Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
You would think that larger catches would be good news for fishermen. But prices now are so low that they barely cover variable costs. Individual fishermen fish harder and longer to bring in even bigger catches to make up for the lower price. This, of course, compounds the problem and pushes the price even lower.
So what are the answers for the fishermen of Maine? One solution is to diversify their catch, but with lobster so plentiful and other fish stocks depleted, this is not easy.
Another solution is to cooperate. The Reuters article below quotes John Jordan, a lobsterman and president of Calendar Islands Maine Lobster Co.:
‘If you had an industry that actually cooperated, you wouldn’t be bringing in more product if you couldn’t sell what you already had, right?’
Restricting the catch would require lobster distributors to cooperate and set quotas for what the fishermen would be permitted to sell. But with over 5000 fishermen, this is not easy.
Another solution is to expand the market. One way is for the distributors or other agencies to market lobster and lobster products more aggressively. For example, 
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
Jordan’s company and others are frantically seeking new ways to sneak lobster into unexpected corners of the food market, from gazpacho to puff pastries and quiche.
In the meantime, for consumers the question is whether the low prices paid to the fishermen of Maine will feed through into low prices in the fishmonger, supermarket and restaurant. So far that does not seem to be happening, as the final two articles below explain.
Webcasts
US lobster fishermen’s ‘problem of plenty’ BBC News, Jonny Dymond (5/10/13)
Maine lobstermen in a pinch over low prices, record catch: Part 1, Part 2, Part 3 Aljazeera America, Adam May (11/10/13)
Articles
Something fishy is going on in the nation’s lobster capital CNBC, Heesun Wee (1/9/13)
Booming lobster population pinches profits for Maine’s fishery Reuters, Dave Sherwood (25/8/13)
Lobster’s worth shelling out for The Observer,
Rachel Cooke (21/9/13)
Clawback The New Yorker, James Surowiecki (26/8/13)
Why The Glut Of Cheap Lobster Won’t Lower Price Of Lobster Rolls Gothamist, John Del Signore (20/7/12)
Questions
- Why have lobster prices paid to fishermen fallen? Illustrate your argument with a demand and supply diagram
- What has determined the size of the fall in prices? What is the relevance of price elasticity of demand and price elasticity of supply to your answer?
- How is the fallacy of composition relevant to the effects on profits of an increase in the catch by (a) just one fisherman and (b) all fishermen? What incentive does this create for individual fishermen in a competitive market?
- What can lobster fishermen do to restore profit margins through collaborative action?
- In what ways is there a conflict between economics and ecology in the lobster fishing industry?
- How does stored lobster affect (a) the price elasticity of supply and (b) the price volatility of lobster?
- How could cooperation between lobster fishermen and lobster processors and distributors benefit all those involved in the cooperation?
- Why may restaurants choose to maintain high prices for lobster dishes for ‘psychological reasons’? Are there any other reasons?
The cost of living is a contentious issue and is likely to form a key part of the political debate for the next few years. This debate has been fuelled by the latest announcement by SSE of an average rise in consumer energy bills of 8.2%, meaning that an average dual-fuel customer would see its bill rise by £106. With this increase, the expectation is that the other big energy companies will follow suit with their own price rises.
Energy prices are made up of numerous factors, including wholesale prices, investment in infrastructure and innovation, together with government green energy taxes. SSE has put their price hike down to an increase in wholesale prices, but has also passed part of the blame onto the government by suggesting that the price hikes are required to offset the government’s energy taxes. Will Morris, from SSE said:
We’re sorry we have to do this…We’ve done as much as we could to keep prices down, but the reality is that buying wholesale energy in global markets, delivering it to customers’ homes, and government-imposed levies collected through bills – endorsed by all the major parties – all cost more than they did last year.
The price hike has been met with outrage from customers and the government and has provided Ed Miliband with further ammunition against the Coalition’s policies. However, even this announcement has yet to provide the support for Labour’s plans to freeze energy prices, as discussed in the blog Miliband’s freeze. 
Customers with other energy companies are likely to see similar price rises in the coming months, as SSE’s announcement is only the first of many. A key question is how will the country provide the funding for much needed investment in the energy sector? The funds of the government are certainly not going to be available to provide investment, so the job must pass to the energy companies and in turn the consumers. It is this that is given as a key reason for the price rises.
Investment in the energy infrastructure is essential for the British economy, especially given the lack of investment that we have seen over successive governments – both Labour and Conservative. Furthermore, the government’s green targets are essential and taxation is a key mechanism to meet them. Labour has been criticized for its plans to freeze energy prices, which may jeopardise these targets. The political playing field is always fraught with controversy and it seems that energy prices and thus the cost of living will remain at the centre of it for many months.
More energy price rises expected after SSE increase BBC News (10/10/13)
SSE retail boss blames government for energy price rise The Telegraph, Rebecca Clancy (10/10/13)
A better way to take the heat out of energy prices The Telegraph (11/10/13)
SSE energy price rise stokes political row Financial Times, John Aglionby and Guy Chazan (10/10/13)
Ed Miliband condemns ‘rip-off’ energy firms after SSE 8% price rise The Guardian, Terry Macalister, Angela Monaghan and Rowena Mason (28/9/12)
Coalition parties split over energy companies’ green obligations Independent, Nigel Morris (11/10/13)
Energy price rise: David Cameron defends green subsidies The Guardian, Rowena Mason (10/10/13)
‘Find better deals’ users urged as energy bills soar Daily Echo (11/10/13)
Energy Minister in row over cost of taxes Sky News (10/10/13)
SSE energy price rise ‘a bitter pill for customers’ The Guardian, Angela Monaghan (10/10/13)
Energy firm hikes prices, fuels political row Associated Press (10/10/13)
Only full-scale reform of our energy market will prevent endless price rises The Observer, Phillip Lee (27/10/13)
Questions
- In what market structure would you place the energy sector?
- Explain how green taxes push up energy bills? Use a diagram to support your answer.
- Consider the energy bill of an average household. Using your knowledge and the articles above, allocate the percentage of that bill that is derived from wholesale prices, green taxes, investment in infrastructure and any other factors. Which are the key factors that have risen, which has forced SSE (and others) to push up prices?
- Why is investment in energy infrastructure and new forms of fuel essential? How might such investment affect future prices?
- Why has Labour’s proposed 20-month price freeze been criticised?
- What has happened to energy prices over the past 20 years?
- Is there now a call for more government regulation in the energy sector to allay fears of rises in the cost of living adversely affecting the poorest households?
‘Farm-gate’ milk prices (the price paid to farmers) have been rising in the UK. In July they reached a record high of 31.4p per litre (ppl). This was 5.1ppl higher than in July 2012. There were further price rises this month (October). Sainsbury’s increased the price it pays farmers by nearly 2ppl to 34.15ppl and Arla Foods by 1.5ppl to 33.13ppl. Muller Wiseman is set to raise the price it pays to 32.5p per litre.
And yet many farmers are struggling to make a profit from milk production, claiming that their costs have risen faster than the prices they receive. Feed costs, for example, have risen by 2.12ppl. On average, farmers would need over 38p per litre just to cover their average variable costs. What is more, exceptional weather has reduced yields per cow by some 7%.
Meanwhile, in the USA, supply has risen by some 1.3% compared with a year ago. But despite this, the prices of dairy products are rising, thanks to strong demand. Cheese and butter prices, in particular, are rising rapidly, partly because of high demand from overseas. Demand for imported dairy products is particularly high in China, where supply has fallen by some 6% in the past couple of months.
The problem for dairy farmers in the UK is partly one of the power balance in the industry. Farmers have little or no market power. Supermarkets, however, have considerable market power. As large oligopsonistic buyers, they can put downward pressure on the prices paid to their suppliers. These are mainly large processing firms, such as Robert Wiseman Dairies, Arla Foods and Dairy Crest. They, in turn, can use their market power to keep down the price they pay to farmers.
Articles
Dairy farmers renew protests over milk prices Farmers Weekly, Philip Case (5/9/13)
Dairy farmers ‘lost more than 1p/litre last year’ Farmers Weekly, Philip Case (2/10/13)
South West farming businesses and producers still making a loss on milk South West Business (3/10/13)
Q&A: Milk prices row and how the system works BBC News (23/7/12) (note date of this)
Positive Dairy Trend: Rising Milk Production and Strong Demand The Farmer’s Exchange, Lee Mielke (27/9/13)
Chinese supply crisis to delay dairy price adjustment Rabobank (25/9/13)
China milk ‘crisis’ fuels world dairy price rise Agrimoney (1/10/13)
Data
UK milk prices and composition of milk ONS
Combined IFCN world milk price indicator IFCN
Questions
- Give some examples of (a) variable costs and (b) fixed costs in milk production.
- Why may farmers continue in dairy production, at least for a time, even if they are not covering their average variable costs?
- What factors determine (a) the price of milk paid to farmers; (b) the retail price in supermarkets?
- Explain how dairy futures markets work.
- Could the milk processors use their market power in the interests of farmers? Is it in the interests of milk processors to do so?
- Why is there a Chinese “dairy supply crisis”? What is its impact on the rest of the world? What is the relevance of the price elasticity of demand for dairy products in China to this impact?
No matter the product or service, price is always a key factor and never more so than in tough economic times. In most cases, prices are allowed to be determined by the forces of demand and supply, which gives the equilibrium price. However, in some cases, the government may choose to intervene with a price control, for example rent controls and the national minimum wage. Another market where there is also regulation is the airline industry and the Civil Aviation Authority have recently been criticized by Heathrow Airport for its price control plan.
Whenever we go on holiday, the price we pay for an airline ticket will depend in part on the airport we are taking off from and landing at, as they will charge the airline for landing fees, security, terminals etc. 
Heathrow airport had proposed that annual rises to its tariffs charged to airlines would increase by 4.6% above RPI inflation. However, this plan has been rejected by the CAA, which has said that the annual tariff rise between 2014 and 2018 should not be above the RPI. Though Heathrow are criticizing the CAA about this restriction, it is an improvement from the initial proposal which would have capped price rises at the RPI minus 1.3%.
Controversy has naturally been created, with the CAA arguing that such price controls are needed to keep prices down and thus benefit consumers and retain the competitiveness of Heathrow airport. But, in contrast, Heathrow has argued that such a cap will put its competitive position under pressure and will risk future investment in the UK. But this isn’t the only criticism of the CAA. Airlines aren’t happy with the ruling either, arguing that the CAA has bowed to the pressure of Heathrow. The contrasting positions of the CAA, Heathrow and airlines are evident in the following quotes, firstly from the Chairwoman of the CAA:
The proposals will put an end to over a decade of prices rising faster than inflation at Heathrow. Tackling the upward drift in Heathrow’s prices is essential to safeguard its globally competitive position. The challenge for Heathrow is to maintain high levels of customer service while reducing costs. We are confident this is possible and that our proposals create a positive climate for further capital investment, in the passenger interest.
Secondly, from Heathrow’s Chief Executive:
This proposal is the toughest Heathrow has ever faced. The CAA’s settlement could have serious and far-reaching consequences for passengers and airlines at Heathrow … We want to continue to improve Heathrow for passengers. Instead, the CAA’s proposals risk not only Heathrow’s competitive position but the attractiveness of the UK as a centre for international investment. We will now carefully consider our investment plans before responding fully to the CAA.
And finally from the IAG Chief Executive, who said:
[The CAA] neglected its new primary statutory duty to further the interests of passengers by endorsing a settlement that allows the UK’s monopoly hub to ignore its inefficiencies and over-reward investors by imposing excessive charges … It is a bad day for customers who have been let down by the CAA.
Any price rise from the airports will be passed on to airlines and these in turn will translate into higher prices for customers. However, is there any truth to Heathrow’s claims that investment will be adversely impacted? As costs rise, profit margins and profit will fall, unless the revenue generated can increase. Price controls restrict the amount that prices can rise and thus unless demand increases by a significant margin, profits will decline. With lower profits, there will be less money for investment and arguably the service that customers face will also decline. However, the CAA suggests that Heathrow will be able to cut its costs and thus protect investment into the future, while retaining its competitive position globally by charging lower prices to airlines. This is unlikely to be the end of the journey, but for the moment, the CAA appears to have put its foot down. The following articles consider the battleground between the CAA and Heathrow.
Regulation in the passenger’s interest, support investment and driving competition The Civil Aviation Authority (3/10/13)
Passengers at Heathrow ‘face £1bn fares hike’ Independent, Matthew Beard (4/10/13)
Heathrow airport attacks regulator’s price control plan BBC News (3/10/13)
CAA proposed Heathrow charges rise in line with inflation The Telegraph, Rebecca Clancy (13/10/13)
Passengers face fare increases as Heathrow and Gatwick are allowed to up landing fees Mail Online (3/10/13)
Heathrow and airlines enraged by CAA price proposals The Telegraph, Alistair Osborne (3/10/13)
Heathrow attacks Civil Aviation Authority over airport charges Financial Times, Andrew Parker (3/10/13)
BAA considers life outside Heathrow as CAA backtracks on charges The Guardian, Gwyn Topham (3/10/13)
Heathrow charge plan disappoints all round Wall Street Journal, Peter Evans (3/10/13)
Questions
- What is the role of a regulator?
- Explain how the price control outlined by the CAA will affect Heathrow.
- If Heathrow is unable to cut costs, what is the likely effect? Using a diagram illustrate the impact on profitability if costs (a) can be reduced and (b) cannot be reduced.
- Why are the CAA being criticised by airlines and airports?
- How will customers be affected by Heathrow’s planned price rises and the CAA’s proposal?
- ‘Regulation in the airlines industry is essential to retain competitiveness.’ Evaluate the validity of this statement.
For all households, energy is considered an essential item. As electricity and gas prices rise and fall, many of us don’t think twice about turning on the lights, cooking a meal or turning on the heating. We may complain about the cost and want prices brought down, but we still pay the bills. But, is there anything that can be done about high energy prices? And if there is, should anything be done?
The worlds of politics and economics are closely linked and Ed Miliband’s announcement of his party’s plans to impose a 20-month freeze on energy prices if elected in 2015 showed this relationship to be as strong as ever. The price freeze would certainly help average households reduce their cost of living by around £120 and estimates suggest businesses would save £1800 over this 20 month period. The energy companies have come in for a lot of criticism, in particular relating to their control of the industry. The sector is dominated by six big companies – your typical oligopoly, and this makes it very difficult for new firms to enter. Thus competition is restricted. But is a price freeze a good policy?
Part of the prices we pay go towards investment in cleaner and more environmentally friendly sources of energy. Critics suggest that any price freeze would deprive the energy sector of much needed investment, meaning our energy bills will be higher in the future. Furthermore, some argue this price freeze suggests that Labour is abandoning its environmental policy. Energy shortages have been a concern, especially with the cold weather the UK experienced a few years ago. This issue may reappear with price freezes. As Angela Knight, from Energy UK, suggests:
Freezing the bill may be superficially attractive, but it will also freeze the money to build and renew power stations, freeze the jobs and livelihoods of the 600,000-plus people dependent on the energy industry and make the prospect of energy shortages a reality, pushing up the prices for everyone.
There is a further concern and that is that large energy companies will be driven from the UK. This thought was echoed by many companies, in particular the British Gas owner Centrica, commenting that:
If prices were to be controlled against a background of rising costs it would simply not be economically viable for Centrica to continue to operate and far less to meet the sizeable investment challenge that the industry is facing…The impact of such a policy would be damaging for the country’s long-term prosperity and for our customers.
Share prices naturally fluctuate with global events and a political announcement such as this was inevitably going to cause an effect. But, perhaps the effect was not expected to be as big as the one we saw. 
Share prices for Centrica and SSE fell following the announcement – perhaps no great shock – but then they continued to fall. The market value tumbled by 5% and share prices kept falling. This has led to Ed Miliband being accused of ‘economic vandalism’ by a major shareholder of Centrica, which is hardly surprising, given the estimated cost of such a price freeze would be £4.5 billion.
The economic implications of such a move are significant. The announcement itself has caused massive changes in the FTSE and if such a move were to go ahead if Labour were elected in 2015, there would be serious consequences. While families would benefit, at least in the short term, there would inevitably be serious implications for businesses, the environmental policy of the government, especially relating to investment and the overall state of the economy. The following articles consider the aftermath of Ed Miliband’s announcement.
Miliband stands firm in battle over fuel bills plan The Guardian, Patrick Wintour and Terry Macalister (25/9/13)
Michael Fallon calls Miliband’s energy prices pledge ‘dangerous’ Financial Times, Elizabeth Rigby and Jim Pickard (26/9/13)
Britain’s labour treads narrow path between populism and prudence Reuters (26/9/12)
Ed Miliband’s radical reforms will make the energy market work for the many Independent (26/9/13)
Has Labour fallen out of love with Business? BBC News (26/9/13)
Top Centrica shareholder Neil Woodford accuses Labour leader Ed Miliband of economic vandalism The Telegraph, Kamal Ahmed (25/9/13)
Centrica and SSE slide after Labour price freeze pledge The Guardian (26/9/13)
Ed Miliband’s energy price freeze pledge is a timely but risky move The Guardian, Rowena Mason (24/9/13)
Questions
- Why are energy prices such a controversial topic?
- How are energy prices currently determined? Use a diagram to illustrate your answer. By adapting this diagram, illustrate the effect of a price control being imposed. How could it create an energy shortage? What impact would this have after the 20-month price freeze
- Why would there be adverse effects on energy companies if prices were frozen and costs increased? Use a diagram to illustrate the problem and use your answer to explain why energy companies might leave the UK.
- How would frozen energy prices help households and businesses?
- Why were share prices in Centrica and SSE adversely affected?
- Is there an argument for regulating other markets with price controls?
- Why is there such little competition in the energy sector?
Over the past few years lobster prices in Maine have tumbled. Eight years ago the price paid to fishermen was around $4.60 per pound. Today it’s around $2.20. The problem is one of booming lobster populations and the dominance of lobster in catches. Last year’s haul was double that of a decade ago and, in some waters, six times higher.
this year the State of Maine has established a $2 million marketing collaborative. Another solution is to find new markets.
