News Sept 2003

Economics News Articles: September 2003

Welcome to those of you who are new to economics and to this monthly set of news articles, and welcome back to those who have used this site before.
    As you will see from the contents, there are many economics topics covered in these articles, which are drawn from several different UK and non-UK newspapers, journals and magazines. The topics range across the chapters of the three textbooks, Economics (5th ed), Essentials of Economics (2nd ed) and Economics for Business (2nd ed) and I have ordered them so that they correspond approximately to the order of the chapters.
    I have tried to ensure that the links to the articles stay live over several months, or even permanently. This means that I have not been able to use some sources, such as the Financial Times and the Independent, as their free articles go into a subscription-only archive after a few days.
    As I mentioned in the May set of articles, if you're searching for economics news beyond the articles on this site, I would recommend the following two sites:

The Guardian World News Guide
(This gives easy access to newspapers from around the world and a brief description of each one.)
Google news search
(By typing in a topic, Google will find all the recent relevant newspaper articles for you)

In the meantime, I hope you find the articles below useful for your studies and that they help you to see how relevant economics is to what is going on in the world.
Tutors might like to use the linked articles as the basis for tutorial/seminar work or to use them as the basis for a problem-based approach to student learning.

John Sloman

Contents

1. House prices
2. The economics of ticket touts
3. Do people act as 'rational economic agents'?
4. Why don't rising incomes make everybody happier?
5. Water pricing
6. Higher petrol prices
7. CAP reform
8. The Space Shuttle and the 'innovator's dilemma'
9. The economics of selling music tracks via the Internet
10. Supermarket power
11. The free market for labour – does it yield the best outcome?
12. Property taxes as an efficient means of redistributing incomes
13. Inequality in the UK and USA
14. Price fixing of replica football kits
15. Congestion charging
16. Prospects for the international economy
17. Keynesian policies and problem of deficits
18. The choice of inflation target
19. An epitaph to monetarism?
20. Beyond Cancun
21. Is more flexibility in exchange rates desirable?
22. Swedish voters reject the euro
23. Prices, power and poverty in the international coffee trade

News Item 1: House Prices

Relevant to:

Economics (5^th edition), Chapters 1, 2

Essentials of Economics (2^nd edition), Chapters 1, 2

Economics for Business (2^nd edition), Chapters 4, 5

The rise in house prices has been slowing in recent months. Nevertheless, according to the Nationwide Building Society, the average rise for the year to August 2003 was still 16.6 per cent, considerably above the rate of inflation (currently standing at around 2.9 per cent). But will house prices soon fall significantly? The International Monetary Fund (IMF) argues that there is a threat of a collapse in the property market if UK interest rates rise. The following articles look at the state of the market and the warning of the IMF.

Houses 'better investment than gold' BBC News Online (29/8/03)
Negative equity may hit housing market Ananova (8/9/03)
Government downplays house price rises Times Online (15/9/03)
House price warning from IMF Ananova (18/9/03)
IMF warns over UK property market Times Online (18/9/03)

Questions
1.	What are the main determinants of house prices? Why have they risen so much in recent years?
2.	Why are rises in house prices likely get smaller in the coming months? For what reasons might they actually fall?
3.	How does the concept of elasticity help to explain the size of movements in house prices? Refer to price elasticity of demand and supply, income elasticity of demand and cross price elasticity of demand with respect to rents.

Questions
1.	Why are markets in which ticket touts operate not in equilibrium?
2.	Would it be a good idea for the promoters of the event to charge the equilibrium price in the first place? What would be the arguments against this?
3.	What are the benefits from ticket touts? Would their function be better filled by the promoter practising price discrimination? If so, what form should it use?

Questions
1.	How would you describe 'rational economic behaviour' in the 'neoclassical' sense?
2.	What is meant by the 'endowment effect' in prospect theory? How does it affect people's attitudes towards trading with each other?
3.	What explanations can you put forward for the endowment effect? Is any explanation consistent with 'rational' behaviour in the neoclassical sense?

Questions
1.	How would you explain the apparent paradox referred to in the article?
2.	Why are people more concerned about their income relative to others' rather than the absolute level of their income?
3.	What effect does a rise in other people's incomes have on the utility you get from your income? In what sense could this be seen as a form of pollution?
4.	What effect does a rise in other people's incomes have on the position of your indifference curves between any two products? Would you end up consuming on a higher or a lower indifference curve? Explain. (You will need to have studied indifference analysis to answer this: see Economics (5th edition), section 4.3, or Economics for Business (2nd edition) section 6.3.)
5.	How could a higher marginal rate of income tax help to deal with the pollution effect referred to in the article?

Questions
1.	If water is provided at a zero (marginal) price to consumers, what is the implication for its marginal utility to the consumer?
2.	What are the economic arguments in favour of water pricing? What price ought to be charged if a socially efficient allocation of water resources is to be achieved?
3.	Is a socially efficient allocation of water resources the same as an equitable one? How could equity considerations be taken into account in allocating water resources?
4.	How would a market in tradable water rights work, and what would be its advantages? Would there be any disadvantages and, if so, what?

Questions
1.	If taxes on petrol rise by 1.5p, would you expect prices at the pump to rise by 1.5p too? If so, why? If not, why not? Use the concept of price elasticity of demand in your answer.
2.	Why might increasing petrol taxes be an ineffective way of reducing traffic congestion?
3.	How is a rise in petrol duty likely to affect the distribution of (post-tax) income?
4.	Referring to The Economist article, what is likely to happen to oil prices over the coming months?

Questions
1.	How has the CAP system of supporting agriculture undermined agriculture in developing countries?
2.	How could a reformed CAP both support poorer farmers in the EU and help reduce harmful environmental effects in the EU while not undermining agriculture in developing countries?
3.	Why do many farmers in the EU, especially those with large farms, resist deeper reforms?

Questions
1.	Why does a high average cost and low marginal cost make it important for there to be a large number of flights for the space programme to be cost effective?
2.	Why may the OSP be more costly than the Shuttle in achieving the current programme?
3.	Why should the development costs of the Shuttle and the OSP be treated differently when working out the comparative costs of continuing with the Shuttle or developing the OSP?
4.	What is the relevance of the concept of price elasticity of demand in explaining the importance of falling average costs to the long-term viability of a fully reusable space transport system?

Questions
1.	What is meant by the 'perversity of T-shirt economics? Is it really perverse?
2.	What is the approximate marginal cost of delivering a music track via the Internet? How should this affect the pricing policy of making such tracks downloadable?
3.	Why are the fixed costs of producing tracks for distribution via the Internet likely to be lower than those for conventional CDs?

Questions
1.	What were the reasons for the Competition Commission recommendations and the government's decision over the various proposed bids for Safeway?
2.	Is the reduction in the number of major supermarket chains in the UK from five to four likely to increase or decrease competition?
3.	Referring to the final article above, is Wal-Mart (the owner of Asda) too powerful in the USA and possibly in the future in the UK?
4.	In what ways has the US consumer (a) gained and (b) lost from Wal-Mart's policies?

Questions
1.	What have been the consequences of greater labour market flexibility for (a) the distribution of income; (b) hours worked? Explain why these effects have occurred.
2.	Identify positive and negative externalities that occur when people work. What implications do these have for the socially optimal amount of employment for individuals?
3.	What is the justification of Australia's group training companies?
4.	Identify government interventionist policies that could improve the functioning of the labour market in meeting social goals.

Questions
1.	Why could a tax on increases in land values be described as 'the least unfair tax'? What are the incentive or disincentive effects of such a tax?
2.	To what extent does an annual property tax of a proportion of the value of a house meet the objectives of the type of tax that Henry George was advocating?
3.	Is a tax on increased land values (a) an efficient and (b) a fair way of financing the proposed Crossrail project across London?

Questions
1.	To what extent has London's system of congestion charging been a success in (a) reducing congestion; (b) raising revenue?
2.	What lessons are being drawn from London's experience for Sydney's central business district (CPD) and Edinburgh?
3.	Compare the relative merits of charging to enter a cordon with other forms of electronic road pricing.

Questions
1.	What evidence is there that the world economy is on course for a sustained recovery?
2.	For what reasons might the recovery falter?
3.	Why is relying on America as the engine of recovery likely to lead to serious problems over the longer term?
4.	How 'can the world be weaned off its over-reliance on American spending without sending the global economy into recession?'

Questions
1.	Describe how poverty is measured in the first two articles. Are these the best methods of defining poverty?
2.	Compare inequality in the USA (see tables in third article) with that in the UK (see tables in section 10.1 in Economics (5th edition).
3.	Why has inequality increased in the USA in recent years? Is the best solution to repeal the recent tax cuts, which disproportionately benefit the rich?
4.	What are the arguments for and against a maximum wage? On balance, do you think that a maximum wage would be a good idea? Explain your reasoning.

Questions
1.	What was the nature of agreements to fix prices of replica football kits?
2.	How did the price fixing infringe the 1998 Competition Act?
3.	What was the nature of the market that prevented competition from eliminating price fixing?

Questions
1.	What are the flaws in the current international monetary system (see the second article)? What are the dangers of a world crash?
2.	Should the USA seek to reduce its budget deficit?
3.	To what extent have France and Germany breached the eurozone's Stability and Growth Pact? What are the implications of this for recovery of the French and German economies?
4.	What is the UK Chancellor's Golden Rule? To what extent does it allow deficits to occur when there is a recession or period of low growth? Why has the Chancellor been forced to curb public expenditure?

Questions
1.	Why is the revision of growth and trade figures by the Office for National Statistics likely to be seen as good news by Gordon Brown?
2.	What is the difference between RPIX and HICP? Which provides a better basis for measuring inflation and why?
3.	Why is no one measure of inflation suitable as a complete indicator of the state of the economy?

Questions
1.	What assumptions must be made if the central tenet of monetarism, that inflation is the result of excessive expansion in the money supply, is to hold?
2.	If higher inflation is always accompanied by faster growth in the money supply, does this imply that control of the money supply will (a) be effective in reducing inflation; (b) not cause any undesirable side-effects?
3.	Why, according to Galbraith, was Britain the ideal test bed for monetarism?

Questions
1.	If every country at the WTO meetings has one vote, why do the interests of the developed world tend to dominate the meetings?
2.	Why do developing countries 'worry that efforts to introduce "competition" within trade negotiations will only make life even more difficult'?
3.	Who are the greatest losers from the breakdown of the WTO negotiations – the rich world or the poor world?
4.	What do you understand by the term 'progressive globalisation'? What must be done to achieve progressive globalisation? How can the WTO help in this process?

Questions
1.	How would eurozone countries gain from upward flexibility of Asian currencies against the US dollar?
2.	What are the costs and benefits of greater exchange rate flexibility?
3.	Why do many developing countries seek to peg their currencies against the US dollar? Is it in their long-term interests?
4.	Why has China been building up huge stocks of US dollars and US Treasury securities? What has been the effect of this on China's money supply and the growth in aggregate demand in China?
5.	Why is it 'nonsense to declare before the fact that China's currency is undervalued'?

Questions
1.	What are the arguments for Swedish membership of the eurozone?
2.	What are the arguments against?
3.	What are the implications of the Swedish vote for the future shape of the EU?

Questions
1.	What do coffee prices fluctuate so much on international commodity markets?
2.	Why does 'the basic problem for coffee farmers rest in the balance of supply and demand'?
3.	Would international quotas on coffee production be the solution for poor coffee farmers?
4.	Why don't developing countries export processed (roasted and freeze dried) coffee?