Category: Economics for Business: 8e Ch 12

Energywatch, an industry watchdog, has argued in a recent report to MPs that Britain’s electricity and gas supply industry is a “comfortable oligopoly” that feels little need to innovate or compete. They have called for the sector to be subject to a Competition Commission investigation.

Power companies are ripping off consumers Times Online (21/5/08)
Age of cheap power is over Times Online (21/5/08)
Call to investigate energy ‘oligopolies’ Guardian (21/5/08)

Questions

1. Explain the main characteristics of an oligopolistic industry.
2. What aspects of the electricity and gas supply market would the Competition Commission consider if asked to investigate the industry?
3. Assess the extent to which the electricity supply industry exhibits oligopolist collusion.

Shell have announced record profits of $27bn. This is the highest profit ever made by a European company and is only surpassed worldwide by the annual profits of another oil company ExxonMobil at $40bn. These high profits have led to calls for a windfall tax to be imposed on the oil companies and the articles below consider the likely impact of a tax of this nature.

Threat of windfall tax to energy companies is ‘legalised piracy’ Times Online (28/2/08)
Tax uncertainty a sure-fire killer Times Online (28/2/08)
Q&A: Windfall tax on Shell BBC News Online (31/1/08)
The great fuel folly Guardian (5/2/08)

Video

Windfall tax suggested for fuel profits BBC News Online (February 2008)

Questions

1. Using diagrams as appropriate, show the impact on the equilibrium level of price and output of Shell of a windfall tax being imposed on their profits.
2. Discuss the extent to which the high level of profitability of oil companies is determined by the oil price.
3. Analyse whether a windfall tax is an economically efficient form of taxation. What alternatives could a government consider that might be more efficient?

Oil prices have seen a relentless rise in recent weeks with much speculation that they will go over $100 a barrel in the near future. The high oil price has seen the average price of petrol go over £1 per litre in the UK, shortages and rationing in Tehran and violence in Yemen. So what is causing oil prices to rise and what impact is this likely to have on the global economy?

Tempests, truckers and tribesmen – another week in the oil market Guardian (10/11/07)
Steep decline in oil production brings risk of war and unrest, says new study Guardian (22/10/07)
The high oil price may begin to take its toll Times Online (12/11/07)
What is driving oil prices so high? BBC News Online (6/11/07)
OPEC: the oil cartel in profile BBC News Online (18/10/07)
Oil price rises after OPEC summit BBC News Online (19/11/07)
Oil markets explained BBC News Online (18/10/07)
Oil prices BBC News Online – Evan Davis blog (10/11/07)
Super-spiked The Economist (1/11/07)

Video

The OPEC statement on oil prices BBC News Online – video link (19/11/07)

Questions

1. Using supply and demand analysis, show the reasons why oil prices are rising.
2. Using diagrams as appropriate, assess the likely impact of rising oil prices on the level of economic growth in the UK.
3. Discuss the extent to which OPEC has been the main cause of the rise in oil prices.

Reading the first article linked to below, you may be forgiven for thinking that farming has moved into the realms of science fiction. Dairy farming has moved determinedly into the era of technology and now benefits from extensive economies of scale with much higher productivity levels than even a decade ago. Yet 3000 dairy farmers are planning to leave the industry in the next two years and even the largest farms are struggling to make money. The processing sector has become significantly more concentrated and margins are being squeezed ever further by the power of the supermarkets, so has the market become unbalanced with too much power in the hands of supermarkets and processors?

Rising prices, failing farms. The strange story of milk Guardian (24/4/07)
Why British dairy farming is in crisis Guardian (24/5/07)

Questions

1. Describe the market structure of the milk industry.
2. Discuss the extent to which this market structure has changed the level of prices in the market for milk in recent years.
3. Evaluate possible measures that governments could implement to make the market for milk more competitive.

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?