EU environmental legislation is beginning to cause problems in the UK. As it prohibits coal-fired power plants from generating power, they will be forced to close. This means that the UK will be forced to rely more on imported energy, which could lead to price rises, as energy shortages emerge.
Ofgem, the energy regulator has said that the risk of a gas shortage is likely to be at its highest in about 3 years time, as the amount of spare capacity is expected to fall from its current 14% to just 4%. Energy shortages have been a concern for some time, but the report from Ofgem indicates that the predicted time frame for these energy shortages will now be sooner than expected. Ofgem has said that the probability of a black-out has increased from 1 in 3,300 years now to 1 in 12 years by 2015.
The government, however, has said that its Energy Bill soon to be published will set out plans that will secure power supply for the UK. Part of this will be through investment, leading to new methods of generating energy. The Chief Executive of Ofgem, Alistair Buchanan said:
‘The unprecedented challenges in facing Britain’s energy industry … to attract the investment to deliver secure, sustainable and affordable energy supplies for consumers, still remain.’
One particular area that will see growth is wind-farms: a controversial method of power supply, due to the eye-sore they present (to some eyes, at least) and the noise pollution they generate. But with spare capacity predicted to fall to 4%, they will be a much needed investment.
Perhaps of more concern for the everyday household will be the impact on energy prices. As we know, when anything is scarce, the price begins to rise. As energy shortages become more of a concern, the market mechanism will begin to push up prices. With other bills already at record highs and incomes remaining low, the average household is likely to feel the squeeze. The following articles and the Ofgem report considers this issue.
Report
Electricity Capacity Assessment Ofgem Report to Government, Ofgem (5/12/12)
Articles
Power shortage risks by 2015, Ofgem warns BBC News (5/10/12)
Britain faces risk of blackout The Telegraph (5/10/12)
Ofgem estimates tightening margins for electricity generation Reuters (5/10/12)
Electricity shortages are ‘risk’ by 2015 Sky News (5/10/12)
Future energy bills could give customers a nasty shock ITV News, Chris Choi (5/10/12)
Questions
- What is the role of Ofgem in the UK?
- Explain the way in which prices adjust as resources become more or less scarce. Use a demand and supply diagram to illustrate your answer.
- To what extent do you think the UK should be forced to close down its coal-fired plants, as a part of EU environmental legislation?
- Are there any market failures associated with the use of wind farms? Where possible, use a diagram to illustrate your answer.
- Explain why an energy shortage will lead to an increase in imports and how this in turn will affect energy prices.
- What are the government’s plans to secure energy provision in the UK? Do you think they are likely to be effective?
A modern day hindrance is spam email clogging up your inbox with, for example, offers for cheap drugs or notifications that you will inherit enough money to retire to the Bahamas. A recent paper by Justin Rao and David Reiley in the Journal of Economic Perspectives investigates the economics of spam mail (which, as I discovered, from the article gets it’s name from a Monty Python sketch). Remarkably, they quote figures suggesting that 88% of worldwide email traffic is spam. Their paper then provides a number of interesting insights into the business of spam mail.
First, given that most recipients simply delete it, why is spam mail sent out? For the benefits of sending it to exceed the costs, it must be that somebody is reading and responding to it and the costs must also be reasonably low. Rao and Reiley are able to quantify these costs and benefits. They estimate that if 8.3 million spam emails are sent, only 1.8% (approximately 150,000) will reach the intended recipients’ inboxes, with the remainder being blocked or filtered out. Of these 150,000, just 0.25% (375) are clicked on. Furthermore, these 375 clicks generate just a single sale of the advertised product which is typically sold for around $50. Assuming that free entry of spammers leads to them earning zero economic profit, this means that it costs the spammers around $50 to send the 8.3 million emails.
Second, spam mail clearly imposes a considerable negative externality on society. This includes wasted time for consumers and the costs of the extra server hardware capacity required. Rao and Reiley are also able to quantify the size of the negative externality created. First, they estimate that:
“American firms and consumers experience costs of almost $20 billion annually due to spam.”
This can then be compared to the benefits senders of spam get:
“….. we estimate that spammers and spam-advertised merchants collect gross worldwide revenues on the order of $200 million per year. Thus, the ‘externality ratio’ of external costs to internal benefits for spam is around 100:1.”
They then compare this to estimates for other negative externalities such as car pollution and conclude that the size of the negative externality from spam is significantly greater.
Finally, they also point out that it is predominantly the larger email service providers i.e. Yahoo! Mail, Microsoft Hotmail, and Google Gmail who have both the incentives and resources to fund interventions to eradicate spam. For example, in 2009 Microsoft and Pfizer (the manufacturer of Viagra which faces competition from counterfeit versions often advertised by spam) financially supported the successful operation to shut down the largest spam distributor. Clearly, such operations have large positive spillovers for email users. However, as they also discuss, anti-spam technology also increases the fixed costs of competing as an email provider and they suggest that this has contributed to the increased concentration in the market.
The unpalatable business of spam The undercover economist, Tim Harford (19/07/12)
Huge spam botnet Grum is taken out by security researchers BBC News (19/07/12)
Spammers make a combined $200 million a year while costing society $20 billion BGR, Dan Graziano (28/08/12)
Questions
- Explain why free entry results in zero economic profit.
- Explain how an increase in fixed costs can lead to an increase in concentration.
- Why does Microsoft have large incentives to eradicate spam mail?
- In what ways does the externality created by spam mail differ from other forms of advertising?
- How might government policies alter the costs and benefits of sending spam mail?
Everyone who drives in the UK is required to take out car insurance. Whilst fully comprehensive is voluntary, it is compulsory to have at least third party insurance, which covers damage to other vehicles. Insurance premiums are calculated based on a number of different variables, such that two people driving the same car may face wildly different costs.
Although there are many insurance companies to choose from, this industry has been referred to the Competition Commission by the OFT as it was ‘worried the structure of the market was making costs and premiums unnecessarily high.’
According to Moneysupermarket, the average cost of car insurance reached a high of £554 in April 2011, but have fallen by £76 since. With tight incomes across the UK for many families, high car insurance premiums is another strain and thus this investigation will come at an apt time, even though the findings of the CC may not be reported for 2 years. The Association of British Insurers (ABI) said that the investigation would:
‘bring much-needed reforms to the market that will, in turn, result in lower car insurance premiums for consumers’.
The problem seems to be that when an individual is involved in an accident and sends their car off for repairs, their insurance company doesn’t have much control over the bills they end up paying, which can be inflated by £155 each time. This therefore leads into higher costs for the insurance company, which are then passed on the driver in the form of an increased premium. Other concerns were that courtesy cars were being offered, at an estimated cost of £560 per vehicle (according to the OFT) and that drivers were using these cars for longer than necessary, once again causing costs to rise.
Altogether, it has been suggested that the actions of the insurance company of ‘not-at-fault’ drivers, car hire companies, repairers and brokers push up the prices for ‘at-fault’ drivers’ insurance companies. Given that any insurance company is just as likely to be the ‘at-fault’ insurance company, they all face rising costs.
Back in May, the OFT had already decided that the car insurance market required a more detailed investigation, because of the ‘dysfunctionality’ of the market. Following a public consultation, the industry will now face an investigation by the CC. One additional area that may be of interest to the CC came to light last year, where it was found that insurance companies were claiming against themselves in a bid to drive up premiums. Although the investigation will take some time, it is still a timely review for many drivers, who have seen the cost of motoring reach record highs. The following articles consider the market for car insurance.
Articles
Car insurance market referred to Competition Commission BBC News (28/9/12)
No quick fix for motor insurance abuses, says watchdog Independent, Simon Read (29/9/12)
Car insurance industry faces probe The Press Association (28/9/12)
Competition Commission referral will take time to lower motor insurance premiums The Telegraph, Rosie Murray-West (28/9/12)
UK car insurance probe over-shadows Direct Line IPO Reuters, Matt Scuffham and Myles Neligan (28/9/12)
Car insurance scrutinized over high premiums Sky News (28/9/12)
Rip-off motor insurance firms face competition watchdogs probe over £225million racket Mail Online, Ray Massey (28/9/12)
Questions
- Why are car insurance firms willing to take on other people’s risks?
- What conditions must exist in a market for private companies to provide acr insurance (or insurance of any kind)?
- Why is third-party insurance compulsory, whereas people can opt for fully comprehensive insurance?
- What powers does (a) the OFT and (b) the Competition Commission have? Is it likely that this report will have any impact on car insurance premiums?
- What allegations have been made that help to explain why insurance premiums I this industry have increased?
- Is there an argument for allowing the industry itself to provide its own regulation?
- In which market structure would you place the car insurance industry?
The ECB president, Mario Draghi, has announced a new programme of ‘Outright Monetary Transactions (OMTs)’ to ease the difficulties of countries such as Greece, Spain, Portugal and Italy. The idea is to push down interest rates for these countries’ bonds. If successful, this will make it more affordable for them to service their debts.
OMTs involve the ECB buying these countries’ bonds on the secondary market (i.e. existing bonds). This will be limited to bonds with no more than three years to maturity. Although restricting purchases to the secondary market would not involve the ECB lending directly to these countries, the bond purchases should push down interest rates on the secondary market and this, in turn, should allow the countries to issue new bonds at lower rates on the primary market.
The OMT programme replaces the previous Securities Markets Programme (SMP), which began in May 2010. This too involved purchasing bonds on the secondary market. By the time of the last actions under SMP in January 2012, €212 billion of purchases had been made. Unlike the SMP, however, OMTs are in principle unlimited, with the ECB president, Mario Draghi, saying that the ECB would do ‘whatever it takes’ to hold the single currency together. This means that it will buy as many bonds on the market as are necessary to bring interest rates down to sustainable levels.
Critics, however, argue that this will still not be enough to stimulate the eurozone economy and help bring countries out of recession. They give two reasons.
The first is that OMTs differ from the quantitative easing programmes used in the UK and USA. OMTs would not increase the eurozone money supply as the ECB would sell other assets to offset the bond purchases. This process is known as ‘sterilisation’, which is defined as actions taken by a central bank to offset the effects of foreign exchange flows or its own bond transactions so as to leave money supply unchanged.
The second reason is that OMTs will be conducted only if countries stick to previously agreed strong austerity measures. This is something that it looking increasingly unlikely as protests against the cuts mount in countries such as Greece and Spain.
Articles
Super Mario to the rescue Financial Standard, Benjamin Ong (7/9/12)
Outright monetary transactions: Lowdown on bond-buying scheme Irish Times, Dan O’Brien (7/9/12)
Draghi comments at ECB news conference Reuters (6/9/12)
ECB’s Mario Draghi unveils bond-buying euro debt plan BBC News (6/9/12)
ECB Market Intervention: Outright Monetary Transactions (“OMT”) – A Preliminary Assessment Place du Luxembourg (9/9/12)
Evaluating the OMT: OrlMost Too late? Social Europe Journal, Andrew Watt (7/9/12)
Mario Draghi speech: what the analysts said The Telegraph (6/9/12)
ECB challenges German concern over bond-buying Irish Times, Derek Scally (26/9/12)
Draghi: efforts helping to support stable future MarketWatch, Tom Fairless (25/9/12)
Mario and Mariano versus the man with the beard BBC News, Paul Mason (6/9/12)
Good week for the euro – but also a warning BBC News, Stephanie Flanders (12/9/12)
The price of saving the eurozone BBC News, Robert Peston (26/9/12)
Special Report – Inside Mario Draghi’s euro rescue plan Reuters, Paul Carrel, Noah Barkin and Annika Breidthardt (25/9/12)
ECB to face biggest test on euro gambit Financial Times, Michael Steen and Peter Spiegel (25/9/12)
Press release
ECB: Monetary policy decisions ECB Press Release, (6/9/12)
Questions
- What are the key features of the OMT programme? How does it differ from the former Securities Markets Programme (SMP)?
- In what ways does the OMT programme differ from the quantitative easing programmes in the USA and UK?
- How will the ECB’s buying bonds in the secondary market influence the primary bond market? What will influence the size of the effect?
- How does sterilisation work in (a) the bond market; (b) the foreign exchange market?
- Why is it claimed that the OMT programme is a necessary but not sufficient condition for solving the crisis in the eurozone? What additional measures would you recommend and why?
- What are the risks associated with the OMT programme?
Original post
As a resident of Bristol it is with considerable interest that I’m following the development of the Bristol pound, due for launch in September 2012. One Bristol pound will be worth one pound sterling.
The new currency will be issued in denominations of £1, £5, £10 and £20 and there is a local competition to design the notes. Participating local traders will open accounts with Bristol Credit Union, which will administer the scheme. It has FSA backing and so all deposits will be guaranteed up to £85,000.
The idea of a local currency is not new. There are already local currencies in Stroud in Gloucestershire, Totnes in Devon, Lewes in East Sussex and Brixton in south London. The Bristol scheme, however, is the first to be introduced on a city-wide scale. The administrators are keen that use of the currency should be as easy as possible; people will be able to open accounts with Bristol Credit Union, pay bills online and pay shopkeepers by mobile phone text message (a system used in many countries, but not in the UK).
As the money has to be spent locally, the aim is to help local business, of which more han 100 have already signed up to the scheme. Bristol has a large number of independent traders – in fact, the road where I live is off the Gloucester Road, which has the largest number of independent traders on one street in the UK. The organisers of the Bristol pound are determined to preserve the diversity of shops and prevent Bristol from becoming a ‘clone town’, with high streets full of chain stores.
But how likely is the scheme to encourage people to shop in independent shops and deal with local traders? Will the scheme take off, or will it fizzle out? What are its downsides?
Update
The Bristol pound was duly launched on September 19 and there has been much local interest. The later videos and articles below look at reactions to the new currency and at its chances of success in driving local business.
Videos and webcasts
The town printing its own currency [Stroud] BBC News, Tim Muffett (22/3/10)
Brixton launches its own currency BBC News (17/9/09)
Local currency BBC Politics Show (30/3/09)
Local currency for Lewes BBC News, Rob Pittam (13/5/08)
The Totnes Pound transitionculture.org on YouTube, Clive Ardagh (21/1/09)
Local Currencies – Replacing Scarcity with Trust Peak Moment on YouTube, Francis Ayley (8/2/07)
Videos and webcasts: update
Bristol Pound Launches ITV News, West, Tanya Mercer (19/9/12)
Can Bristol Pound boost local trade? BBC News, West, Jon Kay (19/9/12)
The Bristol Pound BristolPound on YouTube, Chris Sunderland (11/6/12)
Bristol Pound feature on BBC1 Inside Out BBC One in the West on YouTube, Dave Harvey (30/6/12)
Bristol Pound launched to keep trade in the city BBC News, Dave Harvey (19/9/12)
Bristol pound launched to boost local businesses BBC Radio 5 Live, Ciaran Mundy (19/9/12)
Articles
The Bristol Pound set to become a flagship for local enterprise The Random Fact, Thomas Foss (7/2/12)
What is the point of local currency? The Telegraph, Rosie Murray-West (7/2/12)
The Bristol pound: will it save the (local) economy? Management Today, Emma Haslett (6/2/12)
‘Bristol Pound’ currency to boost independent traders BBC News Bristol, Dave Harvey (6/2/12)
We don’t want to be part of ‘clone town Britain’: City launches its own currency to keep money local Mail Online, Tom Kelly (6/2/12)
British Town Prepares To Launch Its Own Currency — Here’s How That’s Going To End Business Insider, Macro Man (7/2/12)
They don’t just shop local in Totnes – they have their very own currency Independent, Rob Sharp (1/5/08)
Articles: update
Bristol banks on alternative pound to safeguard independent retailers Guardian, Steven Morris (21/9/12)
Bristol launches city’s local currency The Telegraph, Rachel Cooper (19/9/12)
The Bristol Pound is launched to help independent retailers Independent, Rob Hastings (20/9/12)
Banknotes, local currencies and central bank objectives Bank of England Quarterly Bulletin (Q4/2013)
Bristol Pound official site
Bristol Pound: Our City, Our Money Bristol Pound
Questions
- What are the advantages of having a local currency?
- What are the dangers in operating a local currency?
- What steps can be taken to avoid the dangers?
- Can Bristol pounds be ‘created’ by Bristol Credit Union? Could the process be inflationary?
- What market failures are there in the pattern of shops in towns and cities? To what extent is the growth of supermarkets in towns and the growth of out-of-town shopping malls a result of market failures or simply of consumer preferences?
- Are local currencies only for idealists?
- What benefits are there for shoppers in Bristol of using Bristol pounds?
EU environmental legislation is beginning to cause problems in the UK. As it prohibits coal-fired power plants from generating power, they will be forced to close. This means that the UK will be forced to rely more on imported energy, which could lead to price rises, as energy shortages emerge.
One particular area that will see growth is wind-farms: a controversial method of power supply, due to the eye-sore they present (to some eyes, at least) and the noise pollution they generate. But with spare capacity predicted to fall to 4%, they will be a much needed investment.
