Tag: positive externalities

20 July 201320 July 2013

The London Olympics legacy: a cost–benefit analysis

Did the benefits of the London Olympics outweigh the costs? The government’s UK Trade and Industry (part of the Department of Business, Innovation & Skills) has just published a report, London 2012, Delivering the economic legacy, which itemises the economic benefits of the games one year on. It claims that benefits to date are some £9.9 billion.

This compares with costs, estimated to be somewhere between £8.9 billion and £9.3 billion, although this figure does not include certain other costs, such as maintenance of the stadium. Nevertheless, according to the figures, even after just a year, it would seem that the Games had ‘made a profit’ – just.

The £9.9 billion of benefits consist of £5.9 billion of additional sales, £2.5 billion of additional inward investment and £1.5 billion of Olympic-related high value opportunities won overseas. Most of these can be seen as monetary external benefits: in other words, monetary benefits arising from spin-offs from the Games. The ‘internal’ monetary benefits would be largely the revenues from the ticket sales.

In a separate report for the Department of Culture, Media & Sport, Report 5: Post-Games Evaluation, it has been estimated that the total net benefits (net gross value added (GVA)) from 2004 to 2020 will be between £28 billion and £41 billion.

But benefits are not confined just to internal and external monetary benefits: there are also other externalities that are non-monetary. The Culture, Media & Sport report identified a number of these non-monetary externalities. The Summary Report itemises them. They include:

• The health and social benefits of more people participating in sport
• Inspiring a generation of children and young people
• A catalyst for improved elite sporting performance in the UK
• Setting new standards for sustainability
• Improved attitudes to disability and new opportunities for disabled people to participate in society
• Greater social cohesion as communities across the UK engaged with the Games
• Increased enthusiasm for volunteering
• Accelerated physical transformation of East London
• Beneficial socio-economic change in East London
• Important lessons learned for the co-ordination and delivery of other large-scale public and public/private projects

But with any cost–benefit analysis there are important caveats in interpreting the figures. First there may be monetary and non-monetary external costs. For example, will all the effects on social attitudes be positive? Might greater competitiveness in sport generate less tolerance towards non sporty people? Might people expect disabled people to do more than they are able (see)? Second, the costs generally precede the benefits. This then raises the question of what is the appropriate discount rate to reduce future benefits to a present value.

Perhaps the most serious question is that of the quantification of benefits. It is important that only benefits that can be attributed to the Games are counted and not benefits that would have occurred anyway, even if connected to the Games. For example, it is claimed in the UK Trade & Industry report that much of the Olympic park and stadium for the Winter Olympics in Russia was “designed and built by British businesses”. But was this the direct result of the London Olympics, or would this have happened anyway?

Another example is that any inward investment by any company that attended the London Olympics is counted in the £2.5 billion of additional inward investment (part of the £9.9 billion). As the London Evening Standard article below states:

In London, it credited the Games with helping seal the deal for the £1.2 billion investment in the Royal Albert Docks by Chinese developer ABP, the £1 billion investment in Croydon by Australian shopping centre developer Westfield with UK firm Hammerson and the £700 million investment in Battersea Nine Elms by Dalian Wander Group.

It is highly likely that some or all of these would have gone ahead anyway.

Then there are the £5.9 billion of additional sales. These are by companies which engaged with the Olympics. But again, many of these sales could have taken place anyway, or may have displaced other sales.

Many cost–benefit analyses (or simply ‘benefit analyses’) concern projects where there are strong vested interests in demonstrating that a project should or should not go ahead or, in this case, have gone ahead. The more powerful the vested interests, the less likely it is that the analysis can be seen as objective.

Questions

Distinguish between gross and net benefits; monetary and non-monetary externalities; direct costs (or benefits) and external costs (or benefits).
How should the discount rate be chosen for a cost–benefit analysis?
Give some examples of monetary and non-monetary external costs of the Games.
What are the arguments for and against including non-monetary externalities in a cost–benefit analysis?
Why might the £9.9 billion figure for the monetary benefits of the Games up to the present time be questioned?

4 April 201228 May 2012

The Big Society Bank

A particular issue that has received much attention recently is the difficulty of getting loans. One sector that has found this especially hard is those organisations that are part of the so-called ‘social sector’. Organisations that try to do some good in society while achieving a financial rate of return often find finance impossible to obtain and, as such, the economy is allegedly losing out on billions.

The Big Society is an integral part of the Conservative’s mission and the launch of the Big Society Fund is a key stepping stone in ‘supplying capital to help society expand’. Sir Ronald Cohen, who is Big Society Capital’s Chairman said:

“It will allow an organisation which today is trying to deal for instance with prisoners who are being released and ending up in unemployment then back in prison… to get the capital to increase the size of their organisation and to improve the lives of these prisoners.”

It is hoped that this innovation will help the economy grow through new investment, but will also bring wider benefits to society. One such example is Social Impact Bonds in Peterborough, which aim to help prisoners return to work once they are released from jail. The idea is that rather than being left to their own devices, the scheme helps them integrate back into the community, such that they don’t re-offend, which does tend to be a big problem and creates a big cost for the local community and society at large. In essence, this new bank will simply be providing loans to new social enterprises that demonstrate they can generate an income stream and also provide societal benefits. The financial return will encourage investors, as will the idea of doing some good for society. The following articles consider this new social innovation.

Unclaimed bank cash to fund ‘Big Society’ Sky News (4/4/12)
Big Society Fund launches with £600m to invest BBC News (4/4/12)
’Big Society Bank’ to start providing capital Financial Times, Sarah Neville and Jonathan Moules (4/4/12)
David Cameron unveils Big Society Bank to help savers invest in good causes Telegraph, Rowena Mason (4/4/12)
David Cameron launches £600m ‘big society fund’ Guardian, Nicholas Watt (4/4/12)
The Big Society Promise that has yet to deliver Independent (4/4/12)

Questions

Where is the finance for the big society bank coming from?
Do you think the financial return from investments through the big society bank will have to be equal to the financial return on business investments?
Explain the relevance of externalities to this new social innovation.
To what extent do you think funding through the big society bank is simply a way of replacing direct government funding of the welfare state?
Do you think the amount of money this bank is enough to make any difference?
Why do you think social projects find it difficult to obtain funding through traditional lending?

1 November 20118 November 2011

Is an education monopoly efficient?

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?

18 July 201026 July 2010

A watery smile in the South West

Anyone who lives in the South West can argue that they get a raw deal. Not only are the average salaries in this region lower than in the rest of the United Kingdom, but their water bills are 40% higher than those elsewhere in England and Wales. South West Water is the only provider of water in the South West and hence there are no other competitors that households or businesses can switch to, despite the extortionate prices.

Many households and businesses in the region are struggling to cope with the unfair bills, as people are forced to sacrifice other things in order to find the money. Furthermore, it can be argued that these higher bills are actually used for the benefit of everyone else in the United Kingdom. Since privatisation, South West Water are responsible for cleaning and maintaining over one third of the UK’s beaches and the prices they are charged by SW Water reflect this £2 billion cost. Moreover, with a relatively low population, this large cost cannot be spread across many people. Instead, the small population has to pay larger bills. A hairdresser, who does use a lot of water, is finding herself crippled by water bills of some £2,500. And this bill will pay to clean the beaches in the South West so that people living elsewhere can benefit from the beautiful surroundings.

There is now wide recognition of how unfair this scenario is and proposals have been suggested, ranging from a government grant (hardly likely given the state of public finances) to a levy on other regions’ bills to compensate SW Water for their clean-up costs. However, no decision has been made about how to progress and so for now, residents of the region must just simply grin and bear it, while sacrificing expenditure on other areas and seeing residents from across the UK benefit from their sacrifice.

P.S. If you hadn’t guessed it, yes I do live in the South West!

Why is water so expensive in the South West? BBC News (13/7/10)
North Devon MP Nick Harvey tackles unfair South West Water charges Barnstaple People (14/7/10)

Questions

What is privatisation? Assess the advantages and disadvantages of the privatisation of water some 20 years ago.
Does South West Water have a monopoly?
Which of the 3 proposals is the most beneficial to those a) living in the South West, b) businesses in the South West c) the government and d) the rest of the country?
Which proposal would you recommend and why?
Is it fair that those in the South West should pay disproportionately more to clean and maintain beaches, which are used by everyone?
Is the concept of market failure relevant in this case? Explain your answer.

18 March 201020 March 2010

A budget education

The Labour government’s investment in education has been widely publicised since its rise to power in 1997 and there has been a significant increase in funding to match its ‘50% participation in higher education’ target. However, at the university level, this looks set to change. More than 100 universities face a drop in their government grants as a consequence of £450 million worth of cuts. 69 universities face cuts in cash terms and another 37 have rises below 2 per cent. Furthermore, increased funding is now going to those departments where research is of the highest quality, which means that whilst some universities will not see a cut in funding, they will see a reallocation of their funds.

Sir Alan Langlands, Chief Executive of Hefce, said: “These are very modest reductions. I think it is quite likely that universities will be able to cope with these without in any way undermining the student experience.” Despite this reassurance, there are concerns that, with these spending cuts and growing student numbers, class sizes will have to increase, the quality of the education may fall and ultimately, it may mean a reduction in the number of places offered. The Conservatives have estimated that 275,000 students will miss out on a place. UCAS applications have grown by 23% – or 106,389 – so far this year, but the number of places has been reduced by 6000. This policy of cutting places is clearly contrary to the government’s target of 50% participation.

With the average degree costing students over £9000, it is hardly surprising that students are unhappy with these spending cuts and the fact that it could lead to a lower quality education. With the possibility of rising fees (in particular, as advocated by Lord Patten, who has called for the abolition of a “preposterous” £3,200 cap on student tuition fees) and a lower quality degree, this means that students could end up paying a very high price for a university education.

Articles

Universities fear research funding cuts Financial Times (18/3/10)
More students but who will pay? BBC News, Sean Coughlan (18/3/10)
University cuts announced as recession bites Reuters (18/3/10)
How about $200,000 dollars for a degree? BBC News, Sean Coughlan (18/3/10)
Liberate our universities Telegraph (17/3/10)
Universities should set own fees, say Oxford Chancellor Patten Independent, Richard Garner (17/3/10)
University budgets to be slashed by up to 14% Guardian, Jessica Shepherd (18/3/10)
Universities face cuts as Hefce deals with first funding drop in years RSC, Chemistry World (17/3/10)
University cuts spell campus turmoil BBC News, Hannah Richardson (18/3/10)
Universities told of funding cuts Press Association (18/3/10)
100 universities suffer as government announces £450 million of cuts Times Online, Greg Hurst (18/3/10)

Data

HEFCE announces funding of £7.3 billion for universities and colleges in England HEFCE News (18/3/10)

Questions

Why is there justification for government intervention in higher education? Think about the issues of efficiency and equity and why the market for education fails.
What are the arguments (a) for and (b) against allowing universities to set their own tuition fees?
Why is the government planning these substantial cuts to university funding, when it is still trying to increase the number of students getting places at university?
Is the ‘50% participation in higher education’ a good policy?
What are the benefits of education? Think about those accruing to the individual and those gained by society. Can you use this to explain why the government has role in intervening in the market for higher education?
Is it right that more spending should go to those departments with higher quality research? What are the arguments for and against this policy?
What are the costs to a student of a university education and how will they change with funding cuts and possibly higher tuition fees?

Tag: positive externalities

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