When anyone buys assets – shares, a house, a car or whatever – one important consideration is their likely future value. But the future is uncertain. Your decision to buy, therefore, depends not just on the direct return of the asset (the rate of interest or the pleasure from using the asset) but also on your predictions about the future value of the asset and your attitudes to risk. But with the future of markets so uncertain, or at least the timing of market movements, what’s the best thing to do? The article below considers some of the issues.
The irrelevant future Investors Chronicle (6/4/09)
Questions
- Distinguish between ‘risk’ and ‘uncertainty’.
- What is meant by a ‘bear’ in the context of investing in shares? Explain why ‘intelligent bears’ would ‘leave some money in the market’.
- Faced with uncertainty, why might sticking to a simple ‘do nothing’ rule be the best policy?
- If capital markets were efficient in the strongest sense, where everyone has perfect information about the future, would people be able to make large returns on investing in shares and other assets?
The ‘tragedy of the commons’ refers to the overuse of common land. If people can freely graze their animals on such land and have no responsibility for maintaining it, then the land will be overused and everyone will suffer. The problem is that the benefit of using the land occurs to the individual whereas the cost is collectively incurred.
There are many modern examples of the tragedy of the commons and the articles below look at some of them. Perhaps surprisingly, not all cases of the use of common resources end in tragedy; some common resources are used sustainably. A more thorough analysis must involve deeper questions of human motivation and behaviour.
IT’s tragedy of the commons Datamation (IT Management) (8/4/09)
The Tragedy of the Commons TechFlash (7/4/09)
Encarta’s failure is no tragedy Guardian (7/4/09)
How Self-Interest Destroyed The Economy The Huffington Post (23/3/09)
What does The Pirate Bay ruling mean for the web? Telegraph (17/4/09)
Tragedy of the Commons The Manila Times (23/3/09)
Questions
- Explain how the tragedy of the commons arises and give some examples other than common grazing land.
- How and why does the tragedy of the commons occur in information technology? Consider the benefits and costs of the ‘fix’ to the problem advocated in the first linked article.
- Does the case of Wikipedia (see the third linked article) disprove the proposition that common resources will be overused?
- To what extent is free access to content (music, newspapers, videos, books, etc.) a tragedy of the commons? Is the only solution to devise an effective charging model that rewards content creators?
There has been much discussion recently on the use of fiscal policy to combat recession. What measures should be used? How effective will they be? How will the resulting large budget deficit be brought back into balance in the future?
But what are the microeconomic implications of all the tax changes? Are the changes fair? What implications do they have for incentives? Perhaps it’s time for a completely fresh look at the structure of our tax system – a system that has been changed piecemeal over the past years to meet short-term macroeconomic and political goals. Can it be redesigned to meet the two microeconomic goals of efficiency and equity? The following article looks at what form a redesigned tax structure might take.
Our tax system is a mess. But Darling has a chance to fix it. (Peter Wilby) Guardian (11/4/09)
Questions
- In what ways does the present tax system fail to meet the goals of (a) fairness through redistribution and (b) creating appropriate incentives?
- Explain what is meant by “The whole system has been framed by Tory thinking to assist social engineering, Tory style”.
- Provide a justification and critique of the reforms proposed in the article.
The first linked article below is from the American business magazine Forbes. It looks at the economics of football (‘soccer’) signings and, in particular, that of Robinho by Manchester City. In September 2008 the club was bought by an Abu Dhabi investment fund, controlled by Sheikh Mansour bin Zayed Al Nahyan, for £210 million. But does the investment in new players make good business sense?
Also, what should determine whether a club sells a player? The third link below considers this issue. The link is to the Embedding Threshold Concepts (ETC) site at Staffordshire University. ETC was funded by the Higher Education Funding Council for England’s Fund for the Development of Teaching and Learning (FDTL). The site has a number of teaching and learning resources.
City of Dreams Forbes (8/4/09)
Man City beat Chelsea to Robinho BBC Sport (1/9/08)
Selling footballers: the economic viewpoint ETC reflective exercise
Questions
- Was it consistent with the goal of profit maximisation for Manchester City pay Real Madrid £32.5 million for Robinho? Was it consistent with the goal of profit maximisation for Real Madrid to sell him?
- If Real Madrid had decided to keep Robinho, how would you estimate the cost of doing so?
- What difficulties are there in developing Manchester City into a ‘global brand’?
- In what sense are the top Premier League clubs a ‘self-perpetuating oligopoly’?
The recession of the past few months has taken its toll on organic farmers. Until recently, the industry was booming as consumers switched to products perceived as greener, healthier and more ethically produced. Now, as many consumers are feeling the pinch, they are switching to cheaper foodstuffs. The resulting decline in demand for organic food has turned profit into loss for many organic farmers. According to the first of the linked articles below, at least two organic farmers are leaving the movement each week.
But what will happen as the economy recovers and people start turning back to organic products? Given that it takes some two years to convert to organic standards, there could be supply shortages next year.
As UK shoppers tighten their belts, organic farmers feel the squeeze Guardian (11/4/09)
United Kingdom-Organic slowdown Farming UK (12/4/09)
Can the organics survive the current economy? Limerick Post (10/4/09)
Questions
- How close to perfect competition is the market for organic foods?
- What determines whether an organic farmer should continue in the market even though a loss is being made?
- What can you conclude about the income and price elasticities of demand for organic produce and the cross-price elasticity of demand for organic food with eating out?
- What is likely to happen to the market for organic food over the next two years?