It is widely acknowledged that the supply of oil and gas will eventually run out. As these resources are depleted, prices will inevitably rise. However, with heating and energy bills at extremely high levels, a new ‘resource’ in Sweden has been used to heat buildings: Body Heat!
Hundreds of thousands of people pass through Stockholm Central Station every day and rather than letting the body heat these people generate go to waste, a Swedish firm, Jernhusen, is now ‘collecting’ their heat, converting it into hot water and then using this as a new heating resource. Klass Johnasson, one of the creators of the system said:
This is old technology being used in a new way. The only difference here is that we’ve shifted energy between two different buildings.
The Swedish firm has found that the system is not only environmentally friendly, but it is also good business practice, as it has reduced the energy costs of the block by some 25%, which, during a recession and with high energy prices, is no small thing!
The costs and benefits of such a system will inevitably vary from country to country, but in Sweden’s case, it is a viable method of heating, given their high energy prices and low winter temperatures. They are not stealing the heat from anyone, but are simply converting the excess heat that is already there. Obviously, the fact that the firm owns the station, and also the land between the station and their building, is helpful in ‘transferring’ the energy, but the firm argues that even if this wasn’t the case, it’s nothing co-operation wouldn’t solve. Is this the future of low-cost and low-carbon heating?
Harvesting energy: body heat to warm buildings BBC News, Xanthe Hinchey (9/1/11)
How Sweden turns human body heat into useful energy BBC News (19/4/10)
Passengers passing by Stockholm Central Station reduce 25% of used heating energy The Green Optimistic, Mihai Sandru (12/1/11)
Body heat: the new energy source ecPulse (11/1/11)
Questions
- Think about how we define abundance. Is body heat an abundant resource?
- Why are energy and oil prices so high? How does scarcity affect their price?
- Could this source of heating be described as a market failure? If so, how could we illustrate this on a diagram?
- Consider the Swedish firm’s profit-maximising price and output. The new heating method is said to reduce their costs – will it affect their average and/or marginal costs? Show the impact on a diagram. What happens to the firm’s profits?
- Is this heating method something other firms could benefit from? How could they decide whether it is cost-effective?
- Is there a role for the government to encourage more firms to use this method? Explain your answer.
Here’s an interesting example of oligopoly – one you probably haven’t considered before. It’s the art market. And it’s not just one market, but a whole pyramid of markets. At the bottom are the ‘yearning masses’ of penny-poor artists, from students to those struggling to make a living from their art, with studios in their attic, garden shed or kitchen table. At the top of the pyramid are those very few artists that can earn fantastic sums of money by selling to collectors or top galleries. Then there are all the layers of markets in between, where artists can earn everything from a modest to a reasonable income.
The pyramid is itself depicted as a work of art, which you can see in the linked article below. It’s worth studying this piece of art carefully as well as reading the article.
A guide to the market oligopoly system Reuters, Felix Salmon (28/12/10)
Questions
- Identify the increasing barriers to entry as you work up the art market pyramid.
- Are there any other market imperfections in the art market that you can identify from the diagram?
- What are the key differences between the ‘primary market, tier 1’, the ‘primary market, tier 2’ and ‘the secondary market’?
- Are artists ‘rational maximisers’? If so, what is it they are trying to maximise? If not, why not?
- How would you set about determining the ‘worth’ of a piece of art? How do possible future value of a piece of art determine its present value?
Market failure occurs when the free market fails to deliver an efficient allocation of resources. Pollution by cars is a prime example of a negative externality or an external cost. We pay road tax and face high tax rates on petrol, but another form of government intervention is due to come into effect. From the 1st January 2011, nine models of electric car will be eligible for grants of up to £5000 (although only three models will be immediately available). By subsidising certain electric cars, the government is aiming to give people an incentive to switch to these so-called more environmentally friendly cars, as they will now be cheaper.
There are concerns, however, that generating the electricity to charge these cars still emits carbon dioxide. The Transport Secretary, Philip Hammond, said:
There’s no point in switching the car fleet to running on electricity if the electricity emits vast amounts of carbon dioxide.
So is the electric car the car of the future?
Nine electric cars will be eligible for subsidies BBC News (14/120/10)
Cash grants for environmentally friendly cars announced Telegraph (14/12/10)
£850,000 to kickstart use of electric cars in NI BBC News (14/12/10)
UK names nine electric cars eligible for subsidy Reuters (14/20/10)
Questions
- What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be.
- Why is pollution an example of a market failure? Illustrate this on a diagram.
- Why could electric cars also be an example of a market failure? Illustrate this on a diagram.
- How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them?
- Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively?
- Why is there such a high demand for car usage?
We have covered the issue of bank bonuses in previous blogs. See for example: Banking on bonuses? Not for much longer (November 2009); “We want our money back and we’re going to get it” (President Obama) (January 2010); and Payback time (Updated April 2010). But the issue has not been resolved. Despite public outrage around the world over the behaviour of banks that caused the credit crunch and about banks having to be bailed out with ‘taxpayers money’ and, as a result, people facing tax rises and cuts in public-sector services and jobs, bankers’ pay and bonuses are soaring once more. The individuals who caused the global economic crisis seem immune to the effects of their actions. But are things about to change?
The Committee of European Banking Supervisors (CEBS) has confirmed tough new guidelines on bank bonuses applying to all banks operating in the EU. The CEBS’s prime purpose in recommending restricting bonuses is to reduce the incentive for excessive and dangerous risk taking. As it states in paragraph 1 of the Guidelines on Remuneration Policies and Practices:
Whilst institutions’ remuneration policies were not the direct cause of this crisis, their drawbacks, nonetheless, contributed to its gravity and scale. It was generally recognized that excessive remuneration in the financial sector fuelled a risk appetite that was disproportionate to the loss-absorption capacity of institutions and of the financial sector as a whole.
The guidelines include deferring 40–60% of bonuses for three to five years; paying a maximum of 50% of bonuses in cash (the remainder having to be in shares); setting a maximum bonus level as a percentage of an individual’s basic pay; appointing remuneration committees that are truly independent; publishing the pay and bonuses of all senior managers and ‘risk takers’. Although they are only recommendations, it is expected that bank regulators across the EU will implement them in full.
So will they be effective in curbing the pay and bonuses of top bank staff? Will they curb excessive risk taking? Or will banks simply find ways around the regulations? The following articles discuss these issues
Articles
Bankers’ bonuses to face strict limits in Europe BBC News, Hugh Pym (10/12/10)
Bankers’ bonuses to face strict limits in Europe BBC News (10/12/10)
Europe set to link banking bonuses to basic salaries The Telegraph, Louise Armitstead (10/12/10)
Some bankers may escape EU cash bonus limit moneycontrol.com (India) (11/12/10)
Banks to sidestep bonus crackdown by raising salaries Guardian, Jill Treanor (10/12/10)
Bonuses: When bank jobs pay Guardian (11/12/10)
Bank bonuses (portal page) Financial Times
Committee of European Banking Supervisors (CEBS)
CEBS home page
CEBS has today published its Guidelines on Remuneration Policies and Practices (CP42) CEBS news release (10/12/10)
Guidelines on Remuneration Policies and Practices (10/12/10)
Questions
- What are main objectives of the CEBS guidelines?
- Assess the arguments used by the banking industry in criticising the guidelines.
- In what ways can the banks get around these new regulations (assuming the guidelines are accepted by EU banking regulators)?
- What conditions would have to met for a remuneration committee to be truly independent?
- How likely is it that countries outside the EU will adopt similar regulations? How could they be persuaded to do so?
You will probably have come across the concept of consumer sovereignty. In the mythical world of perfect markets, producers are at the beck and call of consumers. Firms that are not responsive to consumer demand go out of business. In other words, in order to survive they have to respond to any shifts in consumer demand. These in turn can be the result of changes in tastes, changes in income, changes in the prices of other goods, and so on.
Of course, the real world is not perfect, but it is still often assumed that consumers are powerful in influencing what firms sell and at what prices. Well, firms would much rather be in a position of manipulating consumer tastes and hence the huge amounts spent on advertising and marketing.
And it doesn’t end there. Firms use many pricing practices which, to put it mildly, try to confuse consumers or lure them into buying things by making them think they are getting something much cheaper than they really are. Take the case of airline tickets. Some budget airlines offer tickets at extremely low prices, such as 99p. But if you select such a flight, by the time you get to the final screen where taxes, charges, supplements, luggage, etc. are added, the price could exceed £100! And ask yourself this, when you buy something with 20% off, or when you buy ‘three for the price of two’ how rational was your decision? Did you really want the product? Was the offer really ‘genuine’?
The Office of Fair Trading has recently completed two investigations into pricing. As it stated 14 months ago when the investigations were launched:
The first, into online targeting of advertising and prices will cover behavioural advertising and customised pricing, where prices are individually tailored using information collected about a consumer’s internet use. It is expected that this study will be completed by spring 2010.
The second, into advertising of prices, will consider various pricing practices which may potentially mislead consumers. The study will look in particular, but not exclusively, at how these practices are used online.
The following articles look at some of the practices that firms use to drive sales – practices that deliberately attempt to manipulate the consumer. The assumption of ‘perfect knowledge’ by consumers may be a long way from the truth.
Articles
Shoppers lose out on ‘billions’ because of ‘deceitful’ marketing The Telegraph, Harry Wallop (2/12/10)
OFT warns retailers about ‘misleading’ price offers BBC News (2/12/10)
OFT cracks down on price gimmicks Guardian, Rebecca Smithers (2/12/10)
We’re all gulled by special offers BBC News blogs: Peston’s Picks, Robert Peston (2/12/10)
OFT publications
OFT warning on misleading pricing practices, OFT Press Release 124/10 (2/12/10)
OFT launches market studies into advertising and pricing practices, OFT Press Release 126/09 (15/10/09)
Advertising of Prices, Office of Fair Trading, OFT1291 (December 2010)
Advertising of Prices, Office of Fair Trading, project page
Advertising of Prices Study Overview, Office of Fair Trading, video
Questions
- Explain each of the different types of pricing practice investigated by the OFT.
- Which of the pricing practices are the most misleading for customers?
- What is meant by ‘invisible price increases’? How can they be used to mislead the consumer?
- Why do certain pricing practices make it hard for the Office for National Statistics to work out the rate of inflation?
- Explain the new framework the OFT is adopting for ‘prioritising enforcement action’.
- If we end up buying something that we didn’t really intend to buy, does this mean that we were being irrational?
- Is advertising generally in or against the interest of consumers? Explain your answer