You can hardly have failed to miss the snow! From children sledging to cars skidding and from being snowed in from work to being snowed in at work. In the UK, it only happens once in a while and when it does, life practically comes to a standstill. Why is this not the case in countries such as Norway? Well, one way of looking at it as that they’re used to it and have tried and tested methods of dealing with it and the investment to match. As we suffer from these severe conditions only once in a while, any significant investment in improving our ability to deal with it could be considered a waste of money.
However, many businesses affected by the snowy conditions will certainly not see it this way. Transport links have been disrupted: roads closed; trains stopped; airports closed; tunnels blocked and sports fields unplayable. The worst affected city centres have been deserted and retailers have subsequently suffered. Even if shoppers had made it to the shops, they may have found many of them closed, as staff struggled to make it in to work across the country. Office workers were being advised to work from home where possible and off-duty medical staff that could make it in to work were covering for those that couldn’t. Even emergency services were said to be going out only to life threatening situations.
Small businesses are suffering from declining sales, as deliveries cannot be made. Farmers too are facing major problems. Thousands of livestock are being frozen to death and many animals are without food, as farmers simply can’t get to them, suffering from snow drifts that have been up to 4 feet deep across Scotland. These are the worst conditions that some areas in Scotland have experienced in 50 years and they’re expected to continue for some time. Cattle farmers in the UK are also facing wasting thousands of litres of milk, as lorries find they cannot access the farms. This could simply mean pouring all this milk down the drain.
Estimates suggest that this cold winter could cost the UK economy £14.5bn in total from lost business. Daily costs will be about £690 million – certainly something that we don’t need in the current climate – financial that is! The following articles look at some of the problems faced across the UK. Read them and then think about the questions below.
Hundreds stranded as Eurostar train breaks down in channel tunnel again Mail Online, Peter Allen (7/1/10)
UK snow freezes transport links and thousands of schools (including video) Guardian, Peter Walker and Steven Morris (6/1/10)
Snowed in, out of pocket. Store staff face a wage freeze Guardian, Caroline Davis and John Stevens (6/1/10)
Livestock being frozen to death in their thousands Scotsman, Frank Urquhart, Alastair Dalton and Mark Smith (7/1/10)
Heavy snow damages business for hospitality industry Big Hospitality, Becky Paskin (6/1/10)
UK’s snowy winter could cost the economy £14.5bn Metro Reporter (7/1/10)
Business leaders criticise school closures BBC News (7/1/10)
Snow puts business continuity plans to the test Computer Weekly, Warwick Ashford (7/1/10)
Freezing weather will cost Welsh economy £25m a day Western Mail, David James (7/1/10)
Snow brings chaos – and beautiful scenes Cotswold Journal (7/1/10)
Local firms count the cost as the big chill continues Belfast Telegraph (7/1/10)
Is snow actually good for the economy? BBC Magazine, Anthony Reuben (15/1/10)
Businesses affected by bad weather BBC News (8/1/10)
Questions
- How have businesses been affected by the snow? Is opportunity cost relevant here?
- How is a cost of £14.5bn calculated? (See the article from Metro Reporter.)
- What are the arguments (a) for and (b) against more investment in techniques and equipment to combat these type of conditions?
- Why are pay freezes a possibility for some staff? Illustrate and explain the likely effects of this policy.
- Some shops have seen record sales in this snowy weather, with their shelves completely empty. Which shops would you expect to be in these circumstances and why? (See news item, A new concept for you – Thermal elasticity of demand)
- Which sector of the economy do you think will be the worst affected and why? Which sector’s losses are likely to have the biggest consequences for the UK economy?
Increasing traffic on the roads is observable by everyone and government policy is focused on reducing the demand for road space, rather than increasing its supply. One method has been to improve public transport and make it a viable substitute for car travel. Private costs of motoring have increased, but if there is no viable alternative, people will continue to demand car travel. Investment in buses and trains has improved their quality: they are more frequent, more reliable, arguably more comfortable and supposed to be part of an integrated transport policy. Local bus services provide a crucial link for local communities, but it is these services that are now facing problems.
In your economics lectures, you may have looked at local bus services, when you considered monopolies, oligopolies and possibly contestable markets. Oligopolies, whilst closer to the monopoly end of the market spectrum can be very competitive, but are also open to collusion and anti-competitive practices. The local bus sector has been referred to the Competition Commission by the Office of Fair Trading through complaints of ‘predatory tactics’ by companies. It is argued that local bus services, by limiting competition, are causing prices to rise and the quality of service to fall. One key issue is that those companies established in the market are alleged to be acting aggressively towards smaller bus companies and thus reducing competition in the industry. A low number of bids for supported service contracts in many areas, local bus routes dominated by a few large companies and predatory actions by incumbent firms are all complaints that this industry is facing.
This investigation is especially important, given the amount of public money that goes into the bus industry: £1.2bn. Investigations found that in areas of limited competition, prices were 9p higher. A number of take-overs have contributed to this situation. Two-thirds of bus services are controlled by only five operators. This limits competition in the market and hence is argued to be against public interest. Yet, industry representatives still argue that the market is competitive. Read the following articles and answer the questions about this issue. Was the OFT right to to initiate this investigation?
Local buses to be re-regulated BBC News (27/9/09)
OFT refers UK bus market to Competition Commission Dow Jones Newswires, Kaveri Nihthyananthan (7/1/10)
Office of Fair Trading prompts probe into bus services Guardian (7/1/10)
Trasport groups fear OFT competition probe over buses Telegraph, Alistair Osborne (4/1/10)
Bus industry competition queried BBC News (20/8/09)
OFT refers bus industry on poor service and prices Times Online, Francesca Steele (7/1/10)
Inquiry into local bus market ‘may delay investment’ Scotsman, Hamish Rutherford (5/1/10)
Questions
- Why are local bus services argued to be (a) a monopoly; (b) an oligopoly?
- What are the main aspects of UK competition policy?
- What is a concentration ratio and how does this apply to the bus industry?
- What predatory tactics are being used in the local bus industry and how do they affect competition, prices and quality?
- Why may limited competition be against the public interest?
- Traffic congestion is a major problem. Explain the economic theory behind government intervention in this area. Think about the effects of taxes; building more roads; investment in substitutes. Which is likely to be the most effective method?
Most businesses have suffered over the past year or so. Profits and sales have fallen, as the UK (and global) economy suffered from a recession that’s seen UK interest rates at 0.5%, unemployment rising and public debt at unprecedented levels. Christmas trading always sees a boost in sales and that’s just what’s happened for many businesses. Shoppers have responded to the doom and gloom of the past year by spending and making up for a hard year. Phrases such as “I decided to treat myself” became common on the news as reporters travelled to shopping centres across the UK. However, shops such as M&S and Next have warned that attempts by the government to reduce the public deficit could derail the consumer recovery.
These positive stories, whilst true, are a useful tool to help boost consumer confidence and keep expectations positive for the coming months. However, there are warnings that these figures shouldn’t be taken out of context. The economy is still in trouble and public debt has reached almost 60% of GDP. With cuts in government spending and rises in taxation expected, how much confidence should be taken from these positive signs in the retail sector? Only time will tell.
Online powers Shop Direct sales Financial Times, Esther Bintliff (6/1/10)
Poundland, House of Fraser and Co-op see sales rise BBC News (11/1/10)
Links of London see buoyant festive sales Telegraph, James Hall (5/1/10)
John Lewis reports bumper Christmas trading Retail Week, Jennifer Creevy (5/1/10)
New Look expects to build on strong Christmas London Evening Standard (7/1/10)
Christmas trade booming in City Star News Group, Alex de Vos (7/1/10)
Record trading for Cash Generator Manchester Evening News (7/1/10)
Sainsbury’s hails ‘strong’ Christmas trading BBC News (7/1/10)
Cautious M&S reports strong Christmas trade Times Online, Marcus Leroux and Robert Lindsay (6/1/10)
Asda reports ‘solid’ Christmas trading Guardian (6/1/10)
Questions
- Why are expectations important for the future of the British economy? Are the expectations rational or adaptive or a combination of the two?
- Are high Christmas sales really a sign that the economy is recovering? Discuss both sides of the argument. Will high sales now have an adverse effect on future trade in the UK?
- How will expected cuts in government spending affect sales in the retail sector?
- Tax rises are a possibility. How will this affect consumers and sales in the coming year? Think about the circular flow of income.
- If interest rates are increased in the coming months, trace through the likely effects in the goods market.
“As snow sweeps the country, the UK has coped in the way it usually does – with surprise, confusion and chaos.” Not only have the transport authorities in many areas struggled to cope, but individuals too have been caught out. Many have rushed to stock up on things such as blankets, fires, de-icing equipment and warming foods.
But why does Britain cope worse than many other countries? Should more resources be diverted into keeping roads, airports and rail lines open? And how have individuals responded? How much have they stocked up on a range of cold-weather items and why? The linked article looks at these issues?
Why can’t the UK deal with snow? EU Infrastructure, Timon Singh (6/1/10)
Questions
- Does it make economic sense for the UK to invest relatively little in snowy-weather infrastructure?
- How should a local authority decide whether or not to (a) buy an additional gritting lorry; (b) increase its stock piles of grit? How would risk attitudes affect the decision?
- Why might a lower proportion of people get to work in the recent snowy weather than in equivalent weather 20 years ago?
- How might you define a ‘thermal elasticity of demand’ for a product, where the determinant of demand is the temperature?
- What factors determine the thermal elasticity of demand for a product? How is the short-term elasticity likely to be different from the longer-term elasticity and why?
- What would you need to include in measuring the full social costs to the economy of the cold spell?
Life must be very hard for bankers in the UK. Not only are they being partly blamed for the current financial crisis, but they may now have to survive on just their salary. Imagine trying to have a happy Christmas when you’ve only earned £200,000 over the past year: it really will be a cold and hard Christmas for them. Unless of course, the government does call the bluff of the RBS directors who have threatened to quit if an estimated £1.5bn bonus pool for staff at the investment arm of the bank is blocked. Let’s not forget that RBS is largely owned by the public: 70% or an investment of £53.5bn. It’s our taxes that will be used to pay these bonuses giving 20,000 RBS bankers a salary that is at least 3 times greater than the national average.
RBS directors have threatened a mass walkout if the government does withhold the ‘competitive bonus package’. Given that many blame bank directors for plunging us into the credit crunch, some may laugh at their argument that if the bonus package is withheld, then ‘top talent will leave the bank’. However, it is a serious threat: pay out or we leave and you’ll see the profitability of the bank decline, making it less likely that taxpayers will see a ‘return’ on their investment. RBS needs to make profits to repay the taxpayer, but is the taxpayer willing to pay out? RBS directors argue that if its bankers do not receive bonuses, then RBS will lose out in recruiting the best talent. Why would a banker choose to work for a bank that doesn’t pay out bonuses?
Lord Mandelson said: “I understand the point that RBS directors are expressing – they say they have to remain competitive in the market in recruiting senior executives, and this is why it’s important that all the banks are equally restrained, and RBS is not singled out.” One solution here would be a one-off windfall tax on bonuses, or even a permanently higher rate of tax (a ‘supertax’) on bonuses.
Over the past year or so, not a day has gone by when banks are not in the news and the next few days look to be no exception. This is another issue that affects everyone, so read the articles below and make up your mind! The government has an important decision to make, especially given than it’s the taxpayers who will decide on the next government.
‘Bankers need to join the real world’ minister says BBC News (3/12/09)
UK seeks to calm fears of RBS walk-out over bonuses Reuters, (3/12/09)
RBS chief Stephen Hester set to walkout over bonus row Scotsman, Nathalie Thomas (3/12/09)
RBS directors threaten to quit over bonuses Big On News (3/12/09)
Thousands of Bankers paid £1m in bonuses Sky News (3/11/09)
Barclays bankers to get 150pc pay rise Telegraph, Jonathan Sibun and Philip Aldrick (3/12/09)
PM reacts to RBS Director’s threat ITN (3/12/09)
Banks criticise plans for windfall tax on bonuses BBC News (7/12/09)
Will biffing bankers also biff Britain? BBC News, Peston’s Picks, Robert Peston (3/12/09)
Roger Bootle: Bank reform hasn’t gone far enough (video) BBC News (25/12/09)
Questions
- How are wages determined in the labour market? Use a diagram to illustrate this.
- Why do bankers receive such a high salary? (Think about elasticity.)
- What are the main arguments for paying out bonuses to bankers?
- If bonuses were blocked, and the RBS directors did walk out, what do you think would be the likely repercussions? Who would suffer?
- One argument for paying bonuses is that bankers need an incentive. Excluding monetary benefits, are there any other methods that could be used to increase their productivity?
- When we consider the labour market, we look at economic power. Who do you think has the power in this case and what do you think will be the outcome?