Here’s an exciting bit of news. Lake Eyre in South Australia is filling and the Lake Eyre Yacht Club’s sailing regatta started on 5 July. So what, you may ask! Well, Lake Eyre is in the middle of one of the driest deserts in the world. It virtually never rains there and most of the time, the ‘lake’ is one huge dry salt pan.
But just a few times per century, the rainfall many kilometres away is heavy enough to fill the dry river beds of Cooper Creek, Finke River, Georgina River and Diamantina River. These ‘rivers’ drain about one sixth of the whole of Australia (about the size of Germany, France, Italy combined) – but a sixth where rainfall is normally very low. But this season’s rains have been exceptionally high; the rivers are flowing – and the lake is filling.
When the lake does fill, it teems with life. Fish eggs that have lain buried in the salt for years hatch. Sea birds fly in nearly 1000 kilometres from the Southern Ocean. And it’s then that the enthusiasts come to play.
What’s this got to do with economics? Well economics is about scarcity and choice. Many of the choices we make are not simple buying and selling choices. Many clubs and other organisations thrive on the enthusiasm of their members. They’re not there to make money but certainly add to people’s ‘utility’. And enthusiasm, and hope, is what the members of the Lake Eyre Yacht Club have in abundance. Let’s hope they get lots of utility from sailing in the desert over the coming weeks.
Articles
Outback Sailors 10 News (6/7/10)
Floods and boat race brings life to desert lake ABC News (7/7/10)
Flightseeing Lake Eyre Stuff.co.nz, James Shrimpton (25/5/10)
Gone (not fishing) flying over Lake Eyre Australian Daily Telegraph, Maralyn Parker (6/6/10)
The Lake Eyre Yacht Club Lounge of the Lab Lemming, Chuck Magee (21/3/10)
Lake Eyre Regatta ExplorOz, The Landy blog (14/6/10)
Boom follows boom in the Lake Eyre Basin ABC Western Queensland, Julia Harris (23/3/10)
Entries flood in for rare outback regatta ABC News (23/6/10)
Yacht club sails into history with a desert regatta The Age (7/7/10)
Chasing water to Lake Eyre ABC Rural, Caitlyn Gribbin (6/7/10)
Lake Eyre brims with life ABC News, Paul Lockyer (15/6/10)
Yachting regatta in Australian desert for first time in 20 years Telegraph, Bonnie Malkin (7/7/10)
Plain sailing for desert regatta Gulf Times (7/7/10)
Information sites
Lake Eyre Yacht Club
Current Lake Status Lake Eyre Yacht Club
Lake Eyre Wikipedia
Lake Eyre Rita’s Outback Guide
Questions
- What attitude do the members of Lake Eyre Yacht Club have towards risk and uncertainty?
- How would you set about estimating the consumer surplus that members are likely to gain from attending the regatta and sailing on the lake?
- How price elastic would you expect the demand for and supply of services to be, such as ferry crossings and accommodation?
- What business opportunities are likely to be associated with sailing on the lake? Would it be ‘rational’ to set up such a business?
As the news from the Gulf of Mexico goes from very bad to even worse, so BP is increasingly coming under the international spotlight for its approach to risk management and safety. Was it sufficiently cautious? Could the accident on April 20 that killed 11 men and has been gushing some 800,000 gallons per day of crude oil into the sea have been averted? When the consequences of a pipe rupture are so catastrophic, is ‘catastrophic risk’ appropriately priced? As Tony Hayward, BP’s Chief Executive, told the Financial Times (see links below): “It was ‘an entirely fair criticism’ to say the company had not been fully prepared for a deep-water oil leak.”
One insight into BP’s approach to risk has come to light with the leaking of a 2002 memo from BP on how human life ought to be valued in any cost–benefit analysis of a project. As the Chicagoist summarises the memo:
A two page document prepared by risk managers in 2002 titled “Cost benefit analysis of three little pigs” shows the type of thinking BP put into risk assessment. The memo shows, in cartoonish fashion, that blast resistant trailers for BP’s workers weren’t necessary, because the cost was too high. In 2005, a refinery caught fire, killing 15 and injuring 170 people.
So how should catastrophic risk be taken into account? What does a company do when the probability of a disaster is extremely low and yet the costs of such a disaster, were it to occur, are extremely high?
BP’s Shocking Memo The Daily Beast, Rick Outzen (25/5/10)
Old BP document calculates worth of human life with “Three Little Pigs” diagram Yahoo News, Brett Michael Dykes (25/5/10)
Industry can cut accident risks, says BP chief Financial Times, Ed Crooks and Edward Luce (2/6/10)
BP ‘not prepared’ for deep-water spill Financial Times, Ed Crooks (2/6/10)
The BP Oil Spill’s Lessons for Regulation Project Syndicate, Kenneth Rogoff (1/6/10)
US oil firms ‘unprepared’ for major offshore disaster BBC News (15/6/10)
Questions
- What is meant by catastrophic risk?
- Why is it difficult to put an accurate valuation on outcomes with a very low probability of occurrence?
- Explain the table entitled “Cost benefit analysis of three little pigs” in the Rick Outzen blog.
- How should human life be valued?
- What value should be put on a serious injury (of a particular type)?
- Should BP (or any other company, for that matter) ever conduct operations that risk human life? Explain your answer.
- On what basis should BP have decided whether or not to install a $500,000 acoustic trigger that could have shut off the well when the blowout protector failed?
- How is the existence of environmental externalities relevant to BP’s decisions on safety?
Russia is now ranked alongside Zimbabwe on the worldwide corruption index, despite the fact that the Russian authorities have been doing their best to tackle it. The Russian bribery ‘industry’ is worth some $300 billion per year and those who can be bought include several government officials.
The Russian economy is in much need of foreign investment, but the growing world of bribery is deterring international businesses from investing in Russia. Not only will they face the costs of building and running the business, but they are also likely to face substantial costs in trying to get the paperwork through, as IKEA found. Having said that they would never resort to bribery, IKEA had to pay $4 million for investment in local infrastructure and donate a further $1 million for local government projects just to get the 300+ permits they needed to begin construction. This then led to further bribes and a number of lawsuits. For some companies, the delays caused by not paying a bribe may actually cost more than the bribe itself.
The following webcast and articles look at the case of IKEA and the push by foreign businesses to avoid the clutches of Russian bribery.
Webcast
Russian bribes culture hits international business BBC News (14/5/10)
Articles
Foreign firms pledge not to give bribes in Russia BBC News (21/4/10)
IKEA masters rules of Russian business The Moscow Times (14/5/10)
Russians are spending twice as much on bribes Prime Time Russia (13/5/10)
Data Source
Corruption Perceptions Index 2009 Transparency International 2009
Questions
- Why is Russia in need of significant foreign investment? How would it help the economy?
- Can we classify IKEA (or any other company that uses bribery) as a risk-lover? Explain your answer.
- If a foreign firm wants to invest in Russia, which type of expansion do you think would be the easiest and the least open to bribery?
- IKEA began building without the necessary permits, but then ‘the bureaucrats took advantage of the situation’. Was IKEA operating under conditions of risk or uncertainty?
- In the article ‘IKEA masters rules of business’, Lennart Dahlgren said: “If we had waited to receive them all, we would have lost years”. What economic concept is being referred to?
- To what extent is government intervention and international co-operation needed to tackle corruption in Russia?
Whilst the internet and technological developments provide massive opportunities, they also create problems. For some time now, newspapers have seen declining sales, as more and more information becomes available online. Type something into Google or any other search engine and you will typically find thousands of relevant articles, even if the story has only just broken. As revenue from newspaper sales falls, revenue has to be made somewhere else to continue investment in ‘frontline journalism’. The question is: where will this come from?
The Financial Times and News Corp’s Wall Street Journal charge readers for online access and we can expect this to become more common from May, when the Times and the Sunday Times launch their new websites, where users will be charged for access. Subscription to these online news articles will be £1 per day or £2 for weekly access. Whilst the Executives of the Times admit that they will lose many online readers, they hope that the relatively low price, combined with a differentiated product will be enough of an incentive to keep readers reading.
Critics of this strategy argue that this a high risk strategy, as there is so much information available online. Whilst the BBC does plan to curtail the scope of its website, the Times and Sunday Times will still face competition from them, as well as the Guardian, the Independent, Reuters, etc., all of whom currently do not charge for online access. However, if you value journalism, then surely it’s right that a price should be charged to read it. Only time will tell how successful a strategy this is likely to be and whether we can expect other online news sites to follow their example.
Times and Sunday Times websites to charge from June (including video) BBC News (26/3/10)
Murdoch to launch UK web paywall in June Financial Times, Tim Bradshaw (26/3/10)
Times and Sunday Times websites to start charging from June Guardian, Mercedes Bunz (26/3/09)
News Corp to charge for UK Times Online from June Reuters (26/3/10)
Murdoch-owned newspaper charges for content BBC News (14/1/10)
Questions
- Why have newspaper sales declined?
- How might estimates of elasticity have been used to make the decision to charge to view online articles?
- ’If people value journalism, they should pay for it.’ What key economic concepts are being considered within that statement?
- Why is charging for access to the Times Online viewed as a high-risk strategy?
- What are the advantages and disadvantages of this strategy? To what extent do you think it is likely that other newspapers will soon follow suit?
- Which consumers do you think will be most affected by this strategy?
- In what ways might non-pay sites gain from theTimes’ charging policy?
- Would you continue to read articles from the Times linked from this site if you had to pay to access them? If so, why? If not, why not? (We want to know!!)
The winter months traditionally see lower house sales and prices tend to remain steady or fall. However, house prices had continued to increase over Christmas, as the stamp duty holiday came to an end. In a bid to boost the housing market, the stamp duty threshold had been pushed up from £125,000 to £175,000 for just over a year. This seemed to work, as the housing market did rally throughout 2009 and in particular, in the final months of 2009. Mortgage approvals increased, as first-time buyers in particular tried to complete before stamp duty fell back to £125,000.
However, the end of this ‘holiday’, combined with the icy conditions experienced throughout the UK were contributing factors in the first decline in house prices in about 9 months. According to Halifax, house prices in February fell by 1.5%. House prices are still higher that they were 9 months ago, but the upward momentum they did have, has now taken a dive. Mortgage lending was also down in January by about 32%.
Another factor that has contributed to this downturn is the increased number of properties on the market. Throughout 2009, the number of properties for sale was relatively low and as such, ‘Sale agreed’ notices were appearing on properties within days of them being for sale. This imbalance between demand and supply is now beginning to even out. Is this downward trend merely a blip or does it spell further trouble for the UK economy?
Articles
Snow and end of stamp duty holiday leads to first property price decrease in the UK for nine months PropertyWire (1/3/10)
UK house prices see first fall since June, says Halifax BBC News (4/3/10)
Mortage lending slump prediction comes true as stamp duty returns Daily Mail Online (23/2/10)
House price ‘lose momentum’, says Nationwide BBC News (26/2/10)
Snow and tax send house prices down 1.5% (including video) Times Online, Francesca Steele (4/3/10)
UK house prices fall, snapping rally Telegraph (4/3/10)
House prices fall in February Guardian, Hilary Osborne (4/3/10)
Data
For the Halifax data, see
Halifax house Price Index, February 2010
See also Lloyds Banking Group Housing Research home page and in particular the Historical House price Data link
Questions
- What is stamp duty and how did an increase in the threshold aim to stimulate the housing market? Can this be illustrated diagramatically?
- Illustrate how house prices are determined using a demand and supply diagram.
- One factor that had caused house prices to rise was a lack of supply. Show this on your diagram. Are there any factors that make price fluctuations even more severe, following changes in the demand and supply of houses?
- Illustrate how the imbalance of demand and supply has begun to even out.
- Why is the state of the housing market such an important factor in determining the strength of the economy?
- How do interest rates affect the housing market? Think about the impact on mortgages. Why have mortgage approvals fallen?
- To what extent has the weather contributed to falling house prices?