A modern day hindrance is spam email clogging up your inbox with, for example, offers for cheap drugs or notifications that you will inherit enough money to retire to the Bahamas. A recent paper by Justin Rao and David Reiley in the Journal of Economic Perspectives investigates the economics of spam mail (which, as I discovered, from the article gets it’s name from a Monty Python sketch). Remarkably, they quote figures suggesting that 88% of worldwide email traffic is spam. Their paper then provides a number of interesting insights into the business of spam mail.
First, given that most recipients simply delete it, why is spam mail sent out? For the benefits of sending it to exceed the costs, it must be that somebody is reading and responding to it and the costs must also be reasonably low. Rao and Reiley are able to quantify these costs and benefits. They estimate that if 8.3 million spam emails are sent, only 1.8% (approximately 150,000) will reach the intended recipients’ inboxes, with the remainder being blocked or filtered out. Of these 150,000, just 0.25% (375) are clicked on. Furthermore, these 375 clicks generate just a single sale of the advertised product which is typically sold for around $50. Assuming that free entry of spammers leads to them earning zero economic profit, this means that it costs the spammers around $50 to send the 8.3 million emails.
Second, spam mail clearly imposes a considerable negative externality on society. This includes wasted time for consumers and the costs of the extra server hardware capacity required. Rao and Reiley are also able to quantify the size of the negative externality created. First, they estimate that:
“American firms and consumers experience costs of almost $20 billion annually due to spam.”
This can then be compared to the benefits senders of spam get:
“….. we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the ‘externality ratio’ of external costs to internal benefits for spam is around 100:1.”
They then compare this to estimates for other negative externalities such as car pollution and conclude that the size of the negative externality from spam is significantly greater.
Finally, they also point out that it is predominantly the larger email service providers i.e. Yahoo! Mail, Microsoft Hotmail, and Google Gmail who have both the incentives and resources to fund interventions to eradicate spam. For example, in 2009 Microsoft and Pfizer (the manufacturer of Viagra which faces competition from counterfeit versions often advertised by spam) financially supported the successful operation to shut down the largest spam distributor. Clearly, such operations have large positive spillovers for email users. However, as they also discuss, anti-spam technology also increases the fixed costs of competing as an email provider and they suggest that this has contributed to the increased concentration in the market.
The unpalatable business of spam The undercover economist, Tim Harford (19/07/12)
Huge spam botnet Grum is taken out by security researchers BBC News (19/07/12)
Spammers make a combined $200 million a year while costing society $20 billion BGR, Dan Graziano (28/08/12)
Questions
- Explain why free entry results in zero economic profit.
- Explain how an increase in fixed costs can lead to an increase in concentration.
- Why does Microsoft have large incentives to eradicate spam mail?
- In what ways does the externality created by spam mail differ from other forms of advertising?
- How might government policies alter the costs and benefits of sending spam mail?
Original post
As a resident of Bristol it is with considerable interest that I’m following the development of the Bristol pound, due for launch in September 2012. One Bristol pound will be worth one pound sterling.
The new currency will be issued in denominations of £1, £5, £10 and £20 and there is a local competition to design the notes. Participating local traders will open accounts with Bristol Credit Union, which will administer the scheme. It has FSA backing and so all deposits will be guaranteed up to £85,000.
The idea of a local currency is not new. There are already local currencies in Stroud in Gloucestershire, Totnes in Devon, Lewes in East Sussex and Brixton in south London. The Bristol scheme, however, is the first to be introduced on a city-wide scale. The administrators are keen that use of the currency should be as easy as possible; people will be able to open accounts with Bristol Credit Union, pay bills online and pay shopkeepers by mobile phone text message (a system used in many countries, but not in the UK).
As the money has to be spent locally, the aim is to help local business, of which more han 100 have already signed up to the scheme. Bristol has a large number of independent traders – in fact, the road where I live is off the Gloucester Road, which has the largest number of independent traders on one street in the UK. The organisers of the Bristol pound are determined to preserve the diversity of shops and prevent Bristol from becoming a ‘clone town’, with high streets full of chain stores.
But how likely is the scheme to encourage people to shop in independent shops and deal with local traders? Will the scheme take off, or will it fizzle out? What are its downsides?
Update
The Bristol pound was duly launched on September 19 and there has been much local interest. The later videos and articles below look at reactions to the new currency and at its chances of success in driving local business.
Videos and webcasts
The town printing its own currency [Stroud] BBC News, Tim Muffett (22/3/10)
Brixton launches its own currency BBC News (17/9/09)
Local currency BBC Politics Show (30/3/09)
Local currency for Lewes BBC News, Rob Pittam (13/5/08)
The Totnes Pound transitionculture.org on YouTube, Clive Ardagh (21/1/09)
Local Currencies – Replacing Scarcity with Trust Peak Moment on YouTube, Francis Ayley (8/2/07)
Videos and webcasts: update
Bristol Pound Launches ITV News, West, Tanya Mercer (19/9/12)
Can Bristol Pound boost local trade? BBC News, West, Jon Kay (19/9/12)
The Bristol Pound BristolPound on YouTube, Chris Sunderland (11/6/12)
Bristol Pound feature on BBC1 Inside Out BBC One in the West on YouTube, Dave Harvey (30/6/12)
Bristol Pound launched to keep trade in the city BBC News, Dave Harvey (19/9/12)
Bristol pound launched to boost local businesses BBC Radio 5 Live, Ciaran Mundy (19/9/12)
Articles
The Bristol Pound set to become a flagship for local enterprise The Random Fact, Thomas Foss (7/2/12)
What is the point of local currency? The Telegraph, Rosie Murray-West (7/2/12)
The Bristol pound: will it save the (local) economy? Management Today, Emma Haslett (6/2/12)
‘Bristol Pound’ currency to boost independent traders BBC News Bristol, Dave Harvey (6/2/12)
We don’t want to be part of ‘clone town Britain’: City launches its own currency to keep money local Mail Online, Tom Kelly (6/2/12)
British Town Prepares To Launch Its Own Currency — Here’s How That’s Going To End Business Insider, Macro Man (7/2/12)
They don’t just shop local in Totnes – they have their very own currency Independent, Rob Sharp (1/5/08)
Articles: update
Bristol banks on alternative pound to safeguard independent retailers Guardian, Steven Morris (21/9/12)
Bristol launches city’s local currency The Telegraph, Rachel Cooper (19/9/12)
The Bristol Pound is launched to help independent retailers Independent, Rob Hastings (20/9/12)
Banknotes, local currencies and central bank objectives Bank of England Quarterly Bulletin (Q4/2013)
Bristol Pound official site
Bristol Pound: Our City, Our Money Bristol Pound
Questions
- What are the advantages of having a local currency?
- What are the dangers in operating a local currency?
- What steps can be taken to avoid the dangers?
- Can Bristol pounds be ‘created’ by Bristol Credit Union? Could the process be inflationary?
- What market failures are there in the pattern of shops in towns and cities? To what extent is the growth of supermarkets in towns and the growth of out-of-town shopping malls a result of market failures or simply of consumer preferences?
- Are local currencies only for idealists?
- What benefits are there for shoppers in Bristol of using Bristol pounds?
Rail companies will be permitted to raise average regulated rail fares next year by 6.2%. Not surprisingly, this has been met with dismay and anger by rail travellers, especially long-distance commuters, who could see their annual season tickets going up by several hundred pounds.
Some fares, such as advance tickets, are unregulated. Others, such as anytime, off-peak and season tickets, are regulated by the government. The formula for working out permitted price rises for regulated fares is RPI plus 3%, where RPI is the July annual inflation rate based on the retail price index.
The RPI figure was announced by the ONS on 14 August and was a surprisingly high 3.2% – up from 2.8% in June: see Table 21 in the ONS’s CPI And RPI Reference Tables, July 2012. (Click here for a PowerPoint of the chart on the left.) Hence average fares can rise by 3.2% + 3% = 6.2%.
Rail travellers are angry on three counts:
First, the RPI measure of inflation is generally around 0.5% higher than the CPI measure (which is used for working out public-sector pay increases and the uprating of pensions and benefits). The July figure for CPI inflation was 2.6%.
Second, the extra 3% added on top of RPI means that that rail fares are going up more rapidly than other prices, and incomes too. The reason given for this is to shift the burden of funding the railways from the taxpayer to the traveller.
Third, the formula applies to average fares. Rail companies can raise particular regulated fares by up to 5 percentage points more than the formula provided they raise other fares by less than the formula. Thus some fares are set to rise by 11.2% – including some of the most expensive season tickets.
The government justified the increases by arguing that the higher fares will allow more investment by the rail companies, which could result in lower costs in the future. Nevertheless, two thirds of the revenue from the above-inflation increases will go to the government and only one third to the rail companies.
Webcasts
Inflation shock as rail fares set to soar Channel 4 News, Ciaran Jenkins (14/8/12)
Protests as rail fare price rises announced The Telegraph (14/8/12)
How do our rail fares compare with the rest of Europe? BBC News (14/8/12)
Rail fare increase will make life better, says minister BBC News (14/8/12)
Passenger Focus: Train companies ‘using dark arts’ BBC News, David Sidebottom (14/8/12)
Articles
Rail fares set to increase by 6.2% Financial Times, Mark Odell (14/8/12)
Rail fares set to rise by 6.2% in January Guardian, Gwyn Topham (14/8/12)
Rail fare hike of 6.2% sparks angry reaction BBC News (14/8/12)
Soaring rail fares will do nothing for the recovery The Telegraph (14/8/12)
Commuters plead with Osborne to prevent 10 per cent rise in rail fares Independent, Oliver Wright (15/8/12)
Rail fare rises: how to keep your ticket prices as low as possible Guardian, Mark King (14/8/12)
Documents and information
Fares Review Conclusions 2003 Strategic Rail Authority (June 2003)
Fares Office of Rail Regulation
Fares on National Rail Association of Train Operating Companies
Questions
- What are the arguments for and against the general principle of using an RPI+X formula for regulating rail fares?
- What are the arguments for and against allowing train operating companies to raise regulated rail fares by an average of RPI plus 3%, with 2 of the 3 percent above RPI inflation going to the government?
- In what ways are travellers likely to respond to the higher prices?
- Why are some travellers likely to have a much lower price elasticity of demand for rail travel than others? What determines this price elasticity of demand?
- What externalities exist in rail transport? How should this impact on the government’s rail pricing strategy?
- How is infrastructure development funded for (a) rail, (b) roads and (c) airports? Does this lead to an efficient allocation of transport investment?
- How does rail pricing in the UK compare with that in other European countries? Should other European countries follow the UK’s policy of above inflation fare increases to fund rail investment?
A campaign to introduce a tax on disposable plastic bags in England has been launched by various pressure groups, including The Campaign to Protect Rural England (CPRE), Keep Britain Tidy, the Marine Conservation Society and Surfers Against Sewage. Plastic bags, they maintain, litter streets and the countryside and pollute the seas, where they cause considerable damage to marine life.
They propose a tax of 5p per bag, which would be passed on to consumers. Such a levy has already been introduced in Wales in October 2011. As a result, plastic bag use in Wales has dropped dramatically (see also the full report from the Welsh Government). The Scottish Government and the Northern Ireland Assembly are also planning introducing similar charges.
Many other governments have introduced taxes, charges or bans on plastic bags and many more are considering introducing such measures. Ireland introduced a 15 euro cent charge on single-use plastic bags as far back as 2002 and saw a 94% reduction in plastic bag use (328 per person per year to 21). The charge was raised to 22 euro cents in 2007 after bag use rose to 30 per person.
Other countries have banned plastic bags altogether: some, such as Rwanda and Somalia have banned all plastic bags; others, such as China and South Africa have banned very thin bags; others, such as Italy, have banned non-biodegradable ones.
In the USA, various states or districts have introduced levies and in the EU, where more than four billion bags are thrown away each year, the European Commission will soon publish proposals for limiting the use of plastic bags.
So what are the arguments for limiting the use of plastic bags? Why is it not enough to leave things simply to the market? And if the use of plastic bags is to be reduced, what’s the most efficient way of doing so? Are there any problems with alternatives to plastic bags? The following articles and reports consider these questions?
Articles
England urged to pick up Wales’ plastic bag levy businessGreen, Jessica Shankleman (1/8/12)
Wales’ plastic bag charge yields massive green savings businessGreen, Jessica Shankleman (5/7/12)
Supermarkets ‘should charge £1 a bag’ BBC Today Programme, Samantha Harding and Judith Holder (2/8/12)
Environmentalists team up to push for bag tax in England Plastics News, Anthony Clark (1/8/12)
Break the Bag Habit Keep Britain Tidy (1/8/12)
Plastic bag use ‘up for second year running’ Guardian, Rebecca Smithers (5/7/12)
Plastic bag use in Wales plummets due to 5p charge, figures show Guardian, Adam Vaughan (4/7/12)
Carrier bag charge ‘effective and popular’ figures reveal ITV News (4/7/12)
What should be done about plastic bags? BBC News Magazine, Chris Summers (19/3/12)
Irish bag tax hailed success BBC News, Chris Summers (20/8/02)
The Big Fix The Math Behind Sacking Disposable Bags Atlantic Cities, Nate Berg (26/9/11)
Fremantle moves to ban plastic bags ABC News, Lucy Martin (23/7/12)
Bans Plastic Bag Ban Report, Ted Duboise (updated)
Vote With Your Dollars, and Also Vote New York Times, Gernot Wagner (30/7/12)
Reports
Evaluation Of The Introduction Of The Single-Use Carrier Bag Charge In Wales: Attitude Change And Behavioural Spillover, Wouter Poortinga, Lorraine Whitmarsh and Christine Suffolk Report to Welsh Government by Cardiff University (June 2012)
Life cycle assessment of supermarket carrierbags: a review of the bags available in 2006 Environment Agency, Joanna Marchant (25/7/11)
Stakeholder consultation on options to reduce the use of plastic carrier bags … EC Environment (19/3/12)
Questions
- Draw a diagram demonstrating the externalities involved in the use of plastic bags. Show the marginal private and social costs and benefits and the socially efficient level of consumption.
- How would you set about establishing the amount of consumer surplus from the use of plastic bags at a zero price?
- Compare the relative social efficiency of a tax on plastic bags with a ban on plastic bags.
- Would education be an effective alternative to taxing plastic bags?
- Why might it be difficult to get supermarkets and other retailers to agree to a voluntary ban on giving out free plastic bags?
- Why might it be extremely difficult in practice to establish the socially efficient price for plastic bags?
The 2012 London Olympics opened on 27 July. This has been the result of years of planning and investment in infrastructure since London won the bid in 2005.
It is estimated that hosting the Games will have cost over £9bn. It is therefore interesting to consider the long-run impact on a host city years after the last medal has been won. We might expect host cities to achieve increased growth due to the benefits from the improved infrastructure and the impact of increased publicity and exposure on trade, capital and population.
This has recently been investigated in a paper published in the Economic Inquiry by Stephen Billings and James Holladay which looks at the impact hosting the Games has on GDP and trade (working paper available here). One difficulty with trying to identify the impact of hosting the Games, is that only certain cities will have a chance of being chosen as hosts and these may be cities that are more likely to experience future growth. If this is the case, it would appear that the future growth was due to hosting the Games when it would in fact have been likely to occur anyway. In order to control for this, the above paper compares the winners with losing finalists in the selection process for host cities. For example under this approach London would be compared with Singapore, Moscow, New York and Madrid. In addition, subsequent matching processes are also used to select appropriate cities for comparison.
They find that larger cities in wealthier countries are more likely to be chosen to host the Games. However, once comparisons with other appropriate cities are made, overall, they find that hosting the Games has no effect on a cities population, growth or trade. One explanation provided is that the intense competition to host the Games means the potential gains are competed away via escalated promises in order to increase a cities chances of being selected. In addition, they note that there may well still be considerable specific benefits from the investments made to host the Games.
It is also clear that there are both positive and negative externalities from hosting the Games that, whilst difficult to measure, ideally should be taken into account. On the negative side, these include the extra hassle anybody travelling to work in London during the Games will face. On the other hand, on the positive side, it is hoped that part of the long-run legacy of the Games will be increased interest and participation in sport which would result in substantial health benefits.
David Cameron claims London 2012 will bring £13bn ‘gold for Britain’ The Guardian, Hélène Mulholland (05/07/12)
Olympic legacy: how the six Olympic boroughs compare for children The Guardian, Simon Rodgers (19/07/12)
London 2012: Olympics legacy hard to define BBC News, David Bond (13/07/12)
Questions
- Explain how intense competition to host the Games might result in benefits being competed away.
- Can you think of any other externalities resulting from the Olympic Games?
- Why are the impact of externalities difficult to measure?
- What other factors should be taken into account when assessing the costs and benefits of hosting the Games?
- Do you think the decision to bid to host the Games should be purely based on a cost-benefit analysis?
