When you look at the linked articles below, I’m sure many of you will be thinking that this is an odd choice for an economics blog! However, part of the economic relevance of ‘cyber-crime fighters’ relates to the relative skills of workers and the gap that exists between the most and least skilled workers in the UK.
Crime has always existed, but as technology has developed the types of crime committed have grown along with the complexity of them. For certain crimes, a very skilled individual is needed. With this emergence of technologically advanced crimes, those fighting crimes have also had to improve their skills and techniques. Thus crime-fighters have become more technologically advanced as well.
The problem is that the number of skilled workers able to deal with things like cyber crime has not kept pace with the demand for them and thus we have a skills gap. Usage of the Internet has continued to grow, creating more and more opportunities for cyber crime. However, the UK supply of IT and cyber-security professionals has not been able to keep pace. Therefore, we have a shortage of skilled labour in this area.
More investment into research and education is occurring, with the aim of addressing this shortage, but it is expected to take many years before supply catches up to demand. In particular, more investment is needed in the sciences and technology subjects at school to create the supply at university level. The NAO said that:
‘The current pipeline of graduates and practitioners are unable to meet demand.’
A second area of relevance to economics is the cost of cyber crime. The NAO estimated that the cost is somewhere between £18bn and £27bn per annum. However, on the other side, is there a case that crime actually benefits the macroeconomy by requiring government investment. As cyber crime has grown, so has the demand for cyber-crime fighters and this has created more jobs. With more jobs comes increased spending and the benefits of the multiplier. The following articles consider cyber crime and the impact it is having.
National Audit Office warns UK needs more skilled cyber crime fighters BBC News (12/2/13)
IT staff shortages raise cyber crime risk Sky News (12/2/13)
UK planning ‘Cyber Reserve’ defence force BBC News (3/12/12)
Britain vulnerable from cyber attacks for at least 20 years The Telegraph, Tom Whitehead (12/2/13)
Britain targeted by 120,000 every DAY with cost to country thought to total £27billion Mail Online, Jack Doyle (12/2/13)
Questions
- Illustrate the demand for and supply of labour curves in the market for cyber crime fighters. How is the equilibrium wage determined?
- If there is increased investment in education, how would this affect the shape and position of the MRP curve and what impact would this have on your diagram?
- If there is a shortage of cyber crime fighters, what does that suggest about the position of the two curves? Illustrate this situation and explain why it is a problem.
- Which factors would be considered by NAO in estimating the costs of cyber crime?
- Explain why crime can pay.
- How does the macroeconomy benefit from increased crime? Illustrate this on a diagram.
- Does your answer to question 5 above suggest anything about the effectiveness of using GDP as a measure of welfare?
- How is the multiplier effect relevant?
As resources become scarce, the price mechanism works to push up the price (see, for example, Box 9.11 in Economics 8th ed). If you look at the price of petrol over the past few decades, there has been a general upward trend – part of this is due to growth in demand, but part is due to oil being a scarce resource. Many millions have been spent on trying to find alternative fuels and perhaps things are now looking up!
Air Fuel Synthesis, a small British company, has allegedly managed to make ‘petrol from air’. Following this, the company has unsurprisingly received finance and investment offers from across the world. However, the entrepreneur Professor Marmont has said that he does not want any company from the oil industry to get a stake in this firm. This doesn’t mean that investment is not needed or on the cards, as in order to increase production of petrol from thin air financing is needed. Professors Marmont said:
We’ve had calls offering us money from all over the world. We’ve never had that before. We’ve made the first petrol with our demonstration plant but the next stage is to build a bigger plant capable of producing 1 tonne of petrol a day, which means we need between £5m and £6m
Whilst the process appears to be a reality, Air Fuel Synthesis is a long way from being able to produce en masse. However, it does offer an exciting prospect for the future of petrol and renewable energy resources in the UK. At the moment oil companies appear to be uninterested, but if this breakthrough receives the financing it needs and progress continues to be made, it will be interesting to see how the big oil companies respond. The following articles consider this break-through.
Company that made ‘petrol from air’ breakthrough would refuse investment from big oil Independent, Steve Connor (19/10/12)
British engineers create petrol from air and water Reuters, Alice Baghdijan (19/10/12)
Petrol from air: will it make a difference? BBC News, Jason Palmer (19/10/12)
British engineers produce amazing ‘petrol from air’ technology The Telegraph , Andrew Hough (18/10/12)
Questions
- Explain the way in which the price mechanism works as resources become scarce. Use a diagram to help your explanation.
- As raw materials become scarce, prices of the goods that use them to work or require them to be produced will be affected. Explain this interdependence between markets.
- Why is investment from an oil company such a concern for Professor Marmont?
- Why is there unlikely to be any impact in the short run from this new breakthrough?
- If such a technology could be put into practice, what effect might this have on the price of petrol?
- How might oil companies react to the growth in this technology?
The energy sector has a history of criticism with regards to prices and practices. In the past, Ofgem have tried to make the sector more competitive, by ensuring that price comparisons are easier. At the beginning of this year, many of the big six providers announced price cuts, but within the next few weeks, we will see the reverse occurring, as energy prices begin to rise.
British Gas has announced price rises of 6% from 16th November that will affect over 8 million customers by adding approximately £80 per year to the annual dual fuel bill. Npower will also put its prices up 10 days later (8.8% for gas and 9.1% for electricity), creating higher bills for 3 million people.
In January of this year, when we saw energy prices fall, it was not solely due to Ofgem’s findings. We had a relatively mild winter, which reduced the demand for energy and this fed into lower prices. As the winter now approaches once more, demand for energy will begin to increase, feeding into prices that are now higher.
Furthermore, the energy companies have said that a range of external factors are also adding to their costs and putting increasing pressure on them to increase their charges. Npower’s Chief Commercial Officer said:
“There is never a good time to increase energy bills, particularly when so many people are working hard to make ends meet…But the costs of new statutory schemes, increases in distribution charges and the price of gas for the coming winter are all being driven up by external factors, for example government policy”
Significant investment is needed in the energy sector. Energy companies are required to set aside money for maintaining and improving the national grid and investing in renewable energy, such as wind and solar power. In order for the energy companies to fund these investments, more money must be raised and the logical method is to put up prices. However, critics are simply blaming ‘these very big lazy companies’ who are passing ‘above-inflation price rises’ onto already squeezed households.
Part of this is undoubtedly to do with the market structure of this sector. A typical oligopoly creates a market which, under certain circumstances, can be highly competitive, but because of barriers to entry that prevent new firms from entering the market may charge higher prices and be inefficient. Indeed, Ofgem has plans to reduce the power of the main energy providers by forcing them to auction off some of the electricity they generate. The aim of this is to free up the market and make it more competitive.
While only three providers have announced price rises, it is inevitable that the other three will follow. The relative increases will create incentives for consumers to switch providers, but crucial to this is an ability to understand the different tariffs on offer and lack of clarity on this has been a big criticism previously levelled at the energy sector. Indeed, half of UK customers have never switched energy providers. Perhaps this is the time to think about it, firstly as a means of saving money and secondly as a means of putting the energy companies in competition with each other. The following articles consider this market.
Energy price rises: how to switch, save and safeguard your supply The Guardian, Mark King (12/10/12)
Npower and British Gas raise energy prices (including video) BBC News (12/10/12)
Energy price rises? We’re like turkeys voting for Christmas The Telegraph, Rosie Murray-West (12/10/12)
British Gas and Npower to raise prices fuelling fears of a ‘long, cold winter’ for more households Independent
, Graeme Evans (12/10/12)Wholesale prices rise as energy costs jump Wall Street Journal, Sarah Portlock and Jeffrey Sparshott (12/10/12)
British Gas raises gas and electricity prices by 6pc The Telegraph (12/10/12)
Osborne warns energy firms over price hikes Reuters (12/10/12)
Energy price hikes to take effect from next week Independent, Simon Read(13/10/12)
Questions
- What are the main reasons influencing the recent price rises? In each case, explain whether it is a demand- or supply-side factor.
- Using your answer from question 1, illustrate the effect of it on a demand and supply diagram.
- Which features of an oligopolistic market are relevant to the energy sector. How can we use them to explain these higher prices.
- How has government policy affected the energy sector and energy prices?
- Why are customers reluctant to change energy providers? Does this further the energy company’s ability to raise prices?
- Are there any government policies that could be implemented to reduce the power of the energy companies?
The UK has always been an attractive place for investment, as foreign companies look to cities such as London for stable investment opportunities. This provides not only jobs and output, but also tax revenue for the government. However, one drawback is the lost tax revenue through tax avoidance schemes and big businesses say that if the UK is to remain competitive it needs to look at cutting taxes and bureaucracy.
In recent months, we have seen cases of individuals being prosecuted for tax evasion and more recently in the USA, Microsoft and Hewlett-Packard have been criticized by the Senate for allegedly moving an estimated £13bn to offshore accounts. (Microsoft and HP deny any wrong-doing). It is cases like this that provide an argument for governments to cut business rates and avoid losing business and jobs to other tax havens. Lord Fink, who is a Director of Firms located in a variety of tax havens said:
’I don’t see why the UK should not compete for jobs that at present are going to the Cayman Islands’
Tax havens are obviously attractive to firms, as they provide a means of retaining more of a firm’s earnings and hence their profits. By offering a much lower rate of tax than countries such as the UK, they help to ease the tax burden on wealthy individuals and investors in hedge funds, along with many others.
The question is, do these lower tax rates discourage investment into the UK and thus would a relaxation of Revenue Customs’ rules mean an increase in inward investment and the other positive things that this would bring? Or would a decrease in tax rates for wealthy investors send the wrong message?
In a time of austerity, tax cuts for the rich are never going to be a popular policy – at least not amongst the ‘non-rich’ – in truth, the majority of the population. Furthermore, many simply see tax havens as morally wrong – or as George Osborne put it ‘morally repugnant’. The use of them provides the better off with a means of paying less to the taxman, whilst the worse off continue to pay their share.
The controversy surrounding tax havens is perhaps even more of an issue given the size of the public-sector deficit. With tax havens being used by those who should be paying the most, tax revenues are lower than would be the case without tax evasion and avoidance. Is this adding to the burden of basic rate tax payers?
This doesn’t help the gap between government expenditure and revenue, which has contributed to the largest amount of UK public-sector borrowing in August 2012 since records began. Net borrowing reached £14.4bn, as things like corporation tax receipts fell and benefit payments rose. Money that should go in to the government’s coffers is undoubtedly making its way into tax havens, but does that also mean that jobs are making their way out of the country? If tax rates in the UK were cut, cities such as London may become even more attractive places to invest, which could potentially create a much needed boost for the economy. But, at what cost? The following articles consider the controversy of tax havens.
Microsoft and HP rapped by US Senate over tax havens BBC News (20/9/12)
Morally repugnant tax avoiders can rest easy under David Cameron Guardian, Tanya Gold (21/9/12)
Britain could prevent the use of tax havens by ending ‘archaic’ business rules Telegraph, Rowena Mason (21/9/12)
UK public-sector borrowing hits record high of £14.4bn BBC News (21/9/12)
The top Tory who wants to make Britain a tax haven for millionaires Guardian, Martin Williams and Rajeev Syal (20/9/12)
Make UK a tax haven to attract investment from millionaires, urges Tory treasurer Mail Online, Daniel Martin (21/9/12)
Microsoft saved billions using Irish tax havens Irish Times, Genevieve Carbery (21/9/12)
Microsoft, HP skirted taxes via offshore units: U.S. Senate Panel Reuters, Kim Dixon (21/9/12)
Danny Alexander says tax avoidance ‘adds 2p in every £1 to basic tax rate’ Independent, Oliver Wright (24/6/12)
Questions
- What are the key features of tax havens?
- Briefly explain the arguments in favour of tax havens and those against. Think about them from all points of view.
- Explain the way in which a cut in UK tax rates could create jobs and how the multiplier effect may provide a boost for the UK economy.
- If tax rates were cut, how might this affect an individual’s decision to work? What about an individual’s decision to invest? Use indifference analysis to help explain your answer.
- How does tax avoidance and evasion affect public sector borrowing? Is there any way a cut in tax rates on foreign investment could improve the government’s finances?
- Do you think there is any truth in the argument that the UK is losing out to other countries because of its higher tax rates? Is a reduction in tax rates necessary to help us compete?
In the blog A surprising rise we analysed the recent trends in the housing market. In August house prices increased the fastest since January 2010 and this left the average UK house price at just under £165,000.
Whilst this has still meant getting on the property ladder is only a dream for many, for those wishing to buy in London, they will, on average, need to find £368,000. London wages are significantly higher than in the rest of the country, so it is hardly surprising that average house prices are too.
However, an average London wage won’t get you close to the following property! With a reported asking price of £300m, it would be the highest priced house ever sold in London. Undoubtedly, you get a fair amount for your money, including 45 bedrooms and 60,000 square feet, but is this worth £300m? A property expert believes that it will be sold privately, not publicly, as it is such a rare property and that naturally, there will only be a few potential buyers!!
So, who are the likely buyers? You won’t be able to walk into a local estate agent and ask for a viewing. Only certain people with the funds to spare are being offered it. Many foreigners have been purchasing property in London, looking for a safe investment, with the trouble in Europe. This has led to London property prices rising very rapidly. But surely £300m is a little over the top! Assuming the asking price is paid, in order for a potential buyer to get any consumer surplus, he or she would have to value the property at significantly more than £300m – especially as stamp duty of approximately £21m would have to be paid.
The following few articles look at this record property price. (By the way, the house in the picture at the top of this blog is not the house that’s for sale: it’s a girls’ school in Tetbury. I don’t know how much it’s worth!)
London’s most expensive house yet, at £300m? BBC News, Ian Pollock (13/9/12)
London mansion on sale for record £300m Telegraph, Matthew Sparkes (13/9/12)
Money’s not too tight for buyer of £300m London mansion Guardian, Esther Addley and Yasmin Morgan-Griffiths (13/9/12)
Questions
- Why are property prices in London so much higher than in other parts of the UK?
- Why is this property being sold privately not publicly, when selling publicly typically gains a higher price?
- How would an individual place a value on this property?
- What is consumer surplus and how would an individual calculate it?
- Could this record price for the property have a positive or adverse effect on property prices in other parts of London?
- Why is mortgage rationing unlikely to be a concern for this property!
