Category: Essential Economics for Business: Ch 09

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Tackling climate change: ‘Everything, everywhere, all at once’

The United Nations International Panel on Climate Change (IPCC) has just published its most comprehensive report so far. It finds that ‘human activities, principally through emissions of greenhouse gases, have unequivocally caused global warming’. This has led to widespread and rapid changes in climate and biodiversity and to more extreme weather patterns, such as droughts, floods and hurricanes. What is more, the distribution of these effects is uneven, with communities who have contributed the least to current climate change being disproportionately affected.

At the 2015 COP21 climate change conference in Paris (see also), it was agreed to adopt policies to limit the increase in global temperatures to ‘well below’ 2°C above pre-industrial levels and to make an effort to limit it to 1.5°C. Global temperatures have already risen 1.1°C above 1850–1900 levels and are set to reach 1.5°C in the early 2030s. Every increment of global warming will intensify ‘multiple and concurrent hazards’.

Deep, rapid and sustained reductions in emissions would slow down the rise in global temperatures, but even with such reductions, temperatures will still exceed 1.5°C in the next few years and, even under the best-case scenario, would not fall below 1.5°C again until the end of the 21st century. Under more pessimistic scenarios, global temperatures could rise to 2.7°C above pre-industrial levels by the end of the century under an intermediate greenhouse gas emissions scenario and to 4.4°C under a very high emissions scenario. Anything above 2°C would be likely to have catastrophic effects. The longer countries wait to take action, the greater the rise in global temperatures and hence the greater the damage and the more costly it will be to rectify it.

‘For any given future warming level… projected long-term impacts are up to multiple times higher than currently observed (high confidence). Risks and projected adverse impacts and related losses and damages from climate change escalate with every increment of global warming (very high confidence). Climatic and non-climatic risks will increasingly interact, creating compound and cascading risks that are more complex and difficult to manage (high confidence).’ (Paragraph B2)

But the report is not all ‘doom and gloom’. It is possible to limit global warming to 1.5°C or only a little over by making rapid, deep and, in most cases, immediate greenhouse gas emissions reductions in all sectors and reaching net zero emissions in the early 2050s. Science and technology have the answers – answers that are now much cheaper and more available than back in 2015 when the 1.5°C target was agreed. But what it does require is doing ‘everything, everywhere, all at once’. And that requires political will and the right economic incentives.

The politics and economics of achieving net zero

In terms of the politics, there is general global agreement by governments about the likely effects of climate change. And most governments agree that action needs to be taken. However, there are three key political problems.

The first is that the costs of action will be borne now, while the benefits of action will accrue over a much longer period of time. This links to the second problem – the mismatch between the lives of governments and the long-term effects of climate change. If governments put off doing anything now and merely promise that something will be done in the future, they will not have to take unpopular actions, such as raising taxes on energy, private transport and certain goods or banning various activities. Future governments will have to sort things out, by when, although the problems will be greater, the existing politicians will no longer be in power.

The third problem concerns the distribution of the costs and benefits of action. The major emitters of carbon are the rich countries, while the major sufferers are poor people in countries subject to drought, flooding and rising sea levels. Not surprisingly, who should cut down on emissions and pay for the mitigation necessary in many of the poorer countries is a difficult political issue, which is why it’s much easier to say what needs to be achieved overall than precisely what measures should be taken by which countries.

These problems reflect the fact that many, if not most, of the environmental costs of production and consumption are external costs – costs borne, not by the direct producer or consumer, but by other people at other places and/or in the future.

Nevertheless, the relative costs of moving to greener production and consumption are falling. The costs of renewable energy, including solar power, onshore and offshore wind and hydroelectric power are falling relative to that generated from fossil fuels. At the same time, the take up of electric cars is likely to continue rising as battery technology improves. This does, of course, require an increase in charging infrastructure. Domestic heat pump technology is improving and home insulation methods are becoming more efficient.

Persuading consumers and firms to take account of environmental externalities could in part be achieved by education. It makes it much easier for politicians to take appropriate action now if their populations are on board. There has been increasing awareness over the years of the environmental impact of people’s actions. People have become more willing to take responsibility for the world that future generations will inherit. This is helped both by education in schools and colleges and by frequent items in the media.

But incentives also have a major part to play. To internalise environmental externalities, external costs could be taxed and external benefits subsidised.

The effect of a carbon tax on production

The use of taxes to reduce activities with negative environmental externalities is illustrated in the diagram (click here for a PowerPoint). It takes the case of carbon emissions from coal-fired electricity generation in a large country. To keep the analysis simple, it is assumed that all electricity in the country is generated from coal-fired power stations and that there are many such power stations, making the market perfectly competitive.

It is assumed that all the benefits from electricity production accrue solely to the consumers of electricity (i.e. there are no external benefits from consumption). Marginal private and marginal social benefits of the production of electricity are thus the same (MPB = MSB). The curve slopes downwards because, with a downward-sloping demand for electricity, higher output results in a lower marginal benefit (diminishing marginal utility).

Competitive market forces, with producers and consumers responding only to private costs and benefits, will result in a market equilibrium at point a in the diagram: i.e. where demand equals supply. The market equilibrium price is P0 while the market equilibrium quantity is Q0. However the presence of external costs in production means that MSC > MPC. In other words, MEC = b – a.

The socially optimal output would be Q* where P = MSB = MSC, achieved at the socially optimal price of P*. This is illustrated at point d and clearly shows how external costs of production in a perfectly competitive market result in overproduction: i.e. Q0 > Q*. From society’s point of view, too much electricity is being produced and consumed.

If a carbon tax of d – c is imposed on the electricity producers, it will now be in producers’ interests to produce at Q*, where their new private marginal costs (including tax) equals their marginal private benefit.

But this brings us back to the politics of measures to reduce emissions. People do not like paying higher taxes. In his latest Budget, the UK Chancellor, Jeremy Hunt, decided not to raise fuel duties by the 12p that had been previously planned, despite fuel prices having recently fallen. Meanwhile, charging prices for electric cars have risen.

Other economic measures

A simpler method for dealing with environmental externalities is ban certain activities that omit CO2. For example, in the UK there will be a ban on the sale of new petrol and diesel cars and vans from 2030 (with the exception of some low-emission hybrids until 2035). In the EU there will be a similar ban from 2035. Clearly, such measures are only suitable when there are non-emitting alternatives.

Another alternative is a cap-and-trade system, such as the European Emissions Trading Scheme. It involves setting quotas for emissions and allowing firms which manage to cut emissions to sell their surplus permits to less efficient firms. This puts a price pressure on firms to be more efficient. But the quotas (the ‘cap’) must be sufficiently tight if emissions are going to be cut to desired levels. Nevertheless, it is an efficient way of cutting emissions as it gives a competitive advantage to low-emission producers.

Conclusion

If the problem of global warming is to be limited to 1.5°C, or only very little above, multiple solutions will need to be found and there must be a combination of political will, economic incentives and the mobilisation of scientific and technical know-how. As the Secretary-General of the United Nations, António Guterres, stated in launching the new report:

This report is a clarion call to massively fast-track climate efforts by every country and every sector and on every timeframe. In short, our world needs climate action on all fronts – everything, everywhere, all at once.

Report

Videos

Articles

Questions

  1. Why might countries not do ‘everything, everywhere, all at once’ to avert climate change?
  2. What might an optimist conclude from the ICC report?
  3. To what extent is climate change an economic problem?
  4. On a diagram similar to the one above, show how a subsidy could be used to internalise positive externalities.
  5. How might countries reduce the consumption of fossil fuels in the most efficient way? Are they likely to want to do this? Explain.
  6. Is a ‘cap-and-trade’ (tradable permits) system (a) an effective means of reducing emissions; (b) an efficient system?
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The continuing controversy over the sale of tickets for live music events

Tickets for Beyonce’s 2023 UK Renaissance tour went on general sale via Ticketmaster’s website at 10am on Tuesday 7 February. Throughout the day, social media were full of messages from fans complaining about technical issues, long online queues and rising prices. This is not the first time this has happened. Similar complaints were made in 2022 when tickets went on sale for tours by Bruce Springsteen, Harry Styles and Taylor Swift.

With the general sale of tickets for Beyonce’s tour, many fans complained they were waiting in online queues of over 500 000 people. Others reported their frustration with continually receiving ‘403 error’ messages.

Market dominance

In November 2022, Ticketmaster’s website in the USA constantly crashed during the pre-sale of tickets for Taylor Swift’s tour. This led to the general sale of tickets being cancelled.

In response to the public anger that followed this decision, the Senate’s antitrust subcommittee organised a hearing with the title – ‘That’s The Ticket: Promoting Competition and Protecting Competition and Protecting Consumers in Live Entertainment.’

Senator Amy Klobuchar, the Chair of this committee, stated that

The issues within America’s ticketing industry were made painfully obvious when Ticketmaster’s website failed hundreds of thousands of fans hoping to purchase tickets for Taylor Swift’s new tour, but these problems are not new. For too long, consumers have faced long waits and website failures, and Ticketmaster’s dominant market position means the company faces inadequate pressure to innovate and improve.

Ticketmaster merged with Live Nation in 2010 to become the largest business in the primary ticket market for live music events. Some people have accused the firm of abusing its dominant market position by failing to invest enough money in its website, so leading to poor customer service.

Dynamic pricing

Fans have also been complaining about the system of dynamic pricing that Ticketmaster now uses for big live events. What exactly is dynamic pricing?

Firms with market power often adjust their prices in response to changing market conditions. For example, if a business experiences significant increases in demand for its products in one quarter/year it may respond by raising prices in the following quarter/year.

With dynamic pricing, these price changes take place over much shorter time periods: i.e. within minutes. For example, in one media report, a Harry Styles fan placed £155 tickets in their basket for a concert at Wembley stadium. When the same fan then tried to purchase the tickets, Ticketmaster’s website sent a message stating that they were no longer available. However, in reality they were still available but for £386 – the price had instantly jumped because of high demand. Continually monitoring market conditions and responding to changes so quickly requires the use of specialist software and sophisticated algorithms.

Arguments for dynamic pricing

With ticket sales taking place months/years in advance of most live events, it is difficult for artists/promotors to predict future levels of demand. Given this uncertainty and the importance for the artist of playing in front of a full venue, event organisers may err on the side of caution when pricing tickets.

If the demand for tickets proves to be much stronger than initially forecast, then resellers in the secondary market can take advantage of the situation and make significant amounts of money. Dynamic pricing enables sellers in the primary market, such as Ticketmaster, to adjust to market conditions and so limits the opportunities of resale for a profit.

Ticketmaster argues that without dynamic pricing, artists will miss out on large amounts of revenue that will go to re-sellers instead. A spokesperson for the company stated that

Over the past few years, artists have lost money to resellers who have no investment in the event going well. As such event organisers have looked to market-based pricing to recapture that lost revenue.

Critics have claimed that Ticketmaster’s use of dynamic pricing is simply an example of price gouging.

No doubt the controversy over the sale of tickets for live music events will continue in the future.

Articles

Questions

  1. Explain the difference between the primary and secondary market for ticket sales for live events.
  2. Draw a demand and supply diagram to illustrate the primary market for tickets. Using this diagram explain how below market clearing prices in the primary market enable re-sellers to make money in the secondary market.
  3. What are the limitations of using demand and supply diagrams to analyse the primary market for tickets?
  4. Who has the greater market power – Ticketmaster or artists such as Taylor Swift and Beyonce?
  5. Try to provide a precise definition of the term ‘price gouging’.
  6. What other sectors commonly use dynamic pricing?
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Digital Markets: Reform of competition laws

The emergence of the digital economy has brought about increased competition across a wide range of products and services. The digital economy has provided businesses with the opportunity to produce new categories of goods and services with the aid of artificial intelligence. This new digital era has also been beneficial for consumers who now have greater choice and access to often higher-quality products at lower prices.

But while the digital revolution has facilitated greater competition, it also presents some challenges for competition law enforcement. Competition agencies continue to intensify their scrutiny of the digital economy as they try to get to grips with both the opportunities and challenges.

The role of regulation

Many agencies are aware that regulatory overreach could have negative effects on the development of digital markets. Therefore, any competition enforcement in this area needs to be evidenced-based.

A number of agencies have commissioned market studies or appointed experts in the digital field to prepare industry reports. While many of these reports and studies have found that existing competition rules generally continue to provide a solid basis for protecting competition in the digital age, there is growing demand for various changes to regulation. The reports have generally noted that the traditional tools for competition analysis may require some adaptation or refinement to address better the specificities of online markets, such as the multisided nature of platforms, network effects, zero-price markets, ‘big data’ and the increased use of algorithms.

Tech giants and online platforms, in particular, have been a focus of recent intervention by competition authorities. Investigations and intervention have related to a range of practices, including self-preferencing in the ranking of search results, the bundling of apps (and other alleged anti-competitive leveraging strategies), the collection, usage and sharing of data, and the setting of access conditions to mobile ecosystems and app stores.

The duration and complexity of these investigations have been met with concerns that competition authorities are not sufficiently equipped to protect competition in fast-moving digital markets. These concerns have been amplified by the growth in size and importance of online platforms, their significant economies of scale and network effects, and the risk that market power in digital markets can become quickly entrenched.

In addition to the commissioned reports, some agencies have established or appointed specialist digital markets units or officers. The aim of such units is to develop expertise and regulation to deal with fast-paced digital markets. In Europe, The Digital Markets Act (DMA) was adopted by the EU in response to these concerns to establish a uniform ex-ante regulatory regime to make digital markets fairer and more competitive, and to prevent a fragmentation of the EU’s internal market.

A recent case concerns Apple. Because of the Digital Markets Act, Apple has been required to allow app store competitors onto its products. This will come into effect in 2024.

UK policy

In the UK, the government has been concerned that ‘the unprecedented concentration of power amongst a small number of digital firms is holding back innovation and growth’. UK competition rules are thus set to change significantly, with the government setting out the framework for an entirely new ‘pro-competition regime’ for digital markets. As it states in the Executive Summary to its proposals for such a regime (see linked UK official publication below):

The size and presence of ‘big’ digital firms is not inherently bad. Nonetheless, there is growing evidence that the particular features of some digital markets can cause them to ‘tip’ in favour of one or two incumbents… This market power can become entrenched, leading to higher prices, barriers to entry for entrepreneurs, less innovation, and less choice and control for consumers.

It has established a new Digital Markets Unit (DMU) within the Competition and Markets Authority (CMA). It was launched in ‘shadow form’ in April 2021, pending the introduction of the UK’s new digital regulatory regime. Under the proposals, the new regime will focus on companies that the DMU designates as having ‘strategic market status’.

The government is expected to publish its much-awaited Digital Markets, Competition and Consumer Bill, which, according to legal experts, will represent the most significant reform of UK competition and consumer protection laws in years.

It is expected that the Bill will result in important reforms for competition law, but it is also expected to give the DMU powers to enforce a new regulatory regime. This new regime will apply to UK digital firms that have ‘strategic market status’ (SMS). This will be similar to the EU’s Digital Markets Act in how it applies to certain ‘gatekeeper’ digital firms. However, the UK regulations are intended to be more nuanced than the EU regime in terms of how SMS firms are designated and the specific obligations they will have to comply with.

A report by MPs on the influential Business, Energy and Industrial Strategy Committee published in October, urged the Government to publish a draft Digital Markets Bill that would help deter predatory practices by big tech firms ‘without delay’.

On 17th November 2022, the UK Government announced in its Autumn Statement 2022 that it will bring forward the Bill in the third Parliamentary session. There has been no specific date announced yet for the first reading of the Bill, but it will probably be in Spring 2023. Current expectations are that the new DMU regime and reforms to competition and consumer protection laws could be effective as early as October 2023.

Proposals for the Bill were trailed by the Government in the Queen’s Speech. It announced measures that would empower the Competition and Markets Authority’s (CMA) Digital Markets Unit (DMU) to rein in abusive tech giants by dropping the turnover threshold for immunity from financial penalties from £50 million to £20 million and hiking potential maximum fines to 10% of global annual income. Jeremy Hunt, the Chancellor of the Exchequer, said that the Bill, once enacted, would ‘tackle anti-competitive practice in digital markets’ and provide consumers with higher quality products and greater choice. The strategy includes tailored codes of conduct for certain digital companies and a bespoke merger control regime for designated firms.

The Bill is also expected to include a wide range of reforms to the competition and consumer law regimes in the UK, in particular:

  • wide-ranging changes to the CMA’s Competition Act 1998 and market study/investigation powers, including significant penalties for non-compliance with market investigation orders;
  • significant strengthening of the consumer law enforcement regime by enabling the CMA directly to enforce consumer law through the imposition of fines;
  • changes to UK consumer laws to tackle subscription traps and fake reviews and to enhance protections for savings schemes.

Competition law expert Alan Davis of Pinsent Masons said:

Importantly, the Bill will bring about major reforms to consumer protection law, substantially strengthening the CMA’s enforcement powers to mirror those it already uses in antitrust cases, as well as important changes to merger control and competition rules.

It is anticipated that the Bill will announce the most significant reforms of UK competition and consumer protection laws in years and is expected to have an impact on all business in the UK to varying degrees. It is advised, therefore, that businesses need to review their approach to sales and marketing given the expected new powers of the CMA to impose significant fines in relation to consumer law breaches.

Conclusions

Technological innovation is largely pro-competitive. However, competition rules must be flexible and robust enough to deal with the challenges of the online world. A globally co-ordinated approach to the challenges raised in competition law by the digital age remains important wherever possible. Under the EU’s Digital Markets Act, firms that are designated as gatekeepers, and those defined as having strategic market status under the UK regime, will be required to undertake significant work to ensure compliance with the new rules.

Articles

UK official publications

Questions

  1. For what reasons may digital markets be more competitive than traditional ones?
  2. What types of anti-competitive behaviour are likely in digital markets?
  3. Explain what are meant by ‘network economies’? What are their implications for competition and market power?
  4. Explain what is meant by ‘bundling’? How is this likely to occur in digital markets?
  5. Give some examples where traditional markets are combined with online ones. Does this make it difficult to pursue an effective competition policy?
  6. Give some examples of ways in which firms can mislead or otherwise take advantage of consumers in an e-commerce environment.
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Soaring gas prices (updated 1/10/22)

International wholesale gas prices have soared in recent months. This followed a cold winter in 2021/22 across Europe, the bounceback in demand as economies opened up after COVID and, more recently, pressure on supplies since the Russian invasion of Ukraine and the resulting restricted gas supplies from Russia. The price of gas traded on the UK wholesale market is shown in Chart 1 (click here for a PowerPoint). Analysts are forecasting that the wholesale price of gas will continue to rise for some time. The higher price of gas has had a knock-on effect on wholesale electricity prices, as gas-fired power stations are a major source of electricity generation and electricity prices.

In the UK, domestic fuel prices were capped by the regulator, Ofgem. The cap reflected wholesale prices and was designed to allow electricity suppliers to make reasonable but not excessive profits. The cap was adjusted every six months, but this was been reduced to three months to reflect the rapidly changing situation. Prices are capped for both gas and electricity for both the standing charge and the rate per kilowatt hour (kWh). This is illustrated in Chart 2 (click here for a PowerPoint).

The effects of the cap were then projected in terms of a total annual bill for a typical household consuming 12 000 kWh of gas and 2900 kWh of electricity. Chart 3 shows the typical fuel bill for the last four price caps and, prior to the mini-Budget of 23 September, the projected price caps for the first and second quarters of 2023 based on forecasts at the time of wholesale prices (click here for a PowerPoint). As you can see, wholesale gas and electricity prices account for an increasing proportion of the total bill. The remaining elements in cost consist of profits (1.9% assumed), VAT (5%), operating costs, grid connection costs and green levies (around £153). The chart shows that, without government support for prices, the price cap would have risen by 80.6% in October 2022 and was projected to rise by a further 51% in January 2023 and by another 23% in March 2023. If this were to have been the case, then prices would have risen by 481% between the summer of 2021 and March 2023.

This was leading to dire warnings of extreme fuel poverty, with huge consequences for people’s health and welfare, which would put extra demands on an already stretched health service. Many small businesses would not be able to survive the extra fuel costs, which would lead to bankruptcies and increased unemployment.

Future wholesale gas prices

Energy market analysts expect wholesale gas prices to remain high throughout 2023, with little likelihood that gas supplies from Russia will increase. Some European countries, such as Germany, have been buying large amounts of gas to fill storage facilities before winter and before prices rise further. This has added to demand.

The UK, however, has only limited storage facilities. Although it is not an importer of gas from Russia and so, in one sense, storage facilities are less important at the current time, wholesale gas prices reflect international demand and supply and thus gas prices in the UK will be directly affected by an overall global shortage of supply.

What would have been the response to the projected rise in gas prices? Eventually demand would fall as substitute fuels are used for electricity generation. But demand is highly inelastic. People cannot readily switch to alternative sources of heating. Most central heating is gas fired. People may reduce consumption of energy by turning down their heating or turning it off altogether, but such reductions are likely to be a much smaller percentage than the rise in price. Thus, despite some use of other fuels and despite people cutting their energy usage, people would still end up spending much more on energy.

Over the longer term, new sources of supply of gas, including liquified natural gas (LNG), may increase supply. And switching to green energy sources for electricity generation, may bring the price of electricity back down and lead to some substitution been gas and electricity in the home and businesses. Also improved home insulation and the installation of heat pumps and solar panels in homes, especially in new builds, may reduce the demand for gas. But these changes take time. Chart 4 illustrates the situation (click here for a PowerPoint).

Both demand and supply are relatively inelastic. The initial demand and supply curves are D1 and S1. Equilibrium price is P1 (point a). There is now a fall in supply. Supply shifts to S2. With an inelastic demand, there is a large rise in price to P2 (point b).

Over two or three years, there is a modest fall in demand (as described above) to D2 and a modest rise in supply to S3. Price falls back somewhat to P3 (point c). Over a longer period of time, these shifts would be greater and the price would fall further.

Possible policy responses

What could the government do to alleviate the problem? Consensus was that the new Conservative Prime Minister, Liz Truss, and her Chancellor, Kwasi Kwarteng, would have to take radical measures if many households were to avoid severe hardship and debt. One proposal was to reduce VAT on domestic energy from 5% to zero and to cut green levies. Although this would help, it would make only a relatively small dent in people’s rising bills.

Another proposal was to give people cash payments to help with their bills. The more generous and widespread these payments, the more costly they would be.

One solution here would be to impose larger windfall taxes on oil and gas producers (as opposed to retailers). Their profits have soared as oil and gas prices have soared. Such a move is generally resisted by those on the right of politics, arguing that it could discourage investment in energy production. Those on the centre and left of politics argue that the profits are the result of global factors and not because of wise business decisions by the energy producers. A windfall tax would only take away these excess profits.

The EU has agreed a tax on fossil fuel companies’ surplus profits made either this year or next. It is also introducing a levy on the excess revenues that other low-cost power producers make from higher electricity prices.

Another proposal was to freeze retail energy prices at the current or some other level. This would make it impossible for energy suppliers to cover their costs and so they would have to be subsidised. This again would be very expensive and would require substantially increased borrowing at a time when interest rates are rising, or increased taxation at a time when people’s finances are already squeezed by higher inflation. An alternative would be to cap the price North Sea producers receive. As around half of the UK’s gas consumption is from the North Sea, this would help considerably if it could be achieved, but it might be difficult to do so given that the gas is sold onto international markets.

One proposal that was gaining support from energy producers and suppliers is for the government to set up a ‘deficit fund’. Energy suppliers (retailers) would freeze energy prices for two years and take out state-backed loans from banks. These would then be paid back over time by prices being capped sufficiently high to cover costs (which, hopefully, by then would be lower) plus repayments.

Another policy response would be to decouple electricity prices from the wholesale price of gas. This is being urgently considered in the EU, and Ofgem is also consulting on such a measure. This could make wholesale electricity prices reflect the costs of the different means of generation, including wind, solar and nuclear, and would see a fall in wholesale electricity prices. At the moment, generators using these methods are making large profits.

The government’s response

On September 23, the government held a mini-Budget. One of its key elements was a capping of the unit price of energy for both households and firms. The government called this the Energy Price Guarantee. For example, those households on a variable dual-fuel, direct-debit tariff would pay no more than 34.0p/kWh for electricity and 10.3p/kWh for gas. Standing charges are capped at 46p per day for electricity and 28p per day for gas. These rates will apply for 2 years from 1/10/22 and should give an average annual household bill of £2500.

Although the government has widely referred to the ‘£2500 cap’, it is the unit price that is capped, not the annual bill. It is still the case that the more you consume, the more you will pay. As you can see from Chart 3, the average £2500 still represents an average increase per annum of just over £500 per household and is almost double the cap of £1277 a year ago. It will thus still put considerable strain on many household finances.

For businesses, prices will be capped for 6 months from 1 October at 21.1p per kWh for electricity and 7.5p per KWh for gas – considerably lower than for domestic consumers.

The government will pay subsidies to the retail energy companies to allow them to make sufficient, but not excess, profit. These subsidies are estimated to cost around £150 billion. This will be funded by borrowing, not by tax increases, with the government ruling out a windfall tax on North Sea oil and gas extracting companies. Indeed, the mini-Budget contained a number of tax reductions, including scrapping the 45% top rate of income tax, cutting the basic rate of income tax from 20% to 19% and scrapping the planned rise in corporation tax from 19% to 25%.

Articles

Data

Questions

  1. Why are the demand and supply of gas relatively inelastic with respect to price?
  2. Why are the long-run elasticities of demand and supply of gas likely to be greater than the short-run elasticities?
  3. Find out how wholesale electricity prices are determined. Is there a case for reforming the system and, if so, how?
  4. Identify ways in which people could be protected from rising energy bills.
  5. Assess these different methods in terms of (a) targeting help to those most in need; (b) economic efficiency.
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Tackling the menace of fly-tipping

If it costs to dispose of waste, there is the danger that people may resort to fly-tipping – the illegal dumping of waste in the countryside or on the streets. But several local authorities have indeed been charging for the disposal of building/DIY waste, with the inevitable consequences of huge quantities of dumped rubbish.

Apart from being an eyesore and damaging the environment, fly-tipped waste can be a health hazard, often containing toxic materials, such as asbestos and chemicals. According to the UK government, in 2020/21 there were over 60 000 incidents of fly-tipping of construction, demolition and excavation material, costing an estimated £392 million. In addition, people leave black bags of household waste and single items, such as mattresses, on the roadside.

The external costs are considerably greater than the benefits to those doing the dumping, but because the costs are largely external, people are encouraged to fly-tip, especially if they think that they are unlikely to be caught. Many householders are happy to pay low rates to have their DIY waste disposed of and ‘ask no questions’ about what will happen to it.

It is clearly socially efficient to stop fly-tipping. One solution is to enforce the law more rigorously and to introduce stiffer penalties. Increasingly, local authorities and private landowners are installing CCTV cameras to identify people doing the tipping. To be effective, the cameras must be out of reach. Also, the police must then follow up any cases and arrest and charge the culprits.

An alternative is to provide free disposal at council tips. The UK government has launched a consultation on a proposal to prevent local authorities from charging for the disposal of DIY waste. This still involves an externality in that the costs of disposal are not being borne by the person creating the waste, but clearly the size of the negative externality is considerably less than if the waste had been fly-tipped.

Selected local authorities can apply for new grants totalling £450 000 to help fund the provision of free DIY waste disposal and to install systems, such as CCTV and automatic number-plate recognition, to catch fly-tippers in action.

Devising policies to reduce externalities often involves understanding the incentive mechanisms which encourage people to engage in such activities in the first place and then making it in people’s interests not to engage in them in the future.

Videos

Articles

Government publications

Questions

  1. Draw a diagram to illustrate how the consumption of products with large negative externalities is considerably above the socially efficient level.
  2. Compare the relative advantages and disadvantages of the various policy alternatives to tackle fly-tipping that are discussed in the articles.
  3. Are there any ‘nudges’ that could be used to prevent fly-tipping?