Virgin calls foul

Virgin have lost the franchise to run the 'West Coast Mainline', there is a map on the article if you are not sure what this is, but it is basically London to Glasgow, via Birmingham.

This is one of the really important rail routes in the UK (London - Edinburgh and London - South Wales being the others).

When rail was privatised the network was split up into franchises (most of the others being smaller and messier geographically) and whoever wanted the lowest subsidy, or would pay the most was allowed to run them.

The whole process was a mess. Too many franchises, franchise periods that were too short to allow investment or too long to promote competition. There were frequent changes and government interference. Nobody came out of the process with any credit.

Now there are medium term franchises (around 13 years) and the 'bid process' is well established. The aim is to maximise revenue to the government and provide better rail services while ensuring investment. The aims are not necessarily complimentary!

The latest route to be competed for is the West Coast Mainline, which the Virgin Group has run since it was first privatised. They have invested in new trains and improved service frequency and quality. They have also received quite staggering favouritism from government (see Private Eye ad infinitum).

But Virgin lost the franchise to First Group, already a major rail operator. Virgin offered less money and less comprehensive service improvements and after 18 months of the process their bid was judged inferior.

Virgin feel hard done by and are using their considerable PR clout to call foul and demand intervention by MP's. It's very sad and I think really embarrassing.

They have, however, one valid point. The way franchises are awarded may not work.

The theory of franchising is this:
1. Competition promotes efficiency.
2. Efficient allocation of resources is better for consumers - lower prices, and society - more efficient use of scarce resources.
3. Rail is a natural monopoly and so it is inefficient to have multiple train providers on single routes.
4. Therefore competition should be provided in the process of bidding to run the routes. Regulation and regular 're-franchising' will keep franchise holders honest and prevent monopoly profits.
5. The government can make money selling the franchises!

But the process can go wrong when a bidder for a franchise offers too much. If they make losses and walk away this can cause massive disruption and reduce investment in the network. And it has happened before. National Express offered too much for the East Coast mainline and had to be replaced at great cost. In another industry Harlech Television paid too much for the ITV franchise for 'Wales and the West' and went bankrupt.

I hope Virgin is wrong. They have been given preferential treatment throughout their time as a rail operator and this just stinks of sour grapes. However the issues are real and not just for Transport Economics.

The BBC covers the story here

What has this got to do with the price of fish?

The report linked below states that the UK cannot supply enough fish from its own waters to meet demand. It uses the idea of a day in the year when we have eaten our years supply of fish - in 2012 that is August 21st.

Of course it does not work like that, each day Britain consumes, on average, about one third more fish than we catch.

The situation is complicated by quotas, which are aimed at preserving fish stocks.

Read the article and consider:

1. What should happen to the price of fish in the UK as a result of this 'excess demand'

2. Is it bad to import fish?

3. What happened to the fish? Britain used to be able to catch more than enough from her own waters.

BBC article is here

Pigou claims another victory over Keynes

The path taken by unemployment over the period of the recession is very odd. During recessions unemployment should go up as real output falls. In line with this employment should fall.

Well that has not happened for a lot of this recession and explanations of why that is the case are far from complete.

The article below, by Stephanie Flanders of the BBC, looks at some of the issues. It could be because so many of the new jobs, over half a million more than two years ago, are part time. It might be because those who have chosen self-employment over unemployment are actually 'self-unemployed' having no significant work to do.

Two explanations Flanders does not mention are:
1. The effect of mobile European workers - if they go home when there are no jobs this stops unemployment rising as each job is lost. This only explains the low rise in total unemployment.

2. Real wage rates have fallen, allowing firms to employ more people.

The second explanation is simply markets working as they should in a microeconomic sense. When there is a surplus of a product then price falls. This encourages higher demand, but lower supply and the market clears.

Pigou and other leading economists explained that this is what would happen at the start of the Great Depression and that this would lead to unemployment falling and output recovering. Of course the 1930 recession continued into the Great Depression and Keynes explained this by saying wages were 'sticky downwards' and the market adjustment didn't happen.

The supply-side reforms to the labour market and the draconian approach to public sector pay since 2009 have allowed real wages to drift down. Firms can now afford to take on workers with lower productivity and so employment could rise with a lower rise in real GDP associated with it.

There are multiple factors at play here, but I'd like to think that Pigou got this one right.

Stephanie Flanders article is here

Lessons in supply and demand

Corn prices are forecast to rise sharply due to a poor US harvest.

The main one is that there has been a drought in the US, causing corn production to be loweer than last year (indeed the lowest for decades).

Falling production means the supply curve of wheat moves to the left compared to last year and the result is a higher price. This is made worse by two other factors:

1. World population growth means there is rising demand for food. The demand for all food products is growing, shifting the demand curve to the right and so putting upward pressure on prices.

2. The US insists that 40% of US corn is used to make ethanol for car fuel. This restricts the amount of corn available for food.

For now we will leave aside the fact that using corn to make ethanol is exceptionally inefficient and is done for political not environmental reasons.

Grecians will have no problem drawing the diagrams for this, but Deps can use it as a good exercise in understanding market prices.

The BBC covers the story here

Unemployment and poor mental health

One of the stated costs of unemployment is that the unemployed become depressed and suffer more physical illness.

The cause of the physical illness is usually put down to poorer diet and also stress. Of course worrying about the future in a recession is easily understood.

There is evidence that the UK is taking more anti-depressants. The article below makes a real meal of it but it is clear that this provides casual empirical evidence to support this particular cost of unemployment.

The BBC article is here