Category: Economics for Business: Ch 05

Six of the major tea producing countries – India, Kenya, Sri Lanka, Indonesia, Rwanda and Malawi – have formed an International Tea Producers’ Forum (ITPF). Together these countries produce slightly more than the world’s tea. The hope of the members of the new ITPF is that their cartel will allow them to increase the price of tea to the growers and to create greater price stability.

According to the Assam Tribune article below:

ITPF’s main objectives include – safeguarding the interests of the tea-producing countries, evolving collective solutions for the problems facing the producers, providing technical cooperation, sharing of technology and expertise by the member countries, undertaking market studies and research projects to address any specific issues concerning tea in general or any variety of tea, among others.

And according to the article from Sri Lanka’s Daily News:

Chairman of the Planters’ Association of Ceylon, which represents the interests of 23 Regional Plantation Companies, Lalith Obeyesekere said this was a landmark occasion. Sri Lanka particularly looks to the forum to provide long-term sustainability to the tea industry in maintaining price stability and quality standards, among the other objectives set out in the mandate… The Planters’ Association said they were confident that Sri Lanka could use the ITPF to re-look at the industry in order that local tea producers realize their full potential.

Sri Lanka’s plantation industries minister Mahinda Samarasinghe said:

The bulk of production is in the hands of smallholders. So there’s a need to increase their incomes. Price stability is definitely important.

The main aim of the ITPF over the longer term is likely to be to raise tea prices. The chart shows international tea prices from 1983 to the present day. As you can see, they have fluctuated considerably. Note that these are prices in nominal terms and hence do not take inflation into account. Click here for a PowerPoint of the chart.

But if the main aim is to increase prices to tea growers, how could this be achieved? One objective of the ITPF is to stimulate demand for tea by ‘promoting tea consumption through generic promotional campaigns’. The aim would be to encourage people to switch from coffee and soft drinks.

But to take advantage of its market power, the cartel might also want to reduce tea production, thereby pushing up the price. This, of course, would be more feasible if it had a larger than 50% share of the market.

Although production quotas are not currently part of the agreement, these are likely to be considered at future meetings, especially if the three other large producers – China, Vietnam and Iran – can be persuaded to join.

China, with some 38% of the market, is the world’s largest tea producer. Although it sent an observer to the meeting (as did Iran), it was not one of the signatories. If it could be persuaded to join the cartel, this would increase its power. Nevertheless, China specialises in different types of tea, mainly green teas, and is not the world’s biggest exporter – that is Kenya.

Articles

Tea nations join forces Radio New Zealand (25/1/13)
International Tea Producers’ Forum formed Assam Tribune, Ajit Patowary (23/1/13)
Planters’ Association upbeat on newly formed International Tea Producer’s Forum Daily News (Sri Lanka) (26/1/13)
Leaf Lobby: Sri Lanka hosts tea producer forum Lanka Business Online (24/1/13)
‘Tea cartel’ formed by biggest producing nation BBC News (23/1/13)
Tea producers brew up plan to raise prices Emirates 24/7 (23/1/13)

Data

Tea Monthly Price – US cents per Kilogram Index Mundi

Questions

  1. What are the stated aims of the newly formed ITPF? How realistic are they?
  2. What conditions are necessary for a cartel to be successful in raising prices over the long term?
  3. With reference to the chart, what can you say about the real price of tea over the period 1983 to 2013?
  4. To what extent are these conditions met by the ITPF?
  5. Why may a rise in tea prices in the supermarkets not result in a rise in prices to tea growers?
  6. How may tea growers benefit from the ITPF even if the Forum does not result directly in a rise in prices to growers?
  7. How can game theory help to explain the possible behaviour of members of a cartel and producers outside the cartel?

It’s a relatively common dish to see on a menu at a restaurant: mackerel. This particular fish has been promoted as a healthy and sustainable dish, but now its sustainability is coming into question and the Marine Conservation Society has taken it off its ‘fish to eat’ list. My brother Hugh is a marine biologist and often comments on which fish we should be avoiding due to sustainability issues (especially given how much I like fish!) So, how is this an economics issue?

There a couple of key things to pick out here. Firstly, with the conservationists’ warning of this issue of unsustainability, they have been asking consumers to reduce the amount of mackerel they buy. This will naturally have an impact on fisherman. If consumers do listen to the conservationists and hence reduce their demand for mackerel, we could see a fall in the price of this fish and a reduction in the fishermen’s turnover. It could be that we see a switch in consumption to other more sustainable fish, especially if we see some form of intervention.

Another area concerning economics is the idea of over-fishing. For years, there have been disputes over who has the rights to these fish stocks. In the past, the Faroe Isles and Iceland have increased their quotas significantly, as mackerel appear to have migrated to their shores, contributing to this question of sustainability. Iceland and the Faroe Isles have ‘unilaterally agreed their quotas … as they are not governed by the common fisheries policy’.

The question is: when fisherman catch one additional mackerel, what are they considering? Do they think about the private benefit to them (or their company) or do they consider the external cost imposed on others? Whenever one fish is taken from the sea, there is one less fish available for other fishermen.

This leads to over-consumption of fish and contributes towards the well-documented depletion of fish stocks and ‘The Tragedy of the Commons’, if account is not taken of the external cost imposed on other fishermen.

The total catch is now far in excess of what has been scientifically recommended and previously agreed upon by all participating countries. Negotiations to introduce new catch allowances have so far failed to reach agreement.

There are hopes that an international policy on quotas can be agreed to ensure mackerel levels return to or remain at a sustainable level. However, at present no progress has been made. Until some form of an agreement is reached, fishermen around Iceland and the Faroe Isles will continue to battle against the conservationists. The following articles consider this fishy topic.

Mackerel taken off conservationists’ ‘fish-to-eat’ list The Guardian, Rebecca Smithers (22/1/13)
Warning over mackerel stocks Scottish Herald (22/1/13)
Fishing quota talks begin amid ongoing disputes and finger-pointing The Scotsman, Fran Urquhart (14/1/13)
Mackerel no longer an ethical choice because of over-fishing The Telegraph, Louise Gray (22/1/13)
Ths fishy tale of macro-mismanagement The Guardian, Annalisa Barbieri (22/1/13)
You can still eat mackerel – just make sure it’s British The Telegraph, Louise Gray (22/1/13)
Dispute means mackerel is no longer fish of the day BBC News, Matt McGrath (22/1/13)
Mackerel struck off sustainable fish list Associated Press (22/1/13)

Questions

  1. Why are quotas set by the EU for fishing? Who do they apply to?
  2. Why is there an externality from fishing?
  3. What is the Tragedy of the Commons? Using a diagram with average and marginal revenue product and average and marginal cost illustrate the market equilibrium and the social optimum. Why are they different?
  4. Following on from question 3, what does this suggest about the role of governments?
  5. If the conservationists’ request regarding buying less mackerel is successful, what impact might this have on fishermen and fisheries?
  6. If consumers do switch to buying other fish, what would happen to the equilibrium in the mackerel market and in the market for other fish? Think about this question in terms of general equilibrium analysis.

Ministers are considering introducing a minimum price of 45p per unit of alcohol on all drinks sold in England and Wales. The Scottish government has already passed legislation for a minimum price of 50p per unit in Scotland. This, however, is being challenged in the Scottish courts and is being examined by the European Commission.

As we saw in a previous blog, Alcohol minimum price, the aim is to prevent the sale of really cheap drinks in supermarkets and other outlets. Sometimes supermarkets sell alcoholic drinks at less than average cost as a ‘loss leader’ in order to encourage people to shop there. Two-litre bottles of strong cider can be sold for as little as £2. Sometimes they offer multibuys which are heavily discounted. The idea of minimum pricing is to stop these practices without affecting ‘normal’ prices.

The effect of a 45p minimum price per unit would give the following typical minimum prices (depending on strength):

Strength Size Minimum price
Wine 12.5% 750ml £4.22
Beer/lager (normal) 4.5% pint (568ml) £1.15
Beer/lager (strong) 7.5% pint (568ml) £1.92
Beer/lager (normal) 4.5% 2 litres £4.05
Beer/lager (strong) 7.5% 2 litres £6.75
Cider (normal) 5% pint (568ml) £1.28
Cider (strong) 8% pint (568ml) £2.04
Cider (normal) 5% 2 litres £4.50
Cider (strong) 8% 2 litres £7.20
Whisky 40% 700ml £12.60
Vodka 37.5% 700ml £11.81

The hope is that by preventing the sale of really cheap drinks in supermarkets, people will no longer be encouraged to ‘pre-load’ so that when they go out for the evening they are already drunk.

But how successful will such a policy be in cutting down drunkenness and the associated anti-social behaviour in many towns and cities, especially on Friday and Saturday nights? The following articles discuss the issue and look at some of the evidence on price elasticity of demand.

Articles
Alcohol minimum price plan to be unveiled BBC News, Dominic Hughes (28/11/12)
Multi-buy alcohol deals face ban under minimum price plans The Telegraph, James Kirkup (28/11/12)
Alcohol at 40p, 45p or 50p a unit to be Cameron choices for minimum price The Guardian, Juliette Jowit (25/11/12)
Minimum price plan to end cheap alcohol sales BBC News, Nick Triggle (28/11/12)
Minimum pricing having a difficult birth in Scotland BBC News, James Cook (28/11/12)
Cameron to set minimum price for alcohol Independent, Brian Brady (25/11/12)
Minimum Alcohol Price: Doubts Measures Will Cut Binge Drinking Huffington Post (25/11/12)
An industry divided: Pubs set against brewers and retailers in battle for cheap booze This is Money, Rupert Steiner (26/11/12)
A minimum price per unit of alcohol BMC Public Health, Adam J Lonsdale, Sarah J Hardcastle and Martin S Hagger (23/11/12)

Home Office alcohol policy
Alcohol strategy (23/3/12)

Questions

  1. Draw a diagram to illustrate the effect of a minimum price per unit of alcohol on (a) cheap cider; (b) good quality wine.
  2. How is the price elasticity of demand for alcoholic drinks relevant to determining the success of minimum pricing?
  3. Compare the effects of imposing a minimum unit price of alcohol with raising the duty on alcoholic drinks? What are the revenue implications of the two policies for the government?
  4. What externalities are involved in the consumption of alcohol? How could a socially efficient price for alcohol be determined?
  5. Is imposing a minimum price for alcohol fair? How will it effect the distribution of income?

Increases in the cost of living over the past few years have put many families under financial pressure. One of the main factors that has been hurting households is the price of petrol and diesel. Road fuel duty was due to be increased last August, but the Chancellor delayed it in June. However, a planned 3p rise in duty by the Coalition, which has faced rebellion from numerous MPs may now be delayed further, following a hint from the Treasury.

The government has said that it will do everything it can to support struggling families with the cost of living and this has led many to conclude that in the Autumn Statement, the Chancellor will delay the planned 3p rise. Labour was defeated in its efforts to force a delay of the proposed 3p duty rise, as Tory bankbenchers were given this hint that the Treasury would decide to delay the increase anyway. The Economic Secretary to the Treasury said that fuel duty is part of the government’s strategy to help cut the cost of living. He commented that fuel duty was 20% lower in real terms compared to March 2000, when it was at its peak.

If we had continued with the policies of the previous government, quite simply prices would be higher, fuel would be 10p more expensive per litre. I know some will call for a further freeze in fuel duty today. I can assure them this government understands the financial pressures hard-working families are facing. Subject to the constraints of the public finances, this government is determined to help families with the cost of living.

A key economic question to consider is why is fuel one of the products that is frequently taxed? When a tax is imposed on a product, its price will rise and as the law of demand tells us, this will cause people to purchase less of it. But, what is so special about petrol? Why do people continue to purchase petrol even when its price rises? The following articles consider the concerns surrounding the 3p fuel duty rise.

Treasury to defer planned increase in fuel duty The Guardian, Nicholas Watt (13/11/12)
Asda chief Andy Clarke urges scrapping fuel duty rise BBC News (15/11/12)
Fuel Duty: Labour to force vote to delay 3p rise The Guardian, Helene Mulholland (12/11/12)
Fuel duty delay called for by Which? BBC News (11/11/12)
Fuel Duty: Government may still axe increase Sky News (13/11/12)
Chancellor heads off fuel duty rebellion Financial Times, George Parker (12/11/12)
Osborne pressed to shelve fuel duty rise Financial Times, George Parker (8/11/12)
Planned 3p petrol increase could be abandonedThe Telegraph, Christopher Hope (11/11/12)

Questions

  1. Why is petrol a good that is taxed so heavily?
  2. Illustrate the impact of a tax on petrol using a demand and supply diagram. Explain what happens to the equilibrium price and quantity.
  3. Which factors will make the change in price and quantity relatively larger or smaller? Think about how elasticity is relevant here.
  4. What other factors have contributed towards the increased cost of living over the past few years?
  5. Which factors in particular would make a January rise in fuel duty especially painful for many families?
  6. What are the arguments both for and against delaying the 3p rise in duty?
  7. According to the Economic Secretary to the Treasury, fuel duty is 20% lower in real terms. What does this actually mean?

The problem of obesity and healthy eating is a growing problem in many countries and governments have long been looking into designing policy to tackle this issue.

Some have gone for healthy eating campaigns and policies to encourage pregnant women to eat better, but one government took it a step further and introduced a Fat Tax. In October 2011, the Danish government introduced a tax on foods that are high in saturated fat in a bid to reduce consumption of these goods. However, this policy is now to be abolished.

The Fat Tax introduced by the government imposed a surcharge on foods that contained more than 2.3% saturated fat. Numerous products were affected, including meats, dairy and as expected – processed foods. The policy was criticised by scientists who said that saturated fat was the wrong target and perhaps they were proved right, but the government’s u-turn, which will now see the tax being abolished. The tax had gradually increased food prices throughout the country and authorities said that it had even put Danish jobs at risk.

With food prices much higher in Denmark with the tax, consumers switched from buying domestically produced goods to crossing the border into Germany and purchasing their cheaper food. This undoubtedly had an adverse effect on the Danish economy, as it represented a cut in consumer expenditure. Perhaps it also helps to explain Germany’s strong economy – it was feeding 2 nations! The Danish tax ministry said:

‘The fat tax and the extension of the chocolate tax — the so-called sugar tax — has been criticised for increasing prices for consumers, increasing companies’ administrative costs and putting Danish jobs at risk … At the same time it is believed that the fat tax has, to a lesser extent, contributed to Danes travelling across the border to make purchases … Against this background, the government and the (far-left) Red Green Party have agreed to abolish the fat tax and cancel the planned sugar tax’

Once the tax is abolished, other policies will need implementing to tackle the problem of obesity and encourage healthy eating, as it continues to be a big problem in this and many other countries. The following articles consider this problem.

Denmark to scrap world’s first fat tax Associated Press (10/11/12)
Denmark to abolish tax on high-fat foods BBC News (10/11/12)
Fat tax repealed The Copenhagen Post (10/11/12)
Businesses call fat tax a failure on all fronts The Copenhagen Post, Ray Weaver (10/11/12)

Questions

  1. Illustrate the effect of a tax being imposed on a diagram. What happens to equilibrium price and quantity?
  2. According to Danish authorities, consumers didn’t change their consumption habits with the tax. What does this suggest about the PED of these products?
  3. How does the amount of tax revenue generated vary with the price elasticity of demand and supply?
  4. What other policies could be implemented to encourage healthy eating?
  5. Why did this fat tax lead to higher food prices?
  6. Explain the way in which such a tax could adversely affect the Danish economy. Does this justify its removal?