Cycling generated £2.9 billion for the UK economy in 2010 – a rise of 28% over 2009. This amounts to an average ‘Gross Cycling Product’ of £233 for each of Britain’s 12½ million cyclists. What is more, the figures are likely to continue growing rapidly in future years. This is the central finding of the LSE report, The British Cycling Economy, authored by Dr Alexander Grous, a productivity and innovation specialist at the Centre of Economic Performance (CEP) at the London School of Economics.
The major benefits to the economy from cycling include the sale of cycles and accessories, cycle maintenance, the generation of wages and tax revenues from 23,000 people employed directly in bicycle manufacture, sales, distribution and the maintenance of cycling infrastructure. There are also health benefits. These are partly the direct benefits to the economy of fewer days taken in sick leave by cyclists (a contribution of £128 million in 2010) and partly the health and well-being benefits to the individual and the saving on healthcare expenditure.
But are enough people being encouraged to get on their bikes? What are the major incentives for people to cycle? The report identifies the following:
• Cycling being made both segment- and gender-neutral, appealing to the widest number of user groups, across all ages and genders;
• Coordinated and preferential traffic signals that facilitate faster and safer journeys;
• ‘Short cut’ routes in dense urban areas and capital cities that join arterial road routes;
• Traffic calming initiatives that include road narrowing and speed restrictions that range from 30km/h to ‘walking speeds’;
• Extensive parking and in some areas, designated women-only spaces with CCTV and enhanced lighting;
• Established bike rental schemes;
• Long-running training programmes for children;
• The prevalence of strict ‘liability laws’ that assume a car driver is responsible in the event of a collision between a car and a cyclist.
Read the following articles and report and then consider, as an economist, how the benefits and costs should be analysed and what policy implications might follow.
Articles
Wheels of fortune: how cycling became a £3bn-a-year industry Independent, Tim Hume (22/8/11)
Cycling worth £3bn a year to UK economy, says LSE study Guardian (21/8/11)
Cycling industry gives economy £3bn boost BBC News (22/8/11)
Growth in cycling ‘boosting economy’, says LSE BBC News (22/8/11)
Britain Gets Back On Its Bike British Cycling (22/8/11)
‘Gross Cycling Product’ worth £2.9bn to UK economy says LSE Road.cc (22/8/11)
Report
The British Cycling Economy: ‘Gross Cycling Product’ Report LSE, Dr Alexander Grous
Questions
- How is the figure of £2.9bn derived? Explain whether it is a ‘value-added’ figure?
- Which of the benefits can be regarded as externalities?
- Are there any external costs from cycling? If so, what are they and how might they be minimised?
- How might incentives be changed in order to encourage more people to cycle?
- Assume that you are a government or local authority considering whether or not to increase investment in cycle paths. What factors would you take into consideration in order to make a socially efficient decision?
Following a 38% increase in profit margins made by energy companies towards the end of 2010, Ofgem (the energy and gas regulator) began an investigation into the activities of energy companies. The review by Ofgem was aimed at determining whether or not consumers should be better protected from the powerful energy companies, many of whom had previously raised prices, forcing some consumers to pay an extra £138 per year. At the time, it was believed that Ofgem might request support from the Competition Commission, but it seems as though the big size energy companies have had a lucky escape. They will not be referred to the Competition Commission, even though critics, in particular First Utility – Britain’s largest independent energy supplier – suggest that Ofgem’s proposals are unlikely to be effective. It seems that the big six have shown sufficient co-operation with Ofgem.
A key reform that Ofgem hope to implement will try to reduce the power of this oligopoly by making it easier for new entrants to gain market share. One such proposal would see the big six auctioning off up to a fifth of the electricity they generate. As the owners of Britain’s power stations, new companies cannot buy gas and electricity on the open market and this reform aims to change that. However, there are concerns that this will be ineffective, as the big six may simply outbid the smaller companies or even just buy and sell electricity from each other, thereby keeping their dominant positions in the market. Although the big six have received constant criticism from all sides, the lack of government support for a Competition Commission inquiry may be related to the need for these companies to invest £200bn in Britain by 2020 to help create and build new energy sources, including wind farms and nuclear power. Without this investment, Britain’s energy supply could be in jeopardy. The following articles consider this energetic debate.
Articles
Ofgem may be blown away by the power of the ‘Big Six’ energy companies Telegraph, Rowena Mason (23/6/11)
Ofgem pledges to get tough with ‘big six’ energy companies Guardian, Miles Brignall (22/6/11)
Scottish power investigated over ‘misleading’ marketing campaign Independent, Sarah Arnott (23/6/11)
Ofgem and ‘Big Six’ need to put some energy into cleaning up their acts Telegraph, Richard Fletcher (23/6/11)
In search of a coherent energy policy Independent, David Prosser (23/6/11)
UK suppliers face tough power auction reforms Reuters (22/6/11)
Ofgem: ‘We are watching energy companies closely’ BBC News (22/6/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- What is the role of Ofgem? How does it relate to the Competition Commission?
- What factors have contributed to the investigation by Ofgem into the ‘big six’ energy companies?
- How much power does Ofgem actually have to implement reforms?
- What are the characteristics of an oligopoly? To what extent does the energy market fit into this market structure?
- What are the main barriers to entry that prevent new companies from competing with the ‘big six’? Are the reforms likely to help them?
- What other proposals have been suggested by parties other than Ofgem in bid to help new competitors and customers? Are any likely to be more effective than those proposed by Ofgem?
Economics studies the choices people make. ‘Rational choice’ involves the weighing up of costs and benefits and trying to maximise the surplus of benefits over costs. This surplus will be maximised when people do more of things where the marginal benefit exceeds the marginal cost and less of things where the marginal cost exceeds the marginal benefit. But, of course, measuring benefits and costs is not always easy. Nevertheless, for much of the time we do make conscious choices where we consider that choosing to do something is ‘worth it’: i.e. that the benefit to us exceeds the cost.
When we make a choice, often this involves expenditure. For example, when we choose to buy an item in a shop, we spend money on the item, and also, perhaps, spend money on transport to get us to the shop. But the full opportunity cost includes not only the money we spend, but also the best alternative activity sacrificed while we are out shopping.
Then there are the benefits. Not all pleasurable activity costs us money. The sight of beautiful contryside or the pleasure of the company of friends may cost us very little, if anything, in money terms. But they may still be very valuable to us.
If we are to make optimal decisions we need to have some estimate of all costs and benefits, not just ones involving the payment or receipt of money. This applies both to individual behaviour and to collective decisions made by governments or other agencies.
Cost–benefit analysis seeks to do this to help decisions about new projects, such as a new road, a new hospital, environmental projects, and so on. But just how do we set about putting a value on the environment – on the pleasure of a walk in bluebell woods, on protecting bird life in wetlands or sustaining ecosystems?
For the first time there has been a major study that attempts to value the environment. According to the introduction to the report:
The UK National Ecosystem Assessment (UK NEA) is the first analysis of the UK’s natural environment in terms of the benefits it provides to society and the nation’s continuing prosperity. Carried out between mid-2009 and mid-2011, the UK NEA has been a wide-ranging, multi-stakeholder, cross-disciplinary process, designed to provide a comprehensive picture of past, present and possible future trends in ecosystem services and their values; it is underpinned by the best available evidence and the most up-to-date conceptual thinking and analytical tools. The UK NEA is innovative in scale, scope and methodology, and has involved more than 500 natural scientists, economists, social scientists and other stakeholders from government, academic and private sector institutions, and non-governmental organisations (NGOs).
The following podcast and webcast look at the report and at some of the issues it raises in terms of quantifying and incorporating environmental costs and benefits into decision taking.
Podcast and Webcast
‘The hidden value’ of our green spaces BBC Today Programme, Tom Feilden (2/6/11)
Report puts monetary value on Britain’s natural assets BBC News, Jeremy Cooke (2/6/11)
Articles
NEA report highlights need for biodiversity Farmers Guardian, Ben Briggs (2/6/11)
Nature is worth £19bn a year to the UK economy – report Energy & Environmental Management Magazine (2/6/11)
In praise of… the unquantifiable Guardian (3/6/11)
Priceless benefits of bluebell woods Guardian letters, Dr Bhaskar Vira and Professor Roy Haines-Young (4/6/11)
Nature ‘is worth billions’ to UK BBC News, Richard Black (2/6/11)
Putting a price on nature BBC News, Tom Feilden (2/6/11)
Value of Britain’s trees and waterways calculated in ‘ground-breaking’ study The Telegraph, Andy Bloxham (2/6/11)
Nature worth billions, says environment audit Financial Times, Clive Cookson (2/6/11)
Nature gives UK free services worth billions Planet Earth, Tom Marshall (3/6/11)
UK scientists put price on nature with National Ecosystem Assessment GreenWise, Ann Elise Taylor (2/6/11)
Report
UK National Ecosystem Assessment: link to report DEFRA
UK National Ecosystem Assessment (June 2011)
The UK National Ecosystem Assessment: Synthesis of the Key Findings
Questions
- How would you set about valuing the benefits of woodlands?
- According to the report, the health benefits of living close to a green space are worth up to £300 per person per year. How much credance sould we attach to such a figure?
- What do you understand by the ‘ecosystem approach’ and the term ‘ecosystem services’?
- Explain Figure 2 on page 3 of Chapter 2 of the report.
- Should decision makers quantify only those benefits of ecosystems experienced by humans? Would all environmentalists agree with this approach?
- What are the advantages and disadvantages of quantifying all costs and benefits in money terms?
- Compare the consequences over the next 50 years of a ‘world markets’ scenarios with that of a ‘nature at work’ scenario.
- What policy implications follow from the report?
While inflation is a concern in the UK and is making the Bank of England think twice about keeping interest rates at their all time low of 0.5%, inflation in Japan is being celebrated. The Japanese economy has been plagued by deflation for over a decade and for the past 2 years inflation has never been above 0%. However, in April the consumer price index (CPI) rose to 0.6% from the previous year, fuelled by petrol prices. Strangely it might be the Japanese earthquake and tsunami that helped this situation, as Japan was unable to generate sufficient electricity and hence had to import fuel from abroad.
A typical question from non-economists is always about why deflation and hence falling prices is such a bad thing. Surely, it’s great for consumers? For those shopping for bargains, perhaps it is helpful – after all, if prices fall, a consumer’s real income will be higher. However, the problem with falling prices is that people start to hold off buying. If you want to buy a car, but expect prices to be lower next month, then it’s a rational decision to delay your purchase until next month when prices are lower. However, next month, you still expect prices to be lower in the following month and so delay purchasing again. And so the process continues. When people expect prices to fall they put off their purchases, this reduces demand and so prices do indeed fall. There are also costs for businesses: as consumers delay buying, sales begin to fall. And businesses are also consumers, and so they start delaying their purchases of inputs.
While many central banks across the world have begun to tighten monetary policy, the Japanese central bank seems inclined to keep monetary policy loose and has even considered expanding the emergency lending programme. As Azusa Kato, an economist at BNP Paribas, said:
“The bank will probably add stimulus if it sees more signs of weakening demand”. “If you strip out energy and food costs, consumer prices are basically flat now.”
Despite this inflationary pressure, many believe that it is unlikely to continue and deflationary pressures may appear once again in the near future. The following articles consider the Japanese deflationary situation.
Articles
Japan ends 25 months of deflation Bloomberg, Mayumi Otsuma (27/5/11)
Japan consumer prices log first rise in 28 months Associated Press (27/5/11)
Japan beats deflation for the first time in two years BBC News (275/11)
Japan overcomes deflation for first time in two years Guardian, Julia Kollewe (27/5/11)
Japanese consumer price rise (including video) BBC News (27/5/11)
Japan April core CPI rises 0.6 pct yr/yr Reuters (26/5/11)
Japan experiences inflation for first time in over two years Telegraph (27/5/11)
Data
Japan Inflation Rate Trading Economics
Consumer Price Index (Japan) Japanese Statistics Bureau
Inflation Rate and Consumer Price Index (CPI) (for USA, Canada, Australia, UK and Japan) Rate Inflation
Statistical Annex, Preliminary Version OECD
Questions
- What are the main costs of deflation? Think about the wider effects on consumers, businesses and the government.
- What has caused the increase in inflation to 0.6% in Japan and why was there an expectation that inflation would re-appear?
- What explanation can be given for the belief that deflation will soon re-emerge?
- Using a demand and supply diagram, explain the process by which consumers delaying their consumption will lead to prices falling continuously.
- What is the best policy for the Japanese central bank to pursue in light of the new data?
The snow the UK has seen over the past two winters created massive disruption, but that is only one reason for hoping for a milder winter to come. With the cold weather, the UK economy faced threats of gas shortages, as households turned on their heating. However, despite the freezing temperatures, many households were forced to turn off their heating regularly, due to the excessive bills they would face. This trend is expected to be even more prevalent if the 2011/12 winter is as cold, as fuel tariffs are predicted to rise. The Bank of England has said that gas and electricity prices could rise this year by 15% and 10% respectively. British Gas’s Parent company, Centrica said:
“In the UK the forward wholesale prices of gas and power for delivery in winter 2011/12 are currently around 25% higher than prices last winter, with end-user prices yet to reflect this higher wholesale market price environment.”
These predictions might see the average UK household paying an extra £148 over the next year. Although these are only estimates, we are still very likely to see many households being forced to turn off their heating. One thing which therefore is certain: a warmer winter would be much appreciated!
Articles
Switch energy tariff to help beat bill rises Guardian, Miles Brignall (14/5/11)
Quarter of households predicted to turn off heating BBC News, Brian Milligan (14/5/11)
Power bills set to soar by 50% in four years Scotsman (14/5/11)
Domestic fuel bills poised to rise by up to £200 Financial Times, Elaine Moore (13/5/11)
Data
Energy price statistics Department of Energy & Climate Change
Energy statistics publications Department of Energy & Climate Change
Questions
- Which factors have contributed to rising energy prices? Illustrate these changes on a demand and supply diagram.
- To what extent do these higher prices contribute to rising inflation?
- What impact might these price rises have on (a) poverty and (b) real income distribution in the UK?
- Why are energy prices currently being investigated by Ofgem? What powers does the regulator have and what actions could be taken?