A huge majority of the British population are in agreement on one thing: UK drinking is out of control. At a cost to the NHS of over £2 billion per annum, it’s quite obvious that the current ‘binge drinking’ culture is unsustainable for those doing the drinking and for the NHS.
This issue was raised back in January 2010, when the Labour government came under pressure to impose a minimum price on alcohol. (see All-you-can-drink bans) The report published in early January suggested that a minimum price on alcohol of 50p per unit would save more than 3000 lives per year. Dr. Richard Taylor said:
“The evidence we took showed that minimum pricing was the most effective way forward and at the moment you can sometimes buy beer cheaper than water. Our message is that the price would be put up but only by a little for moderate drinkers. Surely that is a sacrifice to pay for the good health of young people.”
The Coalition’s plan is to introduce a minimum price for alcohol, which would increase the price of a can of lager to a minimum of 38p and a litre bottle of vodka would be a minimum of £10.71. By increasing the price of alcohol, it is hoped that demand will be reduced and this will go some way to tackling the problem of binge drinking.
However, many argue that the proposal will be ineffective. Some believe that the minimum price is not high enough and that such a small increase will have no effect. Others argue that it will only affect small supermarkets and will have a significantly adverse effect on pubs, which are already struggling. Furthermore, a concern is that by raising the price of alcohol, the only people who will suffer are the so-called ‘sensible’ drinkers. Those who go out and binge drink will be largely unresponsive to the higher price.
Articles
How can raising the price of alcohol improve health BBC News, Michelle Roberts (18/1/11)
Pub association responds to alcohol minimum price BBC News (18/1/11)
SNP refuses Britain-wide alcohol minimum price Telegraph, Simon Johnson (19/1/11)
Experts say the new minimum prices on alcohol sales are not enough Wales Online, Abby Alford (19/1/11)
UK drinking ‘is out of control’, two thirds of public believe Guardian, Alan Travis (18/1/11)
Alcohol price plans will only save 21 lives per year, says expert Telegraph, Tom Whitehead (19/1/11)
Supermarkets forced to charge ‘minimum price’ for alcohol in bid to curb binge drinking Mirror News, James Lyons (18/1/11)
Report
Alcohol House of Commons Health Committee (10/12/09)
Questions
- Using a diagram, explain how a minimum price control on alcohol will work. What are the likely effects?
- Which factors will determine the effectiveness of the minimum price?
- Why is it that ‘binge drinkers’ may not be responsive to the higher price?
- The Mirror article refers to ‘loss leaders’. What are they and how are they relevant here?
- What other policies could be used to tackle binge drinking?
- Given that taxes on products such as alcohol and cigarettes raise so much tax revenue for the government, would there be an adverse effect by raising the minimum price on alcohol?
- Why is the current drinking culture unsustainable?
- Is alcohol a de-merit good? Why is it an example of market failure?
One of the interesting things about the recent recession was the dilemma that it posed for governments. As aggregate demand fell, unemployment rose, incomes fell, which reduced demand further and so national output began to decline. Obviously there were many other factors contributing to this decline, in particular the housing market, but the long and the short of it is, aggregate demand was falling. With the AD curve shifting inwards, we would expect the average price level to fall at the same time: i.e. inflation doesn’t tend to be much of a problem during a recession. It is this fact that posed something of a dilemma. In the recession, not only was aggregate demand low, but inflation was rising. The explanation for this: in large part due to rising commodity prices – a supply-side shock. Governments had to deal with low national output and inflation: this combination made policy changes much more complex.
While prices for many goods and commodities did fall significantly after their peak in 2008, there has been a gradual rise again and there seems to be no end in sight. Headline food prices, in particular, have increased almost to their 2008 levels, although in real terms prices are still lower. Onions in India; cabbage, pork and mackerel in South Korea; chillies in Indonesia – the list goes on. The rapidly rising prices of these basic foodstuffs has, in many cases, led to emergency government intervention. However, there are fewer concerns this time round, as many hope that the causes of these higher prices are not just the increases in demand but crucially temporary supply shocks. Bloomberg’s Businessweek Assistant Managing Editor, Sheelah Kolhatkar, said:
There are a lot of reasons [for rising prices]. Weather is cited as a big one. There’s been sort of freak weather in different parts of the world. Russia experienced a drought. There are floods in Australia. There’s been sort of freezing weather in Florida. Our own Midwest experienced flooding earlier this year. And because the market for a lot of these food commodities is global, when something strange happens somewhere, that can affect a crop.
On the other hand, there are growing concerns at the timing of this inflation: the developed world has barely escaped from recession. How is it that inflation can already be a problem? Furthermore, with loose monetary policy in many countries, rising food and commodity prices could continue for some time.
An interesting question to consider is which countries will be affected the most? In Britain, like other developed countries, food consumption accounts for between 15 and 20 per cent of a household budget. However, in developing countries, food can take up between 50 and 75 per cent of a houshold budget, so any rise in food prices is disastrous.
What does it mean for the recovery? Well, if food (a necessity) is increasing in price, households have little choice but to pay the higher prices. This means they have less disposable income for other goods, hence aggregate demand may be adversely affected. The following articles will hopefully give you some ‘food for thought’!
Articles
Soaring food prices cast shadow over trading Financial Times, Dave Shellock (14/1/11)
Next shock will be high food prices Sydney Morning Herald (17/1/11)
Commodities can still shock BBC News blogs, Stephanomics, Stephanie Flanders (13/1/11)
Many countries face catastrophe as inflation creeps up the food chain Independent, Hamish McRae (16/1/11)
Soaring demand soaks food oil reserves Sydney Morning Herald, Luzi Ann Javier (17/1/11)
Government to subsidise essential food items Sunday Observer, Gammi Warushamana (16/1/11)
Brace for higher food prices Jamaica Observer, Julia Richardson (16/1/11)
Jordanians protest against soaring food prices Guardian, Johnny McDevitt (15/1/11)
Inflation, the old enemy, is back. But this is no time to be frightened Guardian, Larry Elliott (16/1/11)
Global effort to calm food prices Washington Post, Steve Mufson (15/1/11)
The link between commodity prices and Monetary Policy Seeking Alpha (14/1/11)
Australian floods bost commodity prices, shares and funds Telegraph, Ian Cowie (13/1/11)
Soaring cost of oil and food will result in turmoil Belfast Telegraph Hamish McRae (18/1/11)
Q&A: Why food prices and fuel costs are going up BBC News (14/1/11)
Data
Commodity Prices Index Mundi
Questions
- What is the difference between headline food prices and real prices?
- What are the demand-side factors causing food prices to increase?
- What factors have affected the supply-side of the food market? Use a diagram to illustrate both the demand and supply-side factors.
- Can you identify some of the key differences between the causes of the rising food prices in 2008 and the rising food prices we’re seeing at the moment?
- Who are the winners and losers of rising food prices?
- What methods of government intervention are available to stabilise prices? Are they likely to be efficient and equitable?
- How is the exchange rate affecting food prices?
- Why could a loose monetary policy make food price inflation even worse?
- What are the main consequences of rising food and commodity prices? Think about the impact on different groups within society.
Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.
The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.
A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)
Questions
- Identify the increasing barriers to entry as you work up the art market pyramid.
- Are there any other market imperfections in the art market that you can identify from the diagram?
- What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
- Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
- How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?
For most people, buying a new car is a luxury and in times of hardship it is a luxury that many cannot afford. Sales of new cars did grow during 2010 by 1.8% compared to the previous year, although the end of the car scrappage scheme in March 2010 did see a fall in sales. Sales went from being 19.9 per cent up on 2009 in the first half of the year, to being 13.8 per cent down for the remainder of 2010. On top of this, they are predicted to fall by some 5% over the coming 12 months.
Part of the explanation of this trend is the VAT rise. While an extra 2.5% is hardly noticeable on many every day items (as we saw when VAT was reduced to 15%), it will have a much larger effect on more expensive items, such as cars.
It was expected that people thinking of buying a new car would try to beat the VAT rise and so car firms hoped for a surge in sales during December. However, this did not occur and with VAT at 20% during 2011, car prices will rise: a £15,000 car will cost an extra £320. Another contributing factor to the lower than expected sales in December was the snow. Retail sales in December collapsed by 37.5%, where as fleet sales, which are less likely to be affected by the adverse weather rose by 5.1%. Similar patterns were seen in Spain, Italy and France, but in Germany sales were up by 7% on the year from December 2009.
The good news for the UK car industry is that the second half of 2011 is expected to see growth, so there may be some recovery. Furthermore, UK-built cars have seen a rise in sales – up by 17%. Finally, as petrol prices continue to rise, it is hoped that this might encourage people to trade in their less efficient old cars for more fuel-efficient new cars. This will certainly be an industry to watch over the next few months.
Snow hits new car sales Telegraph, Graham Ruddick (8/1/11)
UK new car sales to fall in 2011, says industry BBC News (7/1/11)
Mixed end to the year for European car sales Independent (7/1/11)
Car sales set to stall? Daily Mirror, Clinton Manning (8/1/11)
UK new car sales rose 1.8pc in 2010 despite end of scrappage scheme Telegraph, Amy Wilson (7/1/11)
New car sales increased in 2010 Telegraph, Chris Knapman (7/1/11)
Car registrations fall 18% from year ago Financial Times, Norma Cohen (7/1/11)
Questions
- What type of tax is VAT? Illustrate the effect of such a tax on a diagram and explain why the higher the price of the good, the bigger the impact of the VAT rise. How might this impact inflation?
- Why are car sales expected to fall in the UK over the coming year? Given this expected trend, what might we expect to see in terms of car prices?
- What impact might rising petrol prices have on new car purchases? What figure would you expect to see for cross elasticity of demand?
- How might the expected decline in car sales affect the UK economy over the next 12 months?
- What type of market structure is the car industry? (Think about the characteristics of monopolistic competition and oligopoly.)
- How did the car scrappage scheme help car sales?
- What might explain the different trend seen in the German car industry?
This week has seen the publications of two sets of forecasts on the UK housing market in 2011. The first of these came from Rightmove. It is forecasting that house prices next year could fall by as much as 5%. The extent of the fall though is argued to dependent, in part, on any rise in the Bank of England’s base rate and the number of properties taken into possession by lenders. These two factors are, of course, linked because higher debt-servicing costs can contribute to repossessions as the affordability of mortgages decrease. An increase in what are termed ‘forced sales’ will add to Rightmove’s general expectation of over-supply of property.
Righmove are expecting considerable local variations in house prices as a result of local demand and supply conditions. This makes forecasting a national average house price change extraordinarily difficult. It argues that the extent to which potential buyers are credit-constrained or to which demand is ‘credit crunch resistant’ varies across the country. This coupled with variations in the amount of supply to local markets will contribute to considerable differences in house price movements with house prices being ‘underpinned’ in some markets.
Rightmove is expecting the number of properties coming on to the housing market in 2011 to be around 1.2 million, 10% lower than in 2010. However, it is expecting only around 600,000 transactions which is close to half the historic average.
The second set of housing market forecasts this week was published by the Council of Mortgage Lenders (CML). The CML is forecasting that low interest rates will help to underpin current house price values with ‘flat or modestly falling house prices’. They argue that that while recent house price weakness will persist they ‘do not foresee any sharp fall in prices’. The CML are not expecting large numbers of buyers to hold off from looking to buy, but acknowledge there is uncertainty about the availability and cost of mortgage funding.
One contributing factor to the uncertainty surrounding the quantity and price of mortgages is the end to the Bank of England’s Special Liquidity Scheme (SLS). The SLS allowed banks to swap for a period of up to 3 years financial assets, such as mortgage-backed securities (a security representing a claim on the cash flows from mortgage loans), for UK Treasury Bills (short-term government debt). The scheme was designed to provide the banking system with liquidity. The last swaps will expire in January 2012. The CML reports that currently about £130 billion needs to be repaid by banks. More generally, of course, financial institutions are likely in 2011 to continue repairing and rebalancing their balance sheets and this is likely to impact on their lending decisions.
We noted how the Rightmove house price forecast for 2011 was partly dependent on those forced sales arising from repossessions. The CML is expecting what it terms a ‘modest increase’ in the number of possessions from around 36,000 this year to 40,000 next year. The CML though expects the number of transactions in 2011 to be a little higher than Rightmove, albeit still historically low at around 860,000.
All in all, activity levels in the housing and mortgage markets in 2011 are expected to be relatively subdued. This coupled with the expectation that house prices will be lower in 2011 suggests a very sober outlook indeed for the UK housing market. Happy New Year!
Articles
Lenders forecast flat house prices Financial Times, Norma Cohen (14/12/10)
UK mortgage lending to fall to 30-year low Telegraph, Steven Swinford (15/12/10)
Repossessions to rise in 2011, lenders forecast BBC News (15/12/10)
Market freeze: Homes sold once in 20 years Sky News, Hazel Baker (15/12/10)
U.K. mortgage lending may decline by a third in 2011 as weakness persists Bloomberg, Scott Hamilton (15/12/10)
House prices fall faster as estate agent predicts worse to come Telegraph, Ian Cowie (13/12/10)
Home sellers warned to drop asking price by 5% if they want to find a buyer Daily Mail, Becky Barrow (13/12/10)
U.K. home sellers may cut prices by as much as 5% in 2011 after December drop Bloomberg, Scott Hamilton (13/12/10)
Housing market forecasts
Rightmove’s housing market forecasts can be found within the December 2010 edition of its House Price Index
Rightmove December 2010 House Price Index (13/12/10)
CML publishes 2011 market forecasts CML News and Views, Issue 24 (15/12/10)
Questions
- Compare and contrast the Rightmove and CML house price forecasts for 2011. How similar are the stories underpinning their forecasts?
- What do you understand by forced sales? Using a demand-supply diagram explore how an increase in properties taken into possession could impact on house prices in 2011.
- What do you think affordability means in the context of housing? How might we measure this?
- What factors do you think might impact on the price and availability of mortgage finance in 2011?
- What do you understand to be the purpose of the Bank of England’s Special Liquidity Scheme. Using a demand-supply diagram explore how the termination of the scheme early in 2012 could impact on house prices in 2011.
- What do you think Rightmove means by ‘credit crunch resistant’ housing demand?
- Can demand-supply analysis help to explain how house prices pressure could vary from one area to another? Explain your answer using appropriate diagrams.
A huge majority of the British population are in agreement on one thing: UK drinking is out of control. At a cost to the NHS of over £2 billion per annum, it’s quite obvious that the current ‘binge drinking’ culture is unsustainable for those doing the drinking and for the NHS.