Sunday, 23 October 2011

one electric car, two electric cars, three electric cars...

What is the purpose of a subsidy? Using a diagram explain how it will work and what the impact should be. 

Subsidy is the amount of money paid by the government to a producer, in order to decrease the sum that the consumers has to pay. In other words, subsidies represent payments by the government to suppliers that have the effect of reducing their costs and, consequently, encouraging them to increase output. The impact of a subsidy is the increase of supply and therefore a decrease in the market equilibrium price. 

In the diagram above we can see the supply (S1, S2) and demand (D) 
curves. The initial meeting point of supply and demand curves is P1Q1 with consumer surplus above the P1 level. The subsidy shifts the supply curve to the right and the equilibrium price decreases to P2. We can see a growth of consumer surplus. 

The purpose of a subsidy on electric cars, for example, is, therefore, reducing market failure (negative externalities – environmental damage) by encouraging people to buy more environmental-friendly cars. 

Why is pollution an example of a market failure? Illustrate this on a diagram. 
Pollution is an example of market failure because it is a negative externality, which leads to market imperfections. Negative externalities occur when an economic activity affects third parties (not consumers or producers). In the diagram we can see the situation when the marginal private cost = marginal social cost and the private optimum is higher than the social optimum. 

Why could electric cars also be an example of a market failure? 

1. Negative externalities (electricity is still produced mainly from fossil fuels) 

2. Positive externalities to third parties (less pollution) 

3. Imperfect competition (e.g. firms producing electric cars can create an oligopoly – nine cars will be given subsidies and, therefore, barriers of entry occur) 

How will the subsidy aim to encourage more firms to produce electric cars and also more consumers to buy them? 

Under the £43m initiative that started on 1 January 2011, buyers could get a 25% discount up to the maximum £5,000. The subsidy encourages people to buy electric cars because their prices are becoming comparable to conventional car prices. Additionally, lower maintenance costs also encourage consumers to buy environmental-friendly cars. As the former Transport Secretary, Phillip Hammond said: "The point of supporting this technology is to get it up to scale." This mean that electric cars would become more competitive with traditional cars which would encourage producers. 

Is there an argument for increased investment in technology to produce electric cars more cheaply and more effectively? The main economic goal of every company is to maximise its profits. By producing electric cars more cheaply and more effectively consumers would be encouraged to buy these products and therefore demand for these goods would rise. Moreover, investments in technology would again lead to higher competition with traditional cars causing the demand for electric cars to increase. However, people argue that electric cars are not the best way of saving our environment because they require electricity, produced mainly from coal and therefore,  there is an argument for investing in hybrid cars technology improvement instead.

Why is there such a high demand for car usage?

Cars allow people to move from place to place more or less freely. Their main advantages are on-demand and door-to-door travel. Cars are the most popular way of transport even if prices and costs of using them are higher than, for example, public transport (or a bicycle!) costs. Of course, demand depends mainly on changes in oil prices but it in a long-term demand is price inelastic. Another reason for a high demand for car usage is, arguably, the lack of close substitutes which would be able to compete with traditional cars. For example, there are more and more electric cars but the infrastructure is not adapted to them (e.g. lack of charging stations). 

Everywhere is walking distance if you have the time. ~Steven Wright

That’s what I think,


Monday, 17 October 2011


Explain how the European Emissions Trading Scheme works.

The first carbon-dioxide trade was created by the Kyoto protocol in 1997 but it did not succeed. Launched in 2005, the EU Emission Trading Scheme works on the "cap and trade" principle. This means there is a "cap", or limit, on the total amount of certain greenhouse gases that can be emitted by the factories, power plants and other installations in the system. Polluters in capped industries are then given credits for each tonne of carbon dioxide they emit. For example, a coal power company may receive credits under the European Trading System for around 80% of its emissions. Within this cap, companies receive emission allowances which they can sell to or buy from one another as needed. The limit on the total number of allowances available ensures that they have a value. At the end of each year each company must surrender enough allowances to cover all its emissions, otherwise heavy fines are imposed. If a company reduces its emissions, it can keep the spare allowances to cover its future needs or else sell them to another company that is short of allowances. The flexibility that trading brings ensures that emissions are cut where it costs least to do so. It is big business – the trade was worth $90bn in 2008, and globally is predicted to grow to up to $3.1 trillion in 2020.

What are the advantages and disadvantages of the ETS as a means of reducing carbon emissions?


·         It is a way of reducing pollution

·         It has started a public debate on an important issue

·         It encourages investments in new technology

·         The trade in such permits allows polluters to pay for emissions reductions made elsewhere.


·         The government's reliance on carbon trading schemes is inefficient and could cause a financial crisis similar to that seen with sub-prime mortgages, says Friends of the Earth

·         Corruption

·         Banks, investment funds and speculators have now become the middlemen in this shadowy trade and are packaging carbon credits into increasingly complex financial products, similar to sub-prime mortgages which triggered the recent economic crash. 

·         The system is so complex the World Bank's latest report claims the EU doesn't even know how many credits are in circulation.

Copenhagen climate change conference in 2009:

Compare these advantages and disadvantages with those of green taxes.
·         They give more control to regulators and businesses over future costs of an anti-pollution program. This is due to flexibility afforded in changing the tax rates and in not meeting the target pollution level if costs become prohibitively high. This feature isn't present in Cap and Trade Markets.

·         Green taxes generate revenues for the instituting government. 

·         Tax is regressive in nature, as the extra cost is passed down to consumer. This harms low-income persons as they spend a higher proportion of their income on consumption of such goods as gasoline.

How does the market price of carbon traded within the scheme reflect the toughness of the policy? What else might the price reflect?

The higher the price the tougher the policy, because if the policy is not taught many people want to sell their limits and few want to buy them. During the first phase of the European Emissions Trading System so many permits were allocated the price of carbon fell to almost zero. But the global downturn meant companies reduced their emissions anyway and sold off their credits for cash. The result was another price crash.

What is likely to happen to the carbon price in the coming months? Explain.

In the coming months the carbon price is likely to rise because it is almost the end of the year and the demand for the limits will increase.

 That's what I think, 


Not enough food for everybody?

Yesterday it was World Food Day, but as stated in the Independent on Sunday, it could be ‘more suitably designated Global Lack of Nutrition Day’. The UN Food and Agriculture Organisation (FAO) has estimated that a total of 925 million people were undernourished in 2010, two-thirds of whom lived in just seven countries (Bangladesh, China, the Democratic Republic of Congo, Ethiopia, India, Indonesia and Pakistan).


But the problem of hunger is not because of scarcity… “In a world that can produce enough food to feed everyone, nearly a billion people will go hungry today. And this is one in seven of us.”

It is not humanity’s inability to grow enough crops but the main reasons are:

1. Rising food prices

2. Stock market speculation in crop futures

3. Political conflicts (e.g. North Korea)

4. Corrupt, repressive regimes

5. Climate change

6. Natural disasters (e.g. droughts followed by floods)

7. Lack of investment in agriculture

8. Short-term solutions

Kostas Stamoulis, director of agricultural development economics for the UN, said: “Unless we stick to a long-term plan for getting regions out of crisis and out of vulnerability, then every five years we’ll be taking about the Horn of Africa.” 

That’s what I think,


Once in the lifetime experience

284 days to go!

On 27 July 2012 Olympic Summer Games will be held in London. The eyes of the world will turn at the UK. It is a unique opportunity for success not only for the sportsmen and sportswomen but also for the Londoners. The Olympic Games are expected to attract approximately 5.5 million daytime visitors and 900,000 overnight visitors but is everybody going to make a profit?

London restaurateurs warned that the 2012 Olympic will be bad for business (and a repeat of the ‘wash-out’ Royal Wedding in 2011). They claim that regulars and cultural tourists will stay away from the Olympics and fans attending events will not dine out in central London. Moreover, business customers will attend special corporate events hosted by the Games organising committee’s sponsors and partners.

Another problem is that transport disruption, such as road closures, will cause problems not only for consumers but also for suppliers. As written in the Independent on Sunday, the Games in London mean “incredible opportunities, but those in affected areas needed to start planning now.”

How can the companies cope with these problems? For example, they could have a special Olympics website page with all information translated into foreign languages or they could offer customers the opportunity to dine at different times to fit around the sporting action. Additionally, they could enable people to watch televised events while they eat or hire the restaurant.

A good news is that some of the capital's top attractions and restaurants have signed up to a charter promising fair prices during 2012. According to the London Visitor Charter, it is done, “to protect the long term reputation, image and international perception of London as a premier visitor destination.”

One thing is obvious, it will be an unforgettable experience for all Londoners. 

That’s what I think,


Monday, 10 October 2011

We don't need no education!

What information failures are there in the market for higher education places?

Students, while choosing their future university, have imperfect information about their choices available and differences between them. As written in the Browne’s report, ‘stundent choice will drive up quality’, but how can they make rational decisions if they do not have access (and possibilities) to get the accurate information about the universities. The main information failures in the market for higher education places are:

1. The quality of teachers (their engagement, experience, skills and teaching abilities). Students do not choose their tutors, they do not even know them (their names) before deciding which university to apply to.

2. The way of teaching. Every university, every college, every tutor has a different approach to the teaching methods and every student prefers a different method of learning. They have no influence on that.

3. The choice of subject. Many students choose their subjects by coincidence (advice, lottery). They do not know what they are going to learn before their classes start. Every university has a different set of subject taught in a course and most students are not aware of that while choosing their school.

There are many more information failures concerning higher education places, including accommodation, teaching and learning resources and extra-curricular activities, but I have decided to describe only the main problems and dillemas.

What externalities are involved in higher education and will this lead to an over or underprovision of higher education in a pure market system?
Positive externalities:

def: the external benefits that may result from a course of action. Sometimes they are called spillover effects because they bring some benefit to a third party, someone who is neither a producer nor a consumer of the product.

1. Better qualified labour force

2. Lower unemployment

3. Higher future incomes à higher spending…

4. Social benefits (less crime, poverty and homelessness)

Negative externalities:

def: occur when an economic activity affects third parties, i.e. people other than the producers or the consumers, in some way which reduces their quality of life.

1. Higher costs for the government (and indirectly the citizens)

2. Bigger social inequalities

The externalities involved in higher education could lead to overprovison in a pure market system.

Apart from externalities and information asymmetries, what other market failures apply to the market for student places in HE?
def: Market failure – occurs when market imperfections lead to an allocation of which is less efficient than it might be:

· public goods

· externalities

· labour immobility

· lack of information

· poverty

· imperfect competition

Apart from externalities and lack of information (information asymmetries) there is also imperfect competition between universities (e.g. some of them are thought to be more prestigious), and students. Additionally, poverty is also an important issue. Poor students are not able to afford higher education are, therefore, locked in a poverty trap.

What are the arguments for subsidising non-STEM subjects (as well as STEM ones)? Should these subsidies vary from course to course and from university to university?

+ The chosen does not determine the future job. Many people after graduation work in another area of interest/knowledge.

+They also improve people’s knowledge and there is a possibility of a development.

+ They are needed. People are becoming more and more ‘social’.

+There should be equality between STEM and non-STEM students. Poorer students would have bigger incentive to choose STEM even if they prefer other courses. That could lead to lower efficiency.

+Poorer students would not go to university if their course is not subsidised.

In my opinion, the state should subsidy the courses that prepare students for most-wanted (and needed) jobs. For example, in Poland, there are subsidies (students even get high scholarships) for science and engineering courses (basically STEM but more specific aim). The subsidies should be based on number of students attending the course, but should not vary from university to university.

What is the best way of tackling the problem of unequal access to higher education?

I believe that everybody should have access to higher education without the distinction between student with rich and poor parents. There should be more subsidies for gifted students, because, as written in the report: ‘Higher education matters because it drives innovation and economic transformation. Higher education helps to produce economic growth, which in turn contributes to national prosperity.’ Moreover, the possibility of taking a loan and paying it back after finding a well-paid job would also allow more people to go to university and decrease inequalities in access to higher education among people. 

“This report displays no real interest in universities as places of education; they are conceived of simply as engines of economic prosperity and as agencies for equipping future employees to earn higher salaries.”

That’s what I think,


Quantitative WHAT?!

What is 'quantitative easing'?

Def: Quantitative easing was proposed in 2008 as a way of providing an additional monetary stimulus to reduce the impact of recession. Interest rates had already been reduced as far as they could be, and banks were still finding it difficult to maintain lending. Early in 2009, the Bank of England began buying bills and bonds, exchanging them for cash which would increase bank deposits. This has the effect of increasing the money supply and giving banks more liquidity. Many other central banks implemented similar policies at the same time. (In the US it is called credit easing.)

This is sometimes described as printing money and, if carried too far, it could lead eventually to inflation. But at the time it was introduced there was a significant risk of deflation occurring, which could turn out to be even more problematic.


Look at this interactive graphic!

Quantitative easing is a government monetary policy occasionally used to increase the money supply it increases the money supply by flooding financial institutions with capital, in an effort to promote increased lending and liquidity. Under this policy, the authorities buy up bonds either from banks or from the commercial sector. There are two potential benefits. The higher the price of a bond, the lower the interest rate the borrower has to pay; so the "yield" – the interest rate – on government bonds falls. Since many interest rates, including mortgage rates for example, are set with reference to gilt yields, QE should therefore help to drive down borrowing costs. Investors are likely to use the extra money from QE to buy something else – shares, for example. That should push up the price of a whole range of assets, boosting wealth and creating demand right across the economy.

Did it work? Will it work? The Bank of England recently published research suggesting that the initial £200bn bout of QE, starting in 2009, boosted GDP by around 1.5 percentage points – though given that the UK still experienced its worst recession in living memory, it was hard to feel the benefit at the time. But other economists, argue that QE1 – combined with the effect of a much larger programme of asset purchases in the US – just handed banks lots of extra money which they used to speculate on commodities such as oil, boosting their price, pushing up inflation and making life even harder for cash-strapped consumers. 

The chancellor, George Osborne, said at the conference in Manchester that the Treasury was drawing up measures to increase the supply of credit to small and medium-sized businesses, which have repeatedly complained that they are missing out on loans from the crisis-hit banks. Ed Balls will gleefully remind Osborne that while in opposition, he described QE as "the last resort of desperate governments".

In my opinion, quantitative easing is not the best way of helping the economy, because the 'printed money' will be 'lost in the banks' and there will be no significant credit easing. There are more efficient, direct ways of creating growth, e.g. creating new jobs and investing in job bureaus.

That's what I think, 


Saturday, 1 October 2011

Don't worry, be happy! :)

Gross National Happiness (GNH) measures the quality of a country in more holistic way and believes that the beneficial development of human society takes place when material and spiritual development occurs side by side to complement and reinforce each other.

Four Pillars of GNH:
1. Sustainable Development
2. Preservation & Promotion of Culture
3. Conservation of Environment
4. Good Governance

This is absolutely amazing!

That’s what I think,



Do you remember playing football in your garden or in the backyard? How many times after your strong kick the ball flew in a wrong direction? And… Score! Who cares about the broken window!? I assume that your parents were not very proud of you and there was no need to explain or excuse. The game was over.

Now, let’s think about it from another point of view. Your parents had to pay for the new window and buy glass and call assistance. The window company has earned more money. The owners could have buy better machinery so another company gained profit and so on…

What’s my point? Was breaking the window beneficial and helpful to encourage more people to exchange goods and services and, consequently, effect in a possible economic growth? Does destroying one thing causes further, uncountable benefits? Should people break their windows during a recession to boost the economy?

The answer seems to be obvious. That cannot be true! So how to explain it?

Imagine the situation when you miss the window. Your parents do not have to spend their money on repairing it and are able to buy you a bicycle instead. The bicycle company buys  more helmets (REMEMBER: SAFETY IS VERY IMPORTANT!) and etc. Everything looks similar but your window is in one piece.  Agreed?

That’s what I think,