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Scooped by
Graham Watson
onto Microeconomics: IB Economics August 12, 2024 9:30 AM
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Bosses of UK’s biggest companies are now paid 120 times more than average full-time worker in some instances
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Environmental group says adding levies to airline tickets would help ease financial burden on poor countries
Graham Watson's insight:
There's another call from environmental groups for a tax on flights to offset the carbon emissions caused by the aviation sector. A Dutch consultancy firm has suggested that "a levy on tickets that began at €10 on short-haul flights in economy, including domestic flights, rising to €30 on long-haul flights, and €20 for short-haul business-class tickets, rising to €120 for long-haul, would produce revenues of about €106bn a year."
Such a move also appeals because it's progressive, with the rich flying most frequently, meaning that it could involve redistribution from the developed to the developing world.
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Nippon agreed to give a "golden share" to the US government to win approval of the takeover.
Graham Watson's insight:
The long running saga of Nippon Steel's takeover of US Steel has been completed with the former making concessions that satisfy President Trump's "national security" concerns, not least in granting the US government a "golden share" in running the company.
No doubt there are economies of scale to be gained and market share captured in the US market, but were I merging, I'd be looking to steer clear of political interference to this extent, so it will be worth monitoring the performance of the company in the years ahead.
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Baldío in Mexico City is part of a new wave of restaurants embracing a regenerative ethos – with delicious results
Graham Watson's insight:
A nice example of the circular economy in action, with a restaurant, Baldio, in Mexico City which has a business model that is predicated upon being zero waste.
Food waste generates negative externalities, and 20% of all food produced is wasted but in this case there are some interesting ways that the chefs are reusing ingredients, making a powder out of dried lime skins. The reality is that the preparation of food is key - using a laboratory and buying locally from farmers still using indigenous farmers using the traditional 'chinampas' floating farms to source nearly 50% of their produce.
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CMA to decide whether deal will substantially lessen competition in delivery market
Graham Watson's insight:
Unsurprisingly the Competition and Markets Authority is going to investigate the merger of Evri and DHL's parcel delivery arm on the basis that it may lead to a "substantial lessening of competition".
The combined firm would be responsible for delivering more than 1bn parcels and 1bn letters each year, in the world's third largest e-commerce market, so choice, competition and consumer welfare are clearly significant issues.
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The media giant will separate its studio and streaming business away from its cable TV networks.
Graham Watson's insight:
The trend for successive waves of merger, followed by demergers appears to be in fully swing, with Warner Bros Discovery looking to demerge its studio and streaming business from its cable TV networks.
For all the jargon in the following quote - ""We are empowering these iconic brands with the sharper focus and strategic flexibility they need to compete most effectively in today's evolving media landscape" - it seems that the company have realised that the former is a growing business but the latter is in decline and they want to try and keep the two separate.
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Exclusive: Common Wealth report argues debt, pollution and underinvestment justify process known as special administration
Graham Watson's insight:
A left-leaning think-tank, Common Wealth, has produced a report suggesting that far from costing nearly £100bn to take water companies back into public ownership, the government could do it for far less, and even close to zero.
This depends upon how the companies are valued - and if you look at the levels of debt and under-investment, you can make a case for arguing that the value of these companies is far less than their current market value.
It's an interesting idea, certainly...
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Firms including Thames Water have been stopped for paying rewards to executives under new rules.
Graham Watson's insight:
Economics is all about incentives and this is a lovely example of something that should have been done many years ago. However, the Water Act has been revised so that executive bonuses are contingent on meeting environmental and consumer standards.
As a result, six companies have been banned from paying bonuses from April 2024 onwards - Anglian Water, Southern Water, Thames Water, United Utilities, Wessex Water and Yorkshire Water. Of course, the danger is that companies will simply boost base salaries.
If the government were really serious about it, they might even consider using the justice system - after all, last time I looked fly-tipping is illegal.
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Partha Dasgupta’s landmark study provided way to put a value on nature – but many fear report has been sidelined
Graham Watson's insight:
This Guardian piece highlights the apparent trade-off between economic growth and the environment, and, in this case, Labour's housebuilding plans and the UK's biodiversity. In doing so, it develops the idea that 5,000 nature sites are going to be imperilled by housebuilding on this scale.
However, that rather assumes that the loss of any environmental resource is a bad thing; the reality is that as an economist you have to weigh up the value/cost of the natural resource and the benefits that would be derived from developing it. If you don't you could reasonably argue that you prefer the level of biodiversity associated with the 16th century, but are you prepared to sacrifice all the economic growth that has taken place since then? I'd very much doubt it.
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Spain’s recent blackout and AI datacentres’ energy needs are leading politicians to reach for the restart button
Graham Watson's insight:
The increased demand for energy means that nuclear power has come back into fashion, with a number of European economies thinking about restarting their nuclear programme to guarantee their energy security.
This is interesting because there's a clear cost-benefit analysis required: nuclear power is also associated with negative externalities.
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Up to 500,000 more plug-in hybrids could be sold because of government flexibility on the zero-emission mandate
Graham Watson's insight:
One for the now-famous "That's Why they Earn the Big Bucks" folder, with a climate advisor reporting that a relaxation of the EVs sales target rules is going to result in higher emissions. Remarkable acuity.
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Watchdog says fines reflect ‘potentially serious risk to the public’ because of missed callout targets
Graham Watson's insight:
What a week for the regulator, with OFGEM fining three companies for their poor service, and failure to respond to callouts relating to gas leaks.
The three firms, Cadent Gas, Scotland Gas Networks (SGN Scotland) and Southern Gas Networks (SGN Southern) have been fined £8m for failing to attend 97% of these callouts within two hours. The money has been earmarked for spending on the most vulnerable customers.
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Plans to build costly DRI plant in Britain to make green steel is seen by some as the future and others as a ‘white elephant’
Graham Watson's insight:
This could be Macroeconomic, but I've put it her because for me it raises questions about the nature of government intervention. The article highlights the fact that the government appear to be considering funding the construction of a so-called green steel (technically, a direect reduced iron [DRI]) plant. Such a plant would cost up to £2bn to build but if green hydrogen were used, it would be an environmentally-friendly method of steel production.
However, it's all about weighing up the costs and benefits: frankly, the benefits don't seem massive given that such plants aren't very labour-intensive and only employ around 200 people. And there's one question that needs to be answered. If such plants were profitable, then why isn't the private sector investing in them.
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The rule requiring planning permission if a heat pump is within 1m of a neighbours property has been removed.
Graham Watson's insight:
This article highlights how government regulations - such as health and safety legislation - can affect supply. In this case, it's heat pumps that are affected, so the government is relaxing regulations that require planning permission if a heat pump is within 1m of a neighbour's property, something that would be an issue given the nature of a lot of the UK's housing stock.
However, the issue is that I, and many others, don't think that this is going to have a marked effect upon their uptake, given their high initial, sunk cost.
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Algorithm’s launch coincided with company taking bigger cut from fares and raising trip prices, researchers say
Graham Watson's insight:
This is a really interesting bit of labour market theory that illustrates how Uber is using its position as a monopsony buyer of labour to take an increasing share of fare incomes at the expense of drivers.
The research undertaken by Oxford University in partnership with the non-profit gig worker organisation Worker Info Exchange (WIE) concludes that "post-dynamic pricing, many aspects of Uber drivers’ jobs have gotten worse. Average pay per hour on the app is stagnant, and is lower in real terms in the year following the introduction of dynamic pricing...Uber’s median take rate per driver has increased from 25% to 29%, and on some trips the take rate is over 50%. Furthermore, the higher take rates are concentrated among higher-fare trips, which explains how Uber can extract an additional 38% [income] from its driver’s labour on average … Many drivers are earning substantially less per hour.”
Who would have thought it? Well, economic theory would suggest that such an outcome is likely. It's now up to the government to work out whether or not that's fair.
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High Pay Centre thinktank says median pay of FTSE 350 chief executive was £2.4m in 2023-24 financial year
Graham Watson's insight:
I simply leave this here, with little in the way of comment.
Can such wage differentials be justified?
My only substantive observation though is that the idea of a maximum wage is really bad economics - it will have no effect on executive pay because all it would do is incentivise firms to find ways of working around such a restriction.
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Taxes now account for $28 of the average $40 price for a packet, following a triple-fold excise hike in 10 years from 46c to $1.40 per cigarette
Graham Watson's insight:
This is a topic area that has proved to be a goldmine for my students with regard to their Microeconomic Internal Assessment. The Australian government has significantly increased excise duty on cigarettes. As the article notes: "Over the past decade, the excise rate per cigarette has tripled from 46c to $1.40. The excise now accounts for $28 of the average $40 price for a packet of 20 cigarettes."
This has had mixed effects - "excise revenues peaked at $16.3bn in 2019-20" as the article notes. However, since then revenues have dramatically fallen: "$7.4bn in this financial year – the lowest since 2012-13 – and will continue to fall to $6.7bn by the end of the decade". And although rates of smoking have halved since 2005, to what extent can this be attributed to the effects of the tax?
The suggestion is that the current level of tax might have reduced economic welfare to the extent that its generated government failure, and a worse outcome than would be generated by the free market.
The reality is that current rates of taxation have driven a significant number of smokers into the shadow economy, meaning that neither have the high duties helped reduce smoking nor have they raised sufficient tax revenues whilst simultaneously increasing the opportunity cost of monitoring, policing and using the legal system combatting the shadow economy.
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TalkTalk has been hit by financial difficulties and customer exodus but it is thought no approach has been made
Graham Watson's insight:
It seems that further consolidation is on the cards in the mobile telecoms/internet markets, with the news that BT might be contemplating taking over TalkTalk.
The latter appears to be struggling, having shed nearly 400,000 customers in the 12 months to February and having over £1.2bn in debt. The combined market share of a merged company would represent 36% of the market and would be certain to attract the attention of the competition authorities.
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MPs ask minister if he will claw back Thames Water executive bonuses | Water industry | The Guardian
Chair of troubled firm admits 21 senior managers were paid 50% of base salary on 30 April
Graham Watson's insight:
Oops. The boss of Thames is - no pun intended - in hot water, after it was revealed that the beleaguered company has already paid out over £18m in bonuses to 21 executives. Of course, as far as the company's concerned they are 'retention bonuses', so that's OK then because the company claims that "None of the retention payments have been funded by customers".
So where they got the money for that is anyone's guess. Presumably Sajid Javid's magic money tree.
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The energy secretary says the move will cut energy bills, but house builders caution against burdensome regulations.
Graham Watson's insight:
The government are legislating to ensure that new homes are built with fitted solar panels, unless they are exempt for a specific reason. It's an interesting move, but as the article makes clear, the opportunity cost of doing so requires careful thought about reducing the paperwork associated with doing so.
However, you might wonder whether this is necessarily good economics. Does this generate the greatest net benefit for a given cost - might legislation to insist on heat pumps, better insulation or light sensitive switches or more efficient appliances have a greater effect?
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Editorial: A new ‘guiding mind’ for the industry will end the fragmentation that came with privatisation. But the public will want to see cheaper tickets too
Graham Watson's insight:
Today's Guardian editorial looks at the future of Great British Railways and argues that, instead of being seen as a last resort, renationalisation should be seen as an opportunity to bring coherence to Britain's rail network.
That said, it's idealistic in imagining that all of this can be provided with reduced fares for customers. The sector needs a real rethink - but in the short-term resolving industrial relations and improving customer service would be a start.
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The setback increases the possibility that the company will collapse into a government-supervised administration.
Graham Watson's insight:
And now the end is near...
It seems as though the rotund soprano is limbering up in the wings, as far as Thames Water is concerned, with preferred potential investor KKR pulling out of bidding for the company. I presume that some, if not all of this, is a result of the recent fine imposed on Thames, and the implications of this for its already pretty tarnished brand image.
Still, as long as the executives get their bonuses, it shouldn't matter, but it looks increasingly like it's going to go back into government-supervised ownership.
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Michael O’Leary is set to earn a bonus worth more than €100m (£84m) after clearing a key performance target.
Graham Watson's insight:
I scoop this, unsurprisingly, because it's one of my favourite topics and because I think it provides an interesting starting point for discussing labour market theory.
Even more interestingly, although I'm generally opposed to such obscene bonuses, I also have a degree of respect for Michael O'Leary and how he's transformed Ryanair from a small regional airline. However, 100m euros strikes me as an unreasonable bonus - not least because in part it's been accrued on the back of the effort of Ryanair's notoriously poorly paid staff.
I also think that his point of comparison with Premier League footballers is inappropriate; I don't think that the notion of 'superstars' earning economic rent applies to business. Most Chief Executives are interchangeable and don't have a unique skillset. However, does the bonus reflect his marginal revenue product over time? Worth discussing.
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More than 60,000 workers have received back pay worth £7.4m from 518 employers after HMRC investigations
Graham Watson's insight:
Despite the fact that the minimum wage is presented as a legally enforceable wage floor, you'd be amazed at the companies that don't pay it.
This article highlights that British Airways, Halfords, Lidl, Capita and Pizza Express have been forced into giving employees back pay after HMRC. They're not insignificant employers - 60,000 workers are set to benefit as a result.
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If fares don’t fall and services don’t improve, it could undermine the case for public ownership for a long time to come, says Sarah Nankivell of Common Wealth
Graham Watson's insight:
Whilst I agree with some of what Sarah Nankivell of Common Wealth is arguing - about the renationalisation. I'd be cautious about this article.
In it, there are a number of things that you might quibble with, not least the notion that rail fares should fall. Perhaps they should, in real terms, but how is that compatible with a higher standard of service and investment in the sector? And if there is significant investment in the sector, shouldn't this be paid for by rail users, rather than the taxpayer?
And then there's the notion that's always wheeled out about comparative train fares in the UK and Europe. Yes, we pay five times more than European rail users but that can be attributed to a high level of state subsidy, and it might be argued that European rail benefits from great economies of scale than the UK.
However, her overall point that rail renationalisation needs to succeed isn't unreasonable. It's just that I don't think that all the arguments in support of this stack up.
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Big brands retaining high prices and government yet to publish response to CMA investigation into infant milk
Graham Watson's insight:
This article highlights the extent to which competition policy is dependent upon the structure of the market it's imposed on. Despite a Competition and Markets Authority investigation of the market for baby formula, its price remains stubbornly high. As one campaigner notes: "...despite being exposed for maintaining 50-75% profit margins, the big brands are maintaining high prices, which we think is shameful.”
The exceptions to this are Aldi and Lidl whose own brand baby formula costs £6.99 in comparison with the £11.99 charged by major brands, who account for 85% of the market. So why haven't other supermarkets sought to produce their own brands? You would have thought that the high price of branded baby formula suggests that there's supernormal profit being earned and that should attract new entrants. Or is it the case that the existing brands are so strong that other action needs to be taken? And would this be good economics or not?
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I'll leave this here - the annual survey from the High Pay Centre shows that executive pay is ever-more divorced from that of the average full-time worker.
Followers of this site know what I think and also my response to the fact that "Soriot has defended his pay packet by arguing that it is important to attract his potential successor to the company by showing that the UK is a leading destination for the life sciences industry, while the company’s chair has said the deal will help stop the chief executive from quitting for a role in the US."
In this first case, are there many people who won't get out of bed for less than a £17m salary, and in the second, let him...