Fighting the fat

Denmark's 'Fat tax' has been repealed but doctors are pushing for a similar tax in the UK backed up with supporting measures.

For doctors in the UK the big problem is fizzy drinks, which are basically water and sugar. They want a tax which will arise prices by 20%.

Of course the PED of these drinks might be quite inelastic, but with so many potential substitutes, from juice to water, we might be pleasantly surprised by the effectiveness of such a tax. (However you can see the dentists getting ready to warn us against the effect of acid in fruit juice.)

The problem of fatty and high calorie foods is that they are 'imperfect information goods' and impose significant costs on the consumer and negative externalities on society who must treat their weight related diseases.

So using a price rise alone isn't enough. It is necessary to improve knowledge and directly intervene, such as banning advertising of unhealthy foods and closing take-aways near schools.

The problem of obesity is the 'new smoking'. The 1970's saw us begin to tackle the evils of smoking, but today the threat to peoples health from eating too much is just as serious.

It will take a broad range of measures to solve this. Some will cause a movement along the demand curve, but most will attempt to move the demand curve to the left.

The BBC report the proposals here

Christmas animal spirits?

Photo courtesy of welshkaren

It’s Christmas! Well, nearly, at least. And as the madness of the Christmas season takes hold, consumer willingness to spend increases significantly compared to the rest of the year. With so many friends and family members to buy gifts for, the overall level of demand in the economy increases.

It’s a great time for retailers. As consumers spend more, their revenues increase. In fact, consumers are willing to pay far higher prices in order to fulfil the social expectations of giving high-value gifts, at the same time as being rushed off their feet and less willing to spend time looking for a good deal.

In comparison, the post-Christmas period is a sales bonanza, seeing equally mad behaviours emerge as people hunt for a cheap deal. Shoppers camp out and queue for the sales that start at an unearthly hour in the morning. The USA’s similar post-Thanksgiving ‘Black Friday’ sales have prompted violent and sometimes fatal behaviour. It was thought that a fatal stabbing during last year’s Oxford Street Boxing Day Sales was due to the retail frenzy.

Firms have begun to take advantage of these very different markets. By charging high prices before Christmas, when demand is price inelastic; and offering discount deals after Christmas, when demand is price elastic; they are able to increase their revenue in both periods. This is an example of price discrimination: where firms charge different prices in different markets to maximise their revenue.

Economic theory would hold that this can only be a good outcome. Is this true?

Comment if you know which famous (and peerless) economist's works the title refers to.

The article below explores the phenomenon in more detail:

Clement Wong’s article

So what happens next?

There have been several posts on demand and supply and changes to the market. Below is a link to an article in The Guardian about the effects of the recent weather on honey production.

What side of the market is affected?
What will happen in the market for honey?
How will the market for jam and marmalade be affected by changes in the honey market?
Upon what will the extent of the changes in these markets depend?

Good one for IB micro internal assessment!

The Guardian article is here

Fuel sales decline 15%

The AA is reporting fuel sales are down 15% in the UK, that's 1.7bn billion litres less compared with three years ago.

The AA blame rising fuel prices. The price of petrol was around £1.05 a litre three years ago and is now £1.37.

Can we infer the Price Elasticity of Demand from this data? Well actually no, ceteris paribus does not apply.

You could calculate the PED but it won't be very accurate. Incomes have changed markedly in the recession, moves to reduce carbon emissions have been ongoing and of course households have had time to adjust to higher prices since the 2008 peak.

Interestingly the same phenomenon has been reported all over the world. All over Europe, in India and North America fuel consumption is down.

The BBC report the drop here

Scotland's 50p per unit minimum alcohol price

Alcohol is an imperfect information good. Those who consume it don't take fully into consideration the complete costs of drinking it on themselves, or on others. There are clear negative externalities, such as the cost to the NHS of treating alcohol related disease. Drinkers also overestimate the private benefits to themselves.

Overall then the market consumes more alcohol than is optimal.

Scotland has decided that they will impose a minimum of 50p per unit of alcohol to try to address the problem of people abusing alcohol. This means that a drink that contains two units of alcohol (say a pint of lager) cannot be sold for less than £1. Of course there is no effect if the price is already over a pound.

The effect of this minimum price therefore depends on the current price. Setting a minimum price below the market equilibrium has no effect at all, while setting a price above equilibrium will reduce demand. Of course it can also raise the willingness to supply!

The aim of this policy is to overcome the 'cheap alcohol' available in supermarkets (such as ownbrands) and 'happy hours'. These promote heavier drinking and, as some people know, this is habit forming!

The real question is will it be effective? Alcohol is already heavily taxed, restricted by age limits and only available from licenced premises. There is also a concerted effort to educate people about the true effects of drinking (although this is far less than the effort made on smoking). So far these have failed to eliminate the problem.

The PED of alcohol is likely to be inelastic. Therefore the effect on current drinkers will be small, but maybe it will stop some people from starting to drink. Therefore the pay-off will come in the long-term. What is clear is that dealing with imperfect information goods needs a set of complementary measures which reinforce each other.

The Guardian has details here