A weekly expense for most families is filling up their car(s) with petrol, but this activity is becoming increasingly expensive and is putting added pressure on lower and middle income families in particular. For those families on lower incomes, a tank of petrol represents a much larger percentage of their income than it does for a higher income household. Assuming that petrol for a month costs you £70 and your monthly income is £500, as a percentage of your income, a tank of petrol costs you 14%. Whereas, if your income is £900, the percentage falls to 7.7% and with a monthly take-home pay of £2000, the cost of a month’s petrol as a percentage of your income is just 3.5%. This is a stark indication of why those on lower incomes feel the burden of higher petrol prices (and indeed, higher prices for any essential items) more than other families.
The price of petrol will today be debated by MPs, following an e-petition signed by more than 100,000 people and having the support of more than 100 MPs. When in power, the Labour government proposed automatic fuel-tax increases, but these were scrapped by the Coalition. However, in January, the government plans to increase fuel duty by 3p a litre and further increases in prices are expected in August in line with inflation. This could mean that the price of unleaded petrol rises to over 1.40p per litre.
And it’s not just households that are feeling the squeeze. The situation described in the first paragraph is just as relevant to firms. The smaller firms, with lower turnover and profits are feeling the squeeze of higher petrol prices more than their larger counterparts. Any businesses that have to transport goods, whether to customers or from wholesalers to retailers etc, are seeing their costs rise, as a tank of petrol is requiring more and more money. To maintain profit margins, firms must pass these cost increases on to their customers in the form of higher prices. Alternatively, they keep prices as they were and take a hit on profitability. If prices rise, they lose customers and if prices are maintained, profitability suffers, which for some companies, already struggling due to the recession, may not be an option.
Mr. Halfon, the Tory MP whose motion launched the e-petition said that fuel prices were causing ‘immense difficulties’ and the Shadow Treasury Minister Owen Smith has said:
‘With our economic recovery choked off well before the recent eurozone crisis, we need action.’
With inflation at 5.2% (I’m writing an hour or so before new inflation data is released on 15/11/11), higher prices for many goods is putting pressure on households. This is possibly contributing towards sluggish growth, as households have less and less disposable income to spend on other goods, after they have purchased their essential items, such as groceries and petrol. A criticism leveled at oil companies is that they quickly pass on price rises, as the world price of oil increases, but do not pass on cuts in oil prices. The issues raised in the debate and how George Osborne and David Cameron respond, together with inflation data for the coming months, may play a crucial role in determining just how much a tank of petrol will cost in the new year.
MPs to debate motion calling for half in petrol prices BBC News (15/11/11)
Petrol price rise: David Cameron faces Commons revolt after No10 e-petition Guardian, Cherry Wilson (15/11/11)
David Cameron faces backbench rebellion over fuel price hike Telegraph, Rowena Mason (14/11/11)
Petrol prices may be slashed by Rs 2 per litre on November 16 The Economic Times (15/11/11)
Paying the price as fuel costs rise BBC News (15/11/10)
Oil barons the big winners from soaring pump prices, ONS figures reveal Daily Mirror, Graham Hiscott (15/11/11)
Scrap rise in petrol duty: 100 MPs demand Osborne abandon planned 3p increase Mail Online, Ray Massey and Tim Shipman (15/11/11)
Questions
- As the price of petrol rises, why do people continue to buy it? What does it suggest about the elasticity of this product?
- Why do higher prices affect lower income families more than higher income families?
- What are the arguments (a) for and (b) against George Osborne’s planned 3p rise in petrol duty?
- Do you think that higher prices are contributing towards sluggish growth? Why?
- What type of tax is imposed on petrol? Is it equitable? Is it efficient?
- Why can the oil companies pass price rises on to petrol stations, but delay passing on any price reductions? Is there a need for better regulation and more pressure on oil companies to change their behaviour?
In the UK, we have a dominant public healthcare sector and a small private sector. In the blog Is an education monopoly efficient? we looked at the idea of an education monopoly and why that may create inefficiencies in the system in comparison with competitive private markets. Does the same argument hold for the market for healthcare? The NHS is largely a state monopoly, although market forces are used in certain areas, which does bring some benefits of competition. However, was the NHS to be privatized, would we see further efficiency gains? As we stated in the previously mentioned blog: ‘the more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price.’
Privatisation of the NHS has always been regarded with skepticism – of all the British welfare state institutions, the NHS is the most symbolic. However, we have recently seen a takeover of a NHS hospital by a private firm. It’s not privatisation, but it is a step towards a more privately run healthcare system.
Hinchingbrooke hospital in Cambridge is only small, but has a history of large debts – £40m and yet only a turnover of about £105m. This new strategy will still see the NHS owning the hospitals, but the private firm becoming liable for the hospital’s debts and essentially taking over the running of it. However, Circle aims to repay all the debts within 10 years and make a profit. There are many skeptics of this bold new approach, suggesting that Circle’s numbers don’t add up, especially with the flat NHS spending we’re going to see. However, the firm does have a positive track record in terms of making efficiency savings and whilst success will undoubtedly be a good thing – it may bring up some pertinent questions for the way in which the NHS is and should be run.
Hinchingbrooke hospital deal shakes up NHS Financial Times, Nicholas Timmins (10/11/11)
Failing NHS hospital is taken over by private firm for the first time in history Mail Online, Jenny Hope (11/11/11)
Andrew Lansley’s NHS is all about private sector hype Guardian, John Lister (11/11/11)
Circle clinches hospital management deal Reuters, Tim Castle (11/11/11)
Will profits come before patients in a hospital run by a private company? Independent, Oliver Wright (11/11/11)
Hospital group’s liabilities capped at £7m Financial Times, Sarah Neville and Gill Plimmer (10/11/11)
First privately run NHS hospital ‘is accident waiting to happen’ Guardian, Randeep Ramesh (10/11/11)
Government rejects hospital privatisation claims BBC News, Democracy Live (10/11/11)
Questions
- What are the benefits of competition?
- What are the market failures within the healthcare market? To what extent do you think that public sector provision (in the form of the NHS) is the most effective type of intervention?
- Is this just the first step towards privatisation of healthcare?
- Do you think private ownership of hospitals with significant debts is a good strategy?
- Why do you think Unison have argued that Circle’s takeover is ‘an accident waiting to happen’?
- Does privatisation mean that profits will be more important than patient care?
There has always been relatively widespread agreement that the best method to produce and finance education is via the government. Education is such a key service, with huge positive externalities, but information is far from perfect. If left to the individual, many would perhaps choose not to send their children to school. Whether it be because they lack the necessary information, they don’t value education or they need the money their child could earn by going out to work – perhaps they put the welfare of the whole family unit above the welfare of one child. However, with such large external benefits, the government intervenes by making education compulsory and goes a step further in many countries and provides and finances it too.
However, is this the right way to provide education? People like choice and the ability to exercise their consumer sovereignty. The more competition there is, the more of an incentive firms have to provide consumers with the best deal, in terms of quality, efficiency and hence price. We see this every day when we buy most goods. Many car salesrooms to visit – all the dealerships trying to offer us a better deal. Innovation in all industries – one phone is developed, only to be trumped by a slightly better one. This is only one of the many benefits of competition. Yet, education sectors are largely monopolies, run by the government. Many countries have a small private sector and there is substantial evidence to suggest that education standards in it are significantly higher. Research from Harvard University academics, covering 220,000 teenagers, suggests that competition from private schools improves achievement for all students. Martin West said:
“The more competition the state schools face for students, the stronger their incentive to perform at high levels…Our results suggest that students in state-run schools profit nearly as much from increased private school competition as do a nation’s students as a whole.”
The study concluded that an increase in the percentage of private school pupils made the education system more competitive and therefore more efficient, with an overall improvement in education standards. With so much evidence in favour of competition in other markets in addition to the above study, what makes education so different?
Or is it different? Should there be more competition in this sector – many economists, including Milton Friedman, say yes. He proposed a voucher scheme, whereby parents were given a voucher to cover the cost of sending their child to school. However, the parents could decide which school they sent their child to – a private one or a state run school. This meant that schools were in direct competition with each other to attract parents, their children and hence their money. Voucher schemes have been trialed in several places, most prominently in Sweden, where the independent sector has significantly expanded and results have improved. Is this a good policy? Should it be expanded and implemented in countries such as the UK and US? The following articles consider this.
Articles
School Competition rescues kids: the government’s virtual monopoly over K-12 education has failed Hawaii Reporter, John Stossel (30/10/11)
Private schools boosts national exam results Guardian, Jessica Shepherd (15/9/10)
Can the private sector play a helpful role in education? Osiris (10/8/11)
Voucher critics are misleading the public Tribune Review, TribLive, Joy Pullmann (30/10/11)
Vouchers beat status quo The Times Tribune (29/10/11)
Why are we allowing kids to be held hostage by a government monopoly? Fox News, John Stossel (26/10/11)
Free Schools – freedom to privatise education The Socialist (26/10/11)
Anyone noticed the Tories are ‘nationalising’ schools? Guardian, Mike Baker (17/10/11)
Publications
School Choice works: The case of Sweden Milton & Rose D Friedman Foundation, Frederick Bergstrom and Mikael Sandstrom (December 2002)
Questions
- What are the general benefits of competition?
- How does competition in the education market improve efficiency and hence exam results? Think about results in the private sector.
- What is the idea of a voucher scheme? How do you think it will affect the efficiency of the sector?
- What do you think would happen to equity in if a scheme such as the voucher programme was implemented in the UK?
- How do you think UK families would react to the introduction of a voucher scheme?
- What other policies have been implemented in the UK to create more competition in the education sector? To what extent have they been effective?
Pay rises have been few and far between since the onset of recession – at least that’s the case for most workers. Pay for private-sector workers rose by 2.7% on average over the past year and for many in the public sector there were pay freezes. But, one group did considerably better: directors. According to the Incomes Data Services (IDS), over the past year, the average pay of the directors of the FTSE 100 companies has increased by almost 50%. Not bad for the aftermath of a recession! Much of the increase in overall pay for directors came from higher bonuses; they rose on average by 23% from £737,000 in 2010 to £906,000 this year.
Unsurprisingly, politicians from all sides have commented on the data – David Cameron said the report was ‘concerning’ and has called for the larger companies to become more transparent about how they set executive pay. How much difference transparency will make is debatable. However, Martin Sorrell, Chief Executive of WPP defended these pay rises, by comparing the pay of directors of UK companies with their counterparts in other parts of the world.
However, this defence is unlikely to make the average person feel any better, as for most people, their overall standard of living has fallen. With CPI inflation at 3.3% in 2010 (and RPI inflation at 4.6%) a person receiving the average private-sector pay rise of 2.7% was worse off; with a pay freeze they would be considerably worse off. Essentially, buying power has fallen, as people’s incomes can purchase them fewer and fewer goods.
However, the data have given David Cameron an opportunity to draw attention to the issue of more women executives. He believes that more women at the top of the big companies and hence in the boardroom would have a positive effect on pay restraint. However, this was met with some skepticism. The following podcasts and articles consider this issue.
Podcasts and webcasts
Directors’ pay rose 50% in past year BBC News, Emma Simpson (28/10/11)
‘Spectacular’ share payouts for executives BBC Today Programme, Steve Tatton of Income Data Services (29/10/11)
Sir Martin Sorrell defends top pay BBC Today Programme, Sir Martin Sorrell, Chief executive of WPP (28/10/11)
‘A closed little club’ sets executive pay BBC Today Programme, John Purcell and Deborah Hargreaves (28/10/11)
Articles
Cameron says Executive pay in U.K. is ‘Issue of concern’ after 49% advance Bloomberg, Thomas Penny (28/10/11)
Directors’ pay rose 50% in last year, says IDS report BBC News (28/10/11)
Cameron ties top pay to women executives issue Financial Times, Jim Pickard and Brian Groom (28/10/11)
£4m advertising boss Sir Martin Sorrell defends rising executive pay Guardian, Jill Treanor and Mark Sweney (28/10/11)
Executive pay soars while the young poor face freefall: where is Labour? Guardian, Polly Toynbee (28/10/11)
My pay is very low, moans advertising tycoon with a basic salary of £1 MILLION a year Mail Online, Jason Groves and Rupert Steiner (29/10/11)
More women directors will rein in excessive pay, says David Cameron Guardian, Nicholas Watt (28/10/11)
David Cameron and Nick Clegg criticise directors’ ‘50% pay rise’ BBC News (28/10/11)
The FTSE fat cats are purring over their pay but that’s good for the UK The Telegraph, Damian Reece (28/10/11)
IDS press release
FTSE 100 directors get 49% increase in total earnings Incomes Data Services (26/10/11)
Questions
- What are the arguments supporting such high pay for the Directors of large UK companies?
- How are wages set in a) perfectly and b) Imperfectly competitive markets?
- Why is the average person worse off, despite pay rises of 2.5%?
- Why does David Cameron believe that more women in the boardroom would act to restrict pay rises?
- To what extent do you think that more transparency in setting pay would improve the system of determining executive pay?
- Do senior executives need to be paid millions of pounds per year to do a good job? How would you set about finding the evidence to answer this question?
- Is the high pay of senior executives a ‘market’ rate of pay or is it the result of oligopolistic collusion between the remuneration committees of large companies (a form of ‘closed shop’)?
- What would be the effect over time on executive pay of remuneration committees basing their recommendations on the top 50% of pay rates in comparable companies?
Families in the UK seemed to have been squeezed in all areas. With incomes flat, inflation rising, petrol and bills high, there seems to be a never ending cycle of price rises without the corresponding increase in incomes. This has been confirmed by the latest figures released from the big six energy companies, whose profit margins have risen from £15 per customer in June to £125 per customer per year. This is assuming that prices remain the same for the coming year.
The regulator, Ofgem has said that profit margins will fall by next year and that they are ensuring that price comparisons between the big energy companies become much easier to allow consumers to shop around. It is a competitive market and yet due to tariffs being so complicated to understand, many consumers are simply unable to determine which company is offering them the best deal. There is certainly not perfect knowledge in this market. Tim Yeo, the Chair of the Energy and Climate Change Committee said the profit margins were:
‘Evidence of absolutely crass behaviour by the energy companies, with a jump in prices announced in the last few months ahead of what will be a winter in which most families face their highest ever electricity and gas bills’
Ofgem will publish proposals later this year with suggestions of how to make the market more competitive. We have already seen in the blog “An energetic escape?” how Ofgem is hoping to reduce the power of the big six by forcing them to auction off some of the electricity they generate. The aim is to free up the market and allow more firms to enter. With the winter fast approaching and based on the past 2 years of snow and cold weather, it is no wonder that households are concerned with finding the best deals in a bid to reduce just one of their bills. The following articles consider this issue.
Energy price hikes see profits soar The Press Association (14/10/11)
Energy suppliers’ profit margins eight times higher, says regulator Ofgem Telegraph (14/10/11)
Energy firms’ profit margins soar, Ofgem says BBC News (14/10/11)
Energy firms’ profits per customer rise 733%, says Ofgem Guardian, Dan Milmo and Lisa Bachelor (14/10/11)
Regulator proposes radical change to energy market Associated Press (14/10/11)
Energy bills face overhaul in first wave of reform Reuters, Paul Hoskins (14/10/11)
Ofgem tells energy companies to simplify tariffs Financial Times, Michael Kavanagh (14/10/11)
You can’t shop around in an oligopoly Financial Times, William Murray (13/10/11)
Questions
- What type of market structure best describes the energy market?
- Of the actions being taken by Ofgem, which do you think will have the largest effect on competition in the market?
- Are there any other reforms you think would be beneficial for competition?
- Why is transparency so important in a market?
- What barriers to entry are there for potential competitors in the energy market?
- Why do you think profit margins are so high in this sector?