in February that Northern Rock – the beleaguered bank – was to be temporarily nationalised. The government had been unable to agree terms with prospective buyers and so decided that temporary nationalisation was the best way to proceed. The move has met with sharp criticism from shareholders and many commentators, but was supported by the Liberal Democrats who had argued from the outset that this was the best solution to the crisis.

Northern Rock shareholders will argue that nationalisation is theft Times Online (20/2/08)
Reaction to Northern Rock nationalisation Guardian (18/2/08)
‘Our shares are worthless’ say the Rock’s furious investors Times Online(18/2/08)
Northern Rock reclassified as public company Guardian (7/2/08)
Northern Rock staff warned of job cuts Guardian (7/2/08)
Q&A: Nationalised Northern Rock – what next? BBC News Online (18/2/08)
Northern Rock crisis (Special Report) BBC News Online

Video
Northern Rock nationalisation BBC News Online (February 2008)

Questions
1. Explain what is meant by nationalisation.
2. Examine the advantages and disadvantages of privatisation. Why was privatisation introduced as a strategy in the 1980s?
3. Discuss the advantages and disadvantages of temporarily nationalising Northern Rock.
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Monopoly abuse on the tracks?

Passenger groups have reacted angrily to the raising of off-peak fares by South West Trains by around 20% on many journeys. The train company has increased unregulated fares significantly where there is little competition, but appears to have limited the increases on journeys where there is competition. Is this an abuse of their monopoly position?

Train firm accused of abusing monopoly Times Online (8/5/07)
Price hike angers train watchdog BBC News Online (8/5/07)


Questions
1. Discuss the extent to which South West Trains has a monopoly on its rail journeys.
2. Using diagrams as appropriate, show the reasons why South West Trains has chosen to increase off-peak prices by as much as 20%.
3. Discuss the likely value of the price elasticity of demand for off-peak rail journeys. To what extent will this have influenced South West Trains’ pricing decision?
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Yeltsin’s legacy

With the news this month of the death of Boris Yeltsin, it has been an opportunity to look back at the economic legacy of the first democratically-elected President of Russia. Boris Yeltsin took over at a time when all goods were scarce and the industrial infrastructure was crumbling. He adopted policies of extensive privatisation and abandoned price controls. To what extent has this created the Russia of today and what is the legacy he has left behind?

Yeltsin’s moment The Economist (subscription) (26/4/07)
Yeltsin’s economic legacy BBC News Online (24/4/07)

Questions
1. Explain the reasoning behind the policies that were adopted by Boris Yeltsin in his early years in office.
2. Discuss the extent to which those policies enabled the development of the Russian economy.
3. Assess the current state of the Russian economy.
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Capitalism – are there really any alternatives?

Recent economic history has led many commentators to believe that a free-market capitalist economy is the only efficient method of allocating resources. The transition of former Eastern Bloc economies has furthered this perception. In the article from the Guardian linked below, Andrew Murray considers this argument and argues that capitalism may not be the be all and end all of economic organisation.

No, capitalism is not the only way to order human affairs Guardian (8/3/07)

Questions
1. Discuss the arguments for and against using a free-market economy as the principal method of resource allocation.
2. Assess the principal reasons for the transition of planned economies to market economies over the past two decades.
3. Examine the validity of the arguments raised by Andrew Murray in his article.
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