Every summer a number of air shows take place in the UK, such as those at Farnborough, Cosford and the Royal International Air Tattoo. Some of these events prove to be extremely popular and successful. For example, over 50,000 people attended the event at Cosford on Sunday 9th June to watch a five-and-a-half-hour flying display, including the Red Arrows, a Vulcan bomber and a RAF Battle of Britain Memorial Flight, which featured Spitfire, Hurricane and Lancaster aircrafts.
The event was so popular that some people who had paid £25 for a ticket failed to make it to the show ground because they were stuck in a 9 mile traffic jam! The popularity of these events does raise an interesting economic question. Why do so many people pay to attend when it is possible to watch much of the air show from outside the showground? If people can enjoy the benefits of watching an event whether or not they have paid then we might expect the majority of them not to pay.
Air shows seem to have some of the characteristics of a public good: i.e. to some extent the consumption benefits are both non-rival and non-excludable. By non-rival it is meant that one person’s use or consumption of the good does not decrease the quantity available for somebody else to use or consume. If one person watches the Red Arrows fly by, it does not decrease the ability of others to watch them. Contrast this with a product that has the characteristic of being ‘rival’ such as a hamburger. If someone eats a hamburger, it reduces the amount that is available for others to enjoy. The good is ‘used up’ during consumption. Other people cannot eat the same hamburger!!! Many sporting and music events share this characteristic of non-rivalry. For example if somebody is watching a band playing live at Glastonbury it does not stop somebody else from enjoying the benefits of watching the band. The performance of the band is not ‘used up’ like the hamburger when a person watches the show.
The major difference between Glastonbury and an air show is that the event organisers at Glastonbury can prevent people who have not paid for a ticket from enjoying the show. The event is excludable, as fans have to enter the show arena in order to see the bands. However, as one contributor to an internet discussion site commented:
Air show organisers are at a particular disadvantage compared to other show organisers because the key elements of their show can be seen for miles.
Another contributor added that:
Unfortunately being an air show by its very nature it’s very public – the planes are in the air for everyone to see for free for miles around.
In other words, air shows have the characteristic of being non-excludable, as people can benefit regardless of whether they have paid or not.
These public good properties seem to be causing problems for an air show in Welshpool that appears to have an issue with a number of non-payers watching the event. The organisers recently stated that:
We can’t stop people watching from the hillsides, but perhaps we can make them understand that they need to come to the show and pay.
The previous year the organisers had sent people out with buckets to collect voluntary donations from those sitting on the hillside. However they found that:
People were not for giving much at all and it was noticeable how much copper was in the buckets we’d used and there were hardly any notes.
One solution being proposed in order to generate more revenue is to increase the entry fee, which is currently £5, in order to compensate for those who are not paying.
Articles
Bob Jones Memorial Air Show urges people to buy tick BBC News (9/6/13)
How to make an airshow pay PistonHeads, (9/6/13)
Free or should you pay Talk Photography, (9/6/13)
An organisers view Airshow, (9/6/13)
Cosford Air Show pledge over traffic chaos Shropshire Star, (10/6/13)
RAF Cosford Air Show – Home RAF Cosford Air Show, (12/6/13).
Questions
- What practical problems does a show such as Glastonbury face in trying to make the event excludable?
- In the blog it explains how one person watching a band live does not have a negative impact on the pleasure other people will derive from watching the same band: i.e. it is non-rival. Is this always true? Can you think of any circumstances when watching a live band might become a rival good?
- What term do economists use for goods that are non-rival but are excludable? Think of at least three examples.
- What ideas might the organisers of an air show adopt to encourage people to pay and enter the show ground area?
- Can you think of any strategies that might be used to increase the number and size of the voluntary donations made by those who watch the airshow for free from a hill-side?
- What are the organisers assuming about the price elasticity of demand for the air show at its current price if they claim that increasing prices will lead to an increase in revenue?
At a cost of €1 trillion to EU states, tax evasion is undoubtedly an area in need of attention. With government finances in deficit across the world, part of the gap could be plugged by preventing tax revenues from going unpaid. Well-known companies and individuals have been accused of tax evasion (and avoidance), but part of the problem is the existence of countries that make such activities possible.
Tax havens not only offer favourable tax rates, but also have in place regulations that prevent the effective exchange of information. That is, they are able to keep the identity and income information of depositors a private affair and are not required to share that information with other governments. This means that other tax authorities are unable to demand the tax revenue from income earned, when it is held in some of these countries. This can deprive the government’s coffers of substantial amounts of money.
In 2000, the OECD produced a report naming so-called ‘uncooperative tax havens’, including Monaco, Andorra, Liechtenstein and Liberia. Since then, all nations on this list have pledged their cooperation and been removed and in a recent step, Andorra has announced a proposal to implement its first ever income tax. This move is partly in response to pressures from EU governments to tackle tax evasion. Furthermore, talks between the finance ministers of tax havens, such as Switzerland and Liechtenstein have been agreed with the aim of improving the flow of bank account information and thus combating tax evasion. The Council of the European Union said:
The decision represents an important step in the EU’s efforts to clamp down on tax evasion and tax fraud”
Countries, such as Switzerland (a non-EU member) are likely to find requests for information difficult to ignore, if they want to have access to EU financial markets. However, any concessions on information provision will come at a significant cost for a country that has long regarded its banking secrecy as an ‘honourable policy.
Reforming policy on tax havens is essential, not only to help tackle tax evasion and thus government deficits, but also to generate investment into countries that don’t offer such favourable tax rates. Investors naturally want to invest in those countries with low tax rates and as such, could it be that countries like the UK suffer from a loss of investment and that the only way to encourage it is to offer similarly low tax rates? International agreement is certainly needed to tackle the worldwide issue of tax evasion and at the moment, it seems as though pressure is building on secretive countries. The following articles consider this controversial issue.
Clock ticks on Swiss banking secrecy BBC News, Imogen Foulkes (21/5/13)
Andorra bows to EU pressure to introduce income tax The Telegraph, Fiona Govan (2/6/13)
Andorra to introduce income tax for first time BBC News (2/6/13)
Andorra to introduce income tax for the first time Economy Watch (3/6/13)
Swiss have no choice but to bow to US ultimatum – Ackermann Reuters, Katharina Bart> (3/6/13)
Austria out front as EU zeroes in on tax evasion The Budapest Times (29/5/13)
EU to start talks with non-EU countries on tax evasion BBC News (14/5/13)
Questions
- What is tax evasion?
- Using game theory, explain why an international agreement on tax evasion might be needed?
- When an income tax is imposed in Andorra, what will be the impact on government revenues?
- How might the labour supply incentive change once an income tax is imposed?
- How do tax havens affect investment in other countries?
- Is there an argument that countries such as the UK should cut its tax rates to encourage investment?
Imagine if none of the clubs in the English Premier League (EPL) or English Football League (EFL) had junior or youth teams. Instead envisage a situation where all of the talented young footballers in the country go to college or university to develop their skills. Then once a year there is a big televised event where each of the clubs in the EPL and EFL take it in turns to choose which young college/university players they would like to recruit.
Strange as it sounds to football fans in Europe this is exactly what happens in American Football in the USA. It is called the NFL draft and this year’s event took place over three days between 25th and 27th April at Radio City Music Hall in New York. There was greater interest in Britain than usual in this year’s event because of the involvement of 24 year old Menelik Watson who was born and raised in Manchester. Although originally a basketball player, coaches spotted his potential to play American football in the NFL and two years ago he obtained a place at Florida State University.
The NFL draft has seven rounds. Each of the 32 teams has the right to choose one player in each round. An important design issue for any draft system is how to determine the running order in which the teams make their choices. Obviously all 32 teams would like to get the first chance at recruiting the most talented of all the college players. The NFL’s solution to this allocation problem is an interesting one. The team with the worst playing record from the previous season gets the first choice in each round. In the 2012-13 season this happened to be the Kansas City Chiefs who played 16 games and only won 2 of them. The second choice in each round goes to the team with the 2nd worst playing record from the previous season and so on. The final choice in each round goes to the previous year’s Super Bowl champions who in the 2012–13 were the Baltimore Ravens. Another interesting characteristic of the system is the ability of teams to trade draft choices. For example in 2013 the Oakland Raiders traded their choice in the first round (which was the 3rd choice overall) with the Miami Dolphins for their choices in both the first and second round (12th and 42nd choice overall).
What is the rationale for having a draft system? It was first introduced in February 1936 and many commentators have argued that it has been a key factor which has helped to maintain competitive balance in sport. The man behind the idea, Bert Bell of the Philadelphia Eagles, argued that without this type of system the sport would be dominated by the 4 richest teams. He stated that:
Every year, the rich get richer and the poor get poorer. Four teams control the championship. Because they are successful, they keep attracting the best college players in the open market, which makes them more successful.
Some evidence for the success of the scheme is that in the last 15 years the Super Bowl has been won by 10 different teams. However in 1934, just before the scheme was proposed, there was another major issue for team owners. The Brooklyn Dodgers and the Philadelphia Eagles had become involved in a bidding war for a very talented young player called Stan Kostka. Brooklyn won the battle but had to pay him a salary of $5,000 – the same amount that was paid to the star player in the league. Some people have argued that the real purpose of the draft scheme was to limit the pay of young players by effectively reducing any competitive bidding for their services. Once drafted, a player is expected to join the team who selected him. There may be some protracted negotiations over his final salary and bonuses but the only option open to him if an agreement breaks down is to re-enter the draft the following year. This effectively gives the teams monopsony power which may enable them to restrict players pay to below that of their marginal revenue product. For example although Andrew Luck, the first choice draft pick in 2012, reportedly earns just over $20million from his 4 year contract with the Indianapolis Colts some commentators have argued that his true market value is over $100 million.
The good news for Menelik Watson was that he was finally drafted by the Oakland Raiders and was the 42nd overall player chosen in the draft process. This is the highest choice ever made by a team in the NFL for a player born and brought up in Britain. The final outcome for the league as a whole can be seen on the NFL website.
NFL Draft 2013: Your essential comprehensive guide BBC Sport Simon Clancy (25/4/13)
NFL Draft 2013: Menelik Watson goes to Oakland Raiders BBC Sport, (26/4/13)
NFL Draft makes Menelik Watson Oakland Raiders’ second British player The Guardian, Paulo Bandini (27/4/13)
NFL Draft: Manchester’s Menelik Watson looking to start with Oakland Raiders right away Sky Sport, Paul Higham (28/4/13)
Manchester’s Watson lands dream NFL job after being drafted by the Oakland Raiders Daily Mail, Matthew Sherry (27/4/13)
Abolish the NFL Draft Sports on Earth, Patrick Hruby (25/4/13) .
Questions
- Explain why the marginal revenue product for sports stars is so much higher than it is for people in most other jobs.
- Draw a diagram to illustrate how the wage rate for players would be determined if the labour market was perfectly competitive.
- Assuming that the marginal revenue product for sports stars was in fact lower than that of most people in other jobs, draw a diagram to illustrate why they would still tend to be paid so much more.
- What is monopsony? Explain how the draft system could give the teams in the NFL monopsony power.
- Draw a diagram to illustrate the impact of monopsony on wages and employment in the labour market for NFL players.
- Can you think of any perverse incentives that the draft system could create for the performance of teams towards the end of the regular season.
The English Premier League (EPL) has negotiated a record TV deal which will generate £5.5 billion of revenue over the next 3 years – beginning in the season 2013–14. This represents a 70% increase on the previous deal. Controversy has arisen over some initial proposals put forward by the EPL as to how the money will be spent. The owners of the clubs in the Championship of the English Football League (EFL) are particularly concerned about the size of the proposed payments to the three teams relegated from the EPL.
Some 30 years ago the money generated from the sale of television rights was equally shared between all the teams in the then four divisions of the English Football League (EFL). In 1992 the top division of the English Football League broke away and formed the English Premier League (EPL). This newly formed EPL negotiated a separate television deal and kept the majority of the money. However, some payments were and still are made to the teams in the EFL and to organisations such as the League Managers Association and Professional Footballers Association. For example in 2011-–12 the EPL donated £189.4 million of the £1.2 billion generated from that year’s TV deal.
The majority of the money donated by the EPL is spent in two main ways. First, some money is redistributed to all the teams in the EFL: i.e. The Championship, League 1 and League 2. These are known as ‘solidarity payments’ and in 2011–12 the EPL spent £49.8 million on this scheme. Each club in the Championship received £2.3 million. It has been proposed that the amount paid into this scheme should be increased by 5% in the season 2013–14. Second, a relatively large amount of money is paid over a four-year period to the three teams relegated each season from the EPL into the Championship. These are known as ‘parachute payments’ and in the season 2011–12 the EPL spent £90.9 million on this scheme. The rationale for having parachute payments is to help the relegated teams adjust their wage bills to the much lower revenue streams that come from playing in the Championship. Proposed changes to the scheme are outlined in Table 1.
The chairmen of the football league clubs met on the 20th March 2013 and a number of them expressed concerns about the relatively large increase in the parachute payments compared to the solidarity payments. They were particularly concerned that the changes to the funding would damage the competitive balance of the Championship.
Competitive balance refers to how the most talented players are distributed amongst the teams in a league. For example, are the majority of the most talented footballers playing for just a couple of the teams? In this case the league is competitively imbalanced and the teams with the best players will tend to win far more games than the other teams. The outcome of the league will be very predictable. If the most talented players were more evenly spread across all the teams in the league, then it would be more competitively balanced. Matches and the outcome of the league would become more unpredictable.
Does the level of competitive balance matter? Some sports economists have argued that it may have a significant impact on the success of the league. This is because fans may value the unpredictability of the results. It follows that closer and more unpredictable results will generate higher match-day attendances and increase the revenues of the clubs.
This is an interesting argument and is the opposite of what economic theory would predict for most markets. For example, the standard prediction would be that as firms outperform their rivals, they generate more revenue and profit. If they manage to drive all their rivals out of business, they would become a pure monopoly and make large abnormal profits. However in professional team sports the outcome may differ significantly. If the unpredictability of the league is highly valued by fans, then teams will generate more revenue when they have strong and evenly matched rivals.
It has been reported that further discussions about the distribution of the money will take place this month with the owners of the championship clubs arguing that there should be smaller increases in parachute payments and much larger increases in solidarity payments. Representatives of the EPL have argued that the parachute payments do not distort competition and make the championship predictable. They point out that at present only one of the top six teams in the championship (Hull) receives parachute payments, while only one of the teams promoted from the Championship in the season 2012–13 (West Ham) received these payments.
Articles
Premier League warned over rich and poor split in wake of TV deal The Guardian, Owen Gibson (19/3/13)
Championship clubs angered by Premier League parachute boost Daily Mail, Charles Sale (6/2/13)
Football league is to lessen the advantage of parachute payments The Guardian, Owen Gibson (20/3/13)
Championship clubs warn Premier League over hike in parachute payments for relegated teams The Independent, Majid Mohamed (20/3/13)
Increased parachute payments could lead to a salary cap in the Championship The Post, A. Stockhausen (21/3/13)
Scudamore:Parachute payment system fair Eurosport, Andy Eckardt (22/3/13)
Parachute payments more than a softened landing The Daisy Cutter, Richard Brook (21/3/13)
Questions
- What factors will influence the size of the attendance at a football match?
- To what extent do you think that the money generated from the sale of television rights should be equally shared between all the clubs in the English Premier League and the English Football League
- Can you think of any ways of measuring the competitive balance of a football league?
- Explain why a very competitively imbalanced league may reduce the revenue for all the clubs in that league?.
- In traditional economic theory it is assumed that firms aim to maximise their profits. What do you think is the objective of a typical football club in the English Premier League?
The most common demands for trade unions are for higher wages and better working conditions. However, pensions have become an increasingly important issue that many public-sector workers in particular have raised concerns over. While actions by trade unions have been less frequent and public in recent months, the Public and Commercial Services Union (PCS) has voted to strike.
The labour market works like any other market – there is a demand for and supply of labour. The intersection of the demand and supply of labour give the equilibrium wage rate and equilibrium number of workers. Trade unions may aim to push up the wage rate above this equilibrium and the impact on the number of workers employed will depend on the type of labour market. If we have a competitive labour market, then the increase in wage will create an excess supply of labour: that is, unemployment. This is often a choice a trade union has to make. However, if the market is a monopsony, then it is possible for a trade union to force up wages and yet there may not be any fall in the number of workers employed.
Pay is just one of the issues being raised by the PCS. Public-sector pay was frozen for two years for those earning above £21,000. According to the Cabinet Office, this was necessary to ‘protect jobs in the public sector and support high quality public services.’ A 5% pay rise has been requested to counter an alleged 7% fall in earnings since 2008. 61% of those who voted in the ballot were in favour of strike action. Other concerns include job losses and pensions.
One concern of the PCS will be the low turn-out. Only 28% of the union’s members voted in this ballot and this is likely to weaken the union’s bargaining position. The government has monopsony power in employing civil servants and this is one of the reasons why a powerful trade union is likely to emerge: it acts to reduce the power of the monopsonist employer. Negotiations will typically take place between the employer and the trade union and with such a low turn-out, the power is certainly with the government. However, with the threat of strike action to occur around the time of the Budget, this does present something of a concern for the government, especially with growth remaining weak and the loss of the AAA rating.
Two separate pay offers have been made to 1.6 million public-sector workers, but Unison has suggested that members of PCS should reject them. If headway is not made in negotiations between PCS and the government, then strike action could be just around the corner. The following articles consider this looming industrial action.
Articles
Questions
- Use a diagram to illustrate a competitive market for labour and show how a trade union will aim to push up the wage rate. Show why a trade-off exists between the higher wage and the number of workers employed.
- Illustrate a diagram showing a monopsony and explain why the MC curve exceeds the AC curve. Why is it possible for a trade union to force up wages without creating a decline in the equilibrium number of workers employed?
- What other actions, besides striking, are available for trade union members? What are the costs and benefits of each relative to striking?
- Which factors, besides a low turn-out in the ballot, will reduce the trade union’s negotiating power?
- Public-sector pay was frozen for two years. If the government accepted the trade union’s pay demands, what would be the impact on the budget deficit? Could the higher pay help boost economic growth by creating a multiplier effect?
