“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?
No-one in the UK can have failed to notice the seemingly never-ending torrent of wind and rain that has swept the country over the past couple of weeks. At the moment, there are 19 flood warnings in the UK and a further 58 areas are on flood watch, according to the Environmental Agency. Cockermouth in Cumbria has been the worse hit, with 12.4 inches of rain falling in just 24 hours, 6 bridges collapsing and over 200 people being rescued by emergency services, some having to break through their roof to get out. Thousands of people have been evacuated; PC Bill Barker lost his life trying to save others; and fears remain for a 21-year old women, who was washed away from a bridge. This has led to a safety review of all 1800 bridges in Cumbria.
Thousands of people have lost their homes and belongings and over 1000 claims to insurance companies have already been made. Flood victims are facing rapidly rising costs, as insurance premiums increase to cover the costs of flooding and this has led to these houses becoming increasingly difficult to sell. Some home-owners are even being forced to pay mandatory flood insurance. Without this in place, insurance companies are not willing to insure homeowners in some areas, or the premiums they’re charging are simply unaffordable. After all, if one household in an area hit by flooding claims for flood damage, the probability of all other houses in that area also claiming is pretty high, if not an almost certainty.
Care packages are arriving for those hit by the floods, as food is starting to run out, and estimates of the costs of flooding have already reached ‘tens of millions of pounds’. Gordon Brown has pledged £1 million to help the affected areas, but who knows where this money will come from; Barclays has also pledged help for the small businesses affected.
An independent inquiry needs to be launched into the causes of this flooding and whether better flood protection should have been in place. However, the extent of the flooding experienced is argued to only happen every 300 years, so is the cost of flood protection really worth the benefits it will bring? A number of issues have arisen from this freak weather, and some are considered in the articles below.
Residents returning to Cockermouth after flooding (including video) BBC News (23/11/09)
Insurers will be hit by £100 million flood bill City AM, Lora Coventry (23/11/09)
£100 million bill after Cumbria floods nightmare Metro, Kirststeen Patterson (23/11/09)
Floods claim in Cumbria could and Scotland could top £100 million (including video) BBC news (22/11/09)
Riverside residents, others may be forced to buy mandatory flood insurance The Times, Illinois, Steve Stout (21/11/09)
Funds for flooding victims set up BBC News (22/11/09)
Flood victims suffer as insurance costs rise Guardian, Jamie Elliott (8/11/09)
1 in 6 house insurance customers at risk of flooding UIA (20/11/09)
Papers focus on flood shortages BBC News (23/11/09)
Questions
- Why are insurance premiums high for flood protection and how will this affect house sales in the affected areas?
- Are the risks of flooding independent?
- Apart from those living in the areas hit by floods, who else will suffer from the flooding and how?
- The flooding experienced is said to be a phenomenon experienced every 300 years. Should better flood defences be put into place to stop the same thing happening in the future or should we use the necessary money elsewhere?
- What are the private and external costs and benefits of increased flood defences? What would a cost–benefit analysis need to establish in order for a decision to be made over whether more defences should be put in place?
- Millions of pounds will be needed to repair the damage caused by the flooding. Where will this money come from? Think about the opportunity cost.
- What do you think will be the likely impact on environmental policy and how will this affect you?
A major failing of free markets is the principal–agent problem. This is where one party to a transaction (normally the principal) has poorer information than the other (normally the agent). A good example of this is rogue traders from the building trade – “builders who overcharge or do shoddy work”. Often people are persuaded by doorstep sellers to have their drives resurfaced or their roofs felted or to have double glazing installed. But frequently, the unsuspecting homeowner (the principal to the transaction) has little knowledge of the quality of the work being offered by the builder (the agent). This asymmetry of information means that the homeowner could be taken in by clever selling or reassuring statements.
Another example is estate agents. A recent OFT study found that nearly a quarter of estate agents deliberately misdescribe the properties they are selling, either by exaggerating a property’s benefits or omitting to mention problems, or, in some cases, by downright lying.
So how are agents able to exploit principals and what can be done about it? Is the answer to have better regulation, or is there a market solution?
More complaints of rogue traders BBC News, Brian Milligan (14/11/09)
Rogue trader complaints on the up (video) BBC News, Brian Milligan (14/11/09)
Crackdown on rogue doorstep traders Press Association (16/11/09)
Estate agents ‘regularly lie to homebuyers’ Telegraph (12/11/09)
Lying estate agents confronted with home truths Times Online, Rebecca O’Connor (12/11/09)
A summary of the OFT campaign against rogue traders selling at the doorstep can be found at:
Doorstep selling campaign strategy Office of Fair Trading (16/11/09)
The relevant section of the OFT’s site is Doorstep selling
The government’s Consumer Direct agency has four relevant sections on its site:
Doorstep selling, Home Improvements, Buying a home in England and Wales and Buying a home in Scotland
Questions
- Give some other examples of the principal–agent problem. Are there any cases where it is the agent that has poorer information and is thus exploited by the principal?
- What can bodies such as the Office of Fair Trading and Consumer Direct do to lessen the problem? What factors determine their success?
- Discuss the relative merits of alternative solutions to the principal–agent problem.
Whether or not you admit it, most people are aware of what’s happening in the X factor. With massive viewing figures, the X Factor remains one the most highly viewed entertainment programmes, so it’s hardly surprising that demand for advertising slots is so high especially when people are waiting for news about the contestants. The X Factor pulls in £8000 per second from TV adverts and it is estimated that the charge for a 30 second advertising slot is a staggering £190,000, expected to rise to £250,000 for the live final. It looks like the recession has had little impact on those wanting to sponsor the X Factor.
Nevertheless, there has been some controversy this week. Every Monday morning we see stories about the contestants and this week was no exception. But, it wasn’t so much about the contestants this week, but rather it concerned the voting. Following the episodes over the weekend of 7th and 8th November 2009, both the ITV and Ofcom, the telecommunications regulator, received thousands of complaints as Simon Cowell gave his support to ‘Jedward’ over Lucie Jones, even though in earlier episodes, he had said he would ‘leave the country if they won’.
However, Ofcom has said that the X Factor won’t be investigated, as the regulator only investigates voting irregularities and the treatment of contestants and not the outcome of the programme. Meanwhile, speculation is rife that Simon Cowell either wants to keep Jedward on the show, because of their viewer ratings, or that by voting Lucie off, the public will rebel and vote Jedward off this week and Simon will avoid looking like the bad guy.
Who knew that the world of entertainment could be analysed using economics!!
Ofcom won’t investigate X Factor ITN (11/11/09)
750 complain to Ofcom over Lucie’s X Factor exit Wales Online (12/11/09)
£8k a second bonanza for X Factor ads as ITV chiefs cash in on Jedward mania Mail Online (11/11/09)
Watchdog rules out X Factor probe BBC News (10/11/09)
Thousands complain to ITV and Ofcom over X Factor ATV Network News, Doug Lambert (10/11/09)
X Factor: Simon Cowell is an evil genius and we love him Telegraph, Liz Hunt (11/11/09)
Simon Cowell’s evil genius rules The X Factor Guardian, Marina Hyde (13/11/09)
Resistance is futile in the face of this master of psychology Independent, Matthew Norman (12/11/09)
Jedward: X Factor twins John and Edward help ITV rake in advertising Telegraph (11/11/09)
The X Factor becomes the ‘British Superbowl’ as advertising fees soar Tines Online, Dan Sabbagh (11/11/09)
The Ofcom site can be found at:
Ofcom (Home Page)
Questions
- What is the purpose of regulation? What are the advantages and disadvantages of legal restrictions?
- What is the role of Ofcom? How does it regulate telecommunications and what other regulators are there?
- Why is the price for an advertising slot during the X Factor so expensive? What does this tell us about price elasticity and income elasticity of demand?
- Ofcom is not going to investigate X Factor. What are the main reasons behind this decision? Do you think this was the right decision?
- If a judge’s decision can increase advertising revenue, then from a commercial point of view does that make it the ‘right’ decision?
In a speech to Scottish business organisations, Mervyn King, the Governor of the Bank of England, argued that it might be necessary to split banks up. The aim would be to separate the core retail banking business, of receving deposits and lending to individuals and businesses, from the more risky and exotic wholesale acitivites of banks, such as securitisation, speculation and hedging – so-called ‘casino banking’.
Governments around the world, as represented at the G20 meeting at Pittsburg in September, have favoured tougher regulation of banks. But Mervyn King believes that this is not enough. It may not prevent the reckless behaviour that resulted in the credit crunch and bank bailouts by the government. “Never has so much money been owed by so few to so many. And, one might add, so far with little real reform.” And if regulation were to fail and banks were to get into difficulties, what would happen? There would have to be another bailout. As Mervyn King said, “The belief that appropriate regulation can ensure that speculative activities do not result in failures is a delusion.”
There are two key problems.
The first is Goodhart’s Law. If rules are set for bank behaviour, banks may adhere to the letter of the rules, but find ways around them to continue behaving in risky ways. The rules may cease to be a good measure of prudent behaviour.
The second is moral hazard. If banks know that they will be bailed out if they get into difficulties because they are too big to fail, then this encourages them to take the risks. As Mervyn King said in his speech, “The massive support extended to the banking sector around the world, while necessary to avert economic disaster, has created possibly the biggest moral hazard in history. The ‘too important to fail’ problem is too important to ignore.”
So should the banks be split? Is there any likelihood that they will? Or are Mervyn King’s proposals merely another headache for the government? The following articles looks at the issues. The first link below is to his speech.
Speech by Mervyn King, Governor to Scottish business organisations, Edinburgh (20/10/09)
Mervyn King: bail-outs created ‘biggest moral hazard in history’ (including video of part of speech) Telegraph (20/10/09)
Governor warns bank split needed BBC News (20/10/09)
A sombre warning BBC News, Stephanomics (20/10/09)
Alistair Darling rebuffs Mervyn King’s attack over timidity of banking reforms Guardian (21/10/09)
King and Brown in rift over whether to split the banks Independent (22/10/09)
Tucker set to join calls for stricter controls on banks Scotsman (22/10/09)
Testing times for bank regulators Financial Times (21/10/09)
Mervyn King is right – the economy is changing and we’re blindfolded, without a map Telegraph, Edmund Conway (22/10/09)
Questions
- Explain what is meant by ‘moral hazard’ in the context of bank bailouts. Are the any ways in which banks could be prevented from failing during a crisis without creating a moral hazard?
- Does regulation necessarily involve Goodhart’s Law? To what extent is it possible to devise regulation and avoid Goodnart’s Law?
- What are the arguments for and against splitting banks’ core business from more risky ‘casino banking’?
- Does the separation of retail and investment banking necessarily involve splitting banks into separate organisations? If they are not split, how can the government or central bank underwrite retail banking without underwriting riskier investment banking?