Traffic congestion is both frustrating and costly. As The Economist article below states:
Congestion does more than irritate drivers. It makes employees and deliveries late, it snarls up modern “just-in-time” supply chains and it clogs up labour markets by making commuting difficult. The cost of all this is almost impossible to measure. But a big review of transport carried out by Rod Eddington, a one-time boss of British Airways, put the cost between £7 billion and £8 billion ($10.6-$12.2 billion) a year.
So what can be done about it? The report, published by the Confederation of British Industry (CBI), looks at various solutions. These range from staggering work times, car sharing and working from home, to improving roads and road pricing.
As economists we should look at the relative costs and benefits of alternative solutions in coming to sensible policy solutions. The problem is that people are often very emotional about traffic schemes. They may complain about sitting in traffic jams, but don’t want to pay to tackle the problem. There is thus a political element in any debate about solutions. Not surprisingly, the government has shied away from introducing road pricing
So what are the best solutions to traffic congestion and how do we overcome the political obstacles? The following articles look at these questions.
Articles
CBI urge radical changes to avoid gridlocked roads Independent, Peter Woodman (15/3/10)
Bunged up The Economist (15/3/10)
Road travel ‘needs big overhaul’ to avoid gridlock BBC News (15/3/10)
CBI sets out case for road pricing Logistics Manager (16/3/10)
CBI urges change to work patterns to avoid road gridlock Business Financial Newswire (15/3/10)
Road tolls ‘essential’ to avoid gridlock autoblog UK, Nic Cackett (15/3/10)
Report
Tackling congestion, driving growth CBI (March 2010)
Questions
- Why does the market fail to achieve the socially optimal amount and pattern of road use?
- What externalities are involved in road use?
- What are the arguments for and against increased road building as the solution to traffic congestion?
- Assess the arguments for and against road pricing
- If increasing use is to be made of road pricing, what is the best form for road pricing to take?
- Why is road pricing ‘lethal’ for politicians?
- Assuming you were in government and were acutely aware of how your policies might be perceived by the public and the press, what would you do about traffic congestion?
The happiness literature has established that, in the developed countries, increasing affluence has not increased well-being in recent decades. We seek an explanation for this in terms of conspicuous consumption, a phenomenon originally identified by Veblen.
This is from the abstract of an article in the Economic Journal, ‘Well-being and Affluence in the Presence of a Veblen Good’ by B. Curtis Eaton and Mukesh Eswaran. The authors argue that while increased affluence of the rich may bring a small amount of extra benefit to them, it actually reduces the well-being of others who crave after things that they cannot afford. As the first article below states:
[The authors] believe their work shows that as a nation becomes wealthier, consumption shifts increasingly to buying status symbols with no intrinsic value – such as lavish jewellery, designer clothes and luxury cars. But they warn: “These goods represent a ‘zero-sum game’ for society: they satisfy the owners, making them appear wealthy, but everyone else is left feeling worse off.”
… There is another downside. As people yearn for more status symbols they have less time or inclination for helping others. This, the authors argue, damages “community and trust”, which are vital to an economy because they ensure the smooth running of society.
But do the super wealthy generate more jobs and more prosperity? Do we need to pay vast salaries and bonuses as incentives for executives to take risks: to invest in new products and processes, and drive technological advance and productivity increases? According to the second article, ‘Too few of the world’s billionaires can claim to be honest-to-God productive entrepreneurs who have enlarged the economic pie by dint of hard work, imagination, risk taking and innovation – although thankfully a useful proportion do populate the list.’
So is the ever widening gap between rich and poor necessary if the economy is to grow? Or is it something of very little value to society, except, perhaps, for the super rich themselves?
Articles
More money makes society miserable, warns report The Observer, Jamie Doward (14/3/10)
Don’t celebrate these billionaires, be horrified by their existence The Observer, Will Hutton (14/3/10)
Data
For the latest Guardian survey of executive pay, see: Executive pay survey, 2009
For data on UK incomes and income distribution, see: Annual Survey of Hours and Earnings (ASHE) Office for National Statistics
For data on the distribution of wealth in the UK, see Distribution of Personal Wealth HM Revenue and Customs
Questions
- Explain what is meant by a ‘Veblen good’.
- What is meant by the diminishing marginal utility of income? What implications does this have for the effects of income distribution and redistribution on social well-being?
- Why may a rise in GDP make society worse off if it is accompanied by growing inequality?
- To what extent can marginal productivity theory explain the salaries and other rewards of the wealthy?
- Using the data below, examine the extent to which the gap between rich and poor is growing.
- Explain why increasing conspicuous consumption by the wealthy might be a zero-sum game for society or even a negative-sum game.
- What factors cause a rise in productivity?
- How might greater entrepreneurship be encouraged in the UK?
From the end of January to the beginning of March, the sterling exchange rate index fell by over 6% – from 81.7 to 76.5. Against the dollar, the fall has been even more dramatic, falling from $1.62 to $1.49 (a fall of 8%). What are the reason for this? And is the depreciation likely to continue? The following clip looks at what has been going on and whether the reasons are political, or whether there are other economic fundamentals that have contributed to sterling’s fall.
Stephanie Flanders on the pound BBC Politics Show, Jo Coburn and Stephanie Flanders (2/3/10)
Articles
One-way bet? BBC News blogs: Stephanomics, Stephanie Flanders (1/3/10)
Euro drops to lowest level in 10 months against dollar BBC News (2/3/10)
Fiscal and political fears hit sterling Financial Times, Peter Garnham (1/3/10)
Sterling’s slide is not just about polls Financial Times (2/3/10)
Sterling rout is more than a wobble over political uncertainty Guardian, Larry Elliott (1/3/10)
The pound is weighed down Guardian, Howard Davies (2/3/10)
Sterling jitters The Economist (1/3/10)
Sterling crisis might break Britain’s political and economic paralysis Telegraph, Jeremy Warner (3/3/10)
Questions
- What are the reasons for the depreciation of sterling between January and March 2010?
- Why was selling sterling a ‘one-way bet’ for speculators?
- Why might there have been ‘overshooting’ of the sterling exchange rate?
- Who gain and who lose from a depreciation of sterling?
- What is the likely effect of a depreciation of sterling on (a) inflation; (b) economic growth; (c) interest rates? Explain your answers.
- How do problems of government debt affect countries’ exchange rates?
There has been much criticism of the European Emissions Trading Scheme, the world’s most significant cap-and-trade (tradable permits) scheme for curbing greenhouse gas emissions. The main criticism is that the scheme has failed to make significant cuts in pollution. The cap was so loose in the first phase (2005–07) that by the end of this period, carbon was trading for as little as €0.02 per tonne. Although the cap on emissions was tightened by 7 per cent for phase 2 (2008–12) (see Economics, 7th ed, Box 12.5), causing the carbon price to rise to about €30.00 per tonne by mid 2009, since then the price has fallen as industry has cut output in response to the recession. By February 2010, the carbon price was around €12.50 per tonne (see the Guardian article Carbon price falls to new low). For carbon price data see the European Climate Change site.
The experience of the ETS has resulted in many people in the USA and elsewhere calling for the use of carbon taxes rather than cap and trade as the best means for reducing greenhouse gas emissions. Others have called for a mix of measures. In the US Senate, three senators are seeking to overturn cap-and-trade proposals and take a sector-by-sector approach to cutting emissions.
But increasingly the evidence, supported by economic argument, is that cap and trade does work – or can be made to work – and that it is a better policy tool than carbon taxes. The following articles look at cap and trade and assess whether it really is the best alternative.
Buying off the big polluters looks bad but it works Sunday Times, Charles Clover (28/2/10)
Economists hail EU emissions trading success BusinessGreen, James Murray (15/2/10)
EU study plumps for cap & trade in ship carbon carbonpositive (17/2/10)
European carbon trading labelled ‘model for the world’ Ecologist (1/3/10)
Cap and Trade vs Carbon Tax – 6 Myths Busted Cleantech Blog (26/2/10)
Senators seen ditching cap and trade in new bill Reuters, Russell Blinch (27/2/10)
Senators to propose abandoning cap-and-trade Washington Post, Juliet Eilperin and Steven Mufson (27/2/10)
U.S. Senate may scrap Cap and Trade in exchange for Cap and Dividend The Energy Collective, Chris Schultz (27/2/10)
See also:
Emissions Trading Wikipedia
Questions
- What determines the price of carbon in the ETS? Why was it higher in 2008/9 than in 2007? Why has it fallen in recent months?
- Does it matter that the carbon price fluctuates with the business cycle?
- Explain whether it is better to allocate carbon credits free of charge or auction them.
- Assess whether or not the EU emissions trading scheme has been a success so far.
- Compare the relative merits of a cap-and-trade scheme with carbon taxes.
- What other alternatives are there to cap and trade and carbon taxes as means of curbing emissions? Compare their relative merits.
- What is the best means of curbing carbon emissions from shipping? Explain.
The demise of the dollar as the world’s reserve currency has been predicted for a long time now. Yet it is still way surpasses other currencies, such as the euro and yen, as the main reserve currency of most countries. Also it still dominates world trade with much of international trade being priced in dollars. Indeed, as the eurozone reeled from the Greek debt crisis in early February (see A Greek tragedy and Debt and the euro) so investors sold euros and bought dollars. The dollar gained 12 per cent against the euro from December 2009 to February 2010 (from $1 = €0.66 on 1/12/09 to $1 = €0.74 by mid February).
But a number of economists, investors and officials argue that the dollar’s dominance is gradually being eroded:
As the United States racks up staggering deficits and the center of economic activity shifts to fast-growing countries such as China and Brazil, these sources fear the United States faces the risk of another devaluation of the dollar. This time in slow motion – but perhaps not as slow as some might think. If the world loses confidence in U.S. policies, “there’d be hell to pay for the dollar … Sooner or later, the U.S. is going to have to pay attention to the dollar”, [said Scott Pardee, economics professor at Vermont’s Middlebury College and formerly on the staff of the New York Fed].
So what is likely to be the future of the dollar? Will it remain the number one world reserve currency? Will its position be gradually, or even rapidly eroded? What will happen to the exchange rate of the dollar in the process? Finally, what is the significance of the trade and budget deficits in the USA? Are these of benefit to the rest of the world in providing the necessary dollars to finance world trade and investment? Or are they a source of global imbalance and instability? The following article look at these issues.
How long can the U.S. dollar defy gravity? Reuters, Steven C. Johnson, Kristina Cooke and David Lawder (23/2/10)
Is greenback’s dominance coming to an end? Stuff (New Zealand), Tony Alexander (24/2/10)
Reconstructing The World Economy Eurasia Review, John Lipsky (25/2/10): see final part on Reforming the International Monetary System. See also the following conference paper referred to in this article:
The Debate on the International Monetary System Korea Development Institute / IMF Conference on Reconstructing the World Economy, Seoul, Korea, Isabelle Mateos y Lago (25/2/10)
Questions
- To what extent does the world benefit from having the dollar as the main reserve currency?
- What is the role of US current account and budget deficits in supporting this reserve currency role? How important is the size of these deficits?
- What is likely to happen to the exchange rate of the dollar against other major currencies in the coming years?
- What alternatives are there to having the dollar as the world’s main reserve?
- Does it matter if China holds $2.3 trillion in foreign exchange reserves, with nearly $800 billion in US Treasury debt?
- Why is the value of its currency a less urgent problem for the USA ‘than it would be for other borrowers who borrow and pay for imports with dollars’?
- What are ‘currency swap accords’ and why are they important for China?
- What are the implications of the Chinese yuan being undervalued against the dollar by as much as 40%?