Microeconomics Real World Examples

Question 1

Scarcity

Answer 1

Several states in India have been facing acute water shortages affecting farmers and households where ground and surface water has essentially dried up. Water prices have increased significantly given its scarcity, burdening families and farmers. High
demand from population growth, drought, and poor monitoring of water resources are the driving causes. Farmers in India are having to dig even deeper to access groundwater with huge concerns over the future availability of water for any uses in the near future. India is ranked as one of 17 nations where water stress is extremely high meaning both surface and groundwater are running out;
Saudi Arabia and South Africa are two notable mentions facing similar water scarcity concerns.

Question 2

Markets In Action - Demand Shift Left

Answer 2

1) The demand for air travel, hotels, foreign holidays, and oil have fallen dramatically given Coronavirus shutting down the hospitality and tourism sectors whilst also changing the nature of travel, reducing the number of road journeys made as more people work from home.

2) Demand for print newspapers has been on a downward trend for the past decade given cheaper substitutes online and new trends to access news via social media.

3) Student housing demand has reduced given higher tuition fees and increases in the general cost of university education. This has led many students to choose universities closer to home where they can live with their parents.

Question 3

Markets in Action - Demand Shift Right

Answer 3

1) Demand for non-dairy milk/non-alcoholic drinks has seen rapid growth with new health trends towards veganism and cutting back on unhealthy dietary inclusions.

2) Demand for electric cars and bicycles has risen considerably in the UK given the government’s push towards replacing fossil fuelled powered cars with more environmentally friendly alternatives.

3) Demand for UK housing continues to increase due to very low-interest rates on mortgages and government support schemes such as stamp duty exemptions and the Help to Buy Scheme for first-time buyers. There is also demand from those buying multiple properties as an investment given the current climate of low market interest rates
reducing returns from generic savings instruments. The signaling, incentive, and rationing functions of the price mechanism have acted as higher demand with price inelastic supply forcing 2020 prices up by 5% with a temporary stamp duty exemption as the major driver.

4) Panic buying at the beginning of the UK Coronavirus lockdown resulted in a surge of demand for essential products like toilet rolls, pasta, and painkillers increasing the prices of these items by 1% almost immediately in the first week of lockdown. Demand for dogs, books, toys, and video conferencing services has seen permanently higher demand given the stay-at-home impact of the virus with the average price of a puppy for example almost doubling to £1900.

Question 4

Markets in Action - Supply Shift Right

Answer 4

1) A very warm British spring and summer in 2020
enabled a bumper watermelon crop where British
prices could compete with imported Spanish produce.

2) The temporary VAT tax cut for the UK hospitality industry to March 2021 reduced costs of production for these firms encouraging greater quantity and lower prices of restaurant meals for example.

3) India is known for large subsides on notable items such as fuel, gas and rice to reduce costs of production for producers who can then lower prices to consumers thus improving affordability.

Question 5

Markets in Action - Supply Shift Left

Answer 5

1) After years of cuts, UK subsidies for home solar panels ended in 2019 given the large fiscal outlay. This has increased costs of production and thus has led to higher installation prices for consumers.

2) Poor weather hindered supply conditions for wheat farmers in the UK with production levels down 40% in 2020 resulting in higher prices for bread and flour.

3) The UK sugar tax on fizzy drinks came into force in April 2018. Drinks with 5-8g of sugar per 100ml are taxed at 18p per litre whilst drinks with more than 8g of sugar per 100ml are taxed at 24p per litre, increasing costs of production for sugary drink providers.

Question 6

Price Inelastic Demand

Answer 6

1) There are several cases of pharmaceutical firms like Nostrum, Pfizer and Flynn hiking up prices of essential medicines, in some cases, life saving AIDS and cancer drugs, given patent protection and a profit motivated business objective.

2) Supermarkets in the UK have reported large increases in revenue in 2020 given the impact of Coronavirus lockdowns and the closing down of restaurants. Price inelastic demand has allowed supermarkets to take away many special deals and offers (in this sense, raising prices) whilst still recording large increases in revenue.

The Apple iPhone si a proven case of price inelastic demand given immense brand loyalty. nI 2017, Apple crossed the $1,000 price mark for the first time with its iPhone X, yet made record revenue ni 2018 despite little to no unit sales growth.

4) Other examples; Cigarettes, Alcohol, Fuel, UK Hospital Parking

Question 7

Price Elasticity of Supply (Price Elastic and Inelastic Supply)

Answer 7

1) Toilet Roll Manufacturers could respond swiftly to Covid panic buying by increasing stocks and swapping machinery away from commercial toilet roll production towards domestic use production -
price elastic supply.

2) Supermarkets offering online delivery are operating at full capacity with demand they cannot meet from new customers working from home - price inelastic supply.

3) The supply of UK Energy is price inelastic with limited stocks and the closing of environmentally unfriendly power plants, reducing capacity.

4) UK housing has price inelastic supply given large production lags and tight planning permission regulation preventing quick increases in supply to match demand.

Question 8

Complements

Answer 8

1) Printers and Printer Ink, 2) Razors and Blades, 3) Coffee Machines and Capsules, 4) Cars and Accessories 5) Games Consoles and Games 6) Ikea Units and Shelves/Component Parts

Question 9

Substitutes

Answer 9

1) Fast Food $1 or £1 Menus 2) Coca-Cola and Pepsi 3) Nike and Adidas Trainers 4) Airlines

Question 10

Normal Goods (YED)

Answer 10

1) With fast-rising incomes among the Indian middle class and increasing job opportunities, the demand for make-up has formed with Indian women seeing make-up as high-end fashion and aspirational.

2) Foreign Holidays 3) Airline Travel

Question 11

Inferior Goods (YED)

Answer 11

1) France is usually known for plentiful independent, local food establishments with consumers willing to pay more for consuming fresh food of their region but years of stagnant incomes and high rates of unemployment have driven up the demand for cheaper and readily available fast food across France.

2) Own Brand Food 3) Bus Travel 4) Staycations

Question 12

Indirect Tax - Fuel Duty in France

Answer 12

In November 2018, the French government announced plans to raise fuel duty on petrol and diesel by 2.9 and 6.5 cents per liter from January 2019. The intentions of the increase were twofold; to raise revenue for the government with budget deficits close to the sensitive 3% permitted level as part of the Maastricht Euro criteria but also this policy was part of the fight against climate change, aiming
to reduce fuel-related emissions. The announcement of this policy was met with wide-ranging protests across the country given its regressive impact and further dent into living standards at a time when job prospects were weak and incomes squeezed. The reaction was so strongly against the policy, that the proposed increase was scrapped a few weeks later.

Other examples of indirect taxes; 1) Cigarette Duty 2) Alcohol Duty 3) Sugar Tax 4) Carbon Tax 5) VAT 6) Air Passenger Duty (APD)

Question 13

Subsidy - Vaccinations in Hong Kong

Answer 13

Healthcare provision in Hong Kong is a mixture of mostly state-funded hospitals together with a good range of private hospitals and surgeries. The Hong Kong government has long offered subsidies for private provision of influenza vaccinations given to very young children but as of 2021, these subsidies have been extended to include pensioners over the age of 50, all children up to the age of 12, pregnant women, and the disabled. The argument for providing these subsidies is one of equity, where the most vulnerable are able to protect themselves through receiving a flu shot with the subsidy level set at HK$240 per dose.

Other examples of subsidies; 1) Electric Cars UK, Germany, and Canada 2) Agriculture EU and USA 3) Research &Development UK 4) Museums UK 5) Fuel, Gas, Rice India 6) Home Insulation UK

Question 14

Minimum Price (Price Floor) - Cocoa in Ivory Coast and Ghana

Answer 14

Ivory Coast and Ghana are responsible for 60% of global COLOC bean supply, representing a major export of both nations.
The price of cocoa beans directly affects the income of producers hence why both governments impose a minimum price to protect farmers from falls in the world price. The minimum farm price as of 2021 has been raised to $1.79/kg in the Ivory Coast and $1.84/kg in Ghana. However, given the nature of government finances, intervention buying of excess supply (QdQs units) does not take place, resulting in no change in the farmers’ income. Farmers are therefore left to bear the costs of producing and storing the excess supply.

Other examples of minimum prices; 1) EU Common Agricultural Policy (CAP) 2) Alcohol Scotland and Wales

Question 15

Maximum Price (Price Ceiling) - Basic Food Items in Venezuela

Answer 15

Venezuela is a highly interventionist economy with
one example being the imposition of maximum
prices on a variety of basic grocery items such as
coffee, oil, milk, meat, butter, flour, toilet paper,
medicines and personal hygiene products. The aim
of these price ceilings is to improve affordability
and ensure that all consumers have access to such
staple goods. While the intention is fair, the reality
of this market distortion has been to cause huge
shortages, smuggling, black markets and mass
queuing across the entire country. Shops are often
empty, left only with items that are not in demand
and ordinary people are left queuing for hours for items that are often not available. This has led to a large black market where smuggled goods from abroad are sold to desperate consumers. These unintended consequences are a direct result of the excess demand caused by price ceiling market distortion where the rationing and incentive functions of the price mechanism are suppressed. Similar consequences have been seen in Cuba with maximum prices imposed on basic food items and taxi fares.

Other examples of maximum prices; 1) Rent Control in New York, San Francisco and Berlin 2) Energy Price Cap UK

Question 16

Negative Externalities

Answer 16

Smoking Cigarettes - £2bn-£6bn annual cost to NHS, £14bn overall cost on the UK taxpayer

Drinking Alcohol - £3.5bn annual cost to NHS, £52bn overall cost to the UK economy

Eating Unhealthily - £6bn annual cost to NHS of obesity, £27bn wider cost to society of obesity

Road Congestion - £37.7bn annual cost of lost UK output and business costs from delays

Dropping Chewing Gum - £60m annual cost to local councils

Gambling - £1.2bn annual cost to society

Eating Red Meat - £700m annual cost to the NHS

Air Pollution - £42.88m annual health and social care costs

Question 17

Positive Externalities - Physical Exercise

Answer 17

Figures suggest that only 30% of the UK population is physically active enough to maintain good health. There are significant private and external benefits of exercise yet data illustrates a large under-consumption. Some of the external benefits include; NHS savings of £100 per person per year, employer benefits of greater productivity and lower absenteeism as well as greater
community spirit and social well-being.

Education - Higher incomes and tax revenue collection

Healthcare and Vaccinations -Reduced spread of disease benefitting wider society

Public Transport - Less congestion on the roads and less air pollution

School Lunches - Greater productivity, school performance and earning potential

Question 18

De-Merit Goods

Answer 18

1) Red Meat is argued to be overconsumed given imperfect information regarding the increased risk of diabetes, stroke, and heart disease. There is also evidence to suggest a direct cause of cancer, particularly in processed meats. Not only this but negative externalities also exist in the form of NHS costs and employer costs due to days absent as a result of ill health caused.

2) Gambling can be over-consumed if it becomes habitual with many of the personal impacts it creates unknown or ignored such as mental health problems, greater anxiety, stress, family breakdown, and financial problems. Once more many of these issues carry 3” party costs such as health service costs and costs to police services of gambling-related crime.

Other examples of de-merit goods; 3) Cigarettes 4) Alcohol 5) Sugary Drinks/Fatty Foods 6) Chewing Gum 7) Tanning Beds

Question 19

Merit Goods

Answer 19

1) The private benefits of sun cream are enormous yet unknown by many including fighting against skin cancer, premature aging and wrinkles.

Other examples of merit goods; 2) Healthcare 3) Education 4) Public Transport 5) Healthy Food and Drink 6) Museums 7) Electric Cars 8) Solar Panels 9) Home Insulation

Question 20

Public Goods

Answer 20

Flood defenses are non-excludable; no price can be charged for them in the free market as 3rd party consumers can benefit without contributing
towards their provision and they are non-rival as they do not diminish in quantity upon consumption. This results in the free-rider problem and a missing market hence why government provision occurs in the UK in flooding sensitive areas. However, a major problem with the direct provision is that comprehensive coverage cannot exist and large-scale flooding still occurs in the UK without defenses due to limited government finances.

2) Roads are non-excludable as in theory the benefits of road space cannot be confined to the individual who pays and they are non-rival as road space does not diminish upon consumption. However, roads could be considered a quasi-public good becoming excludable with road pricing such as toll roads seen throughout Europe or electronic road pricing as used in Singapore. Once more roads can be rivaled during times of peak congestion where road space does diminish in quantity upon consumption.

3) Beaches are both non-excludable and non-rival for the same reasons as roads but again can be argued to be a quasipublic good becoming excludable if owned by a hotel restricting beach entry to hotel guests only and becoming rival during times of peak congestion ni the summer months.

Other examples of pure public goods; 4) Street Lights 5) Road Signs

Question 21

Common Access Resources

Answer 21

Forests in Malaysia are not privately owned giving rise to the Tragedy of the Commons with common access resources that the forests provide. Malaysia is known to have the fastest deforestation rate of any country in the world having lost approximately 15% of its forest coverage since 2000. The aggressive palm oil industry and timber companies are the prime reason for the large-scale destruction of forest areas and with limited government restriction, swathes of forest land have been lost.

Other examples of common access resources; 2) Seas and Over Fishing 3) Air and Pollution

Question 22

Indirect Tax and Market Failure

Answer 22

The UK sugar tax on fizzy drinks came into force in April 2018 to battle childhood obesity where one-third of children aged between 2-15 are recorded as either obese or overweight. Drinks with 5-8g of sugar per 100ml are taxed at 18p per litre whilst drinks with more than 8g of sugar per 100ml are taxed at 24p per litre, increasing costs of production for sugary drink providers.

A year on since its introduction, the sugar tax made 50% of companies change their recipes to ensure sugar volumes fell below the tax thresholds, reducing the average amount of sugar in fizzy drinks by 28.8% compared to 2015 levels. Consumption of fizzy drinks moved heavily towards zero-sugar or low-sugar alternatives. However, in an overall fight against obesity, general consumption of sugar (from all sources) increased from 723,000 tonnes bought from supermarkets in 2015 to 743,000 tonnes in 2018, equivalent to a 0.5% increase in sugar consumption per person.

Key facts:
18p/litre for drinks with 5-8g sugar/100ml * 24p/litre for drinks with >8g sugar/100ml
* Juices, Sports Drinks, Milk Based Drinks and Sugary Foods are completely exempt
* Raised £240m in the first year with money
funding sports in primary schools
* 50% of all manufacturers reduced sugar levels
before the levy started by changing recipes
* Same tax in Mexico reduced consumption by 12% ni its first year but consumption is now back at pre-tax levels

Other examples of indirect taxes to solve market failure; 2) Cigarette Duty 3) Alcohol Duty 4) Fuel Duty 5) Carbon Tax 6) Road Pricing 7) Fat Tax 8) Air Passenger Duty (APD)

Question 23

Subsidies and Market Failure

Answer 23

1) Museums in the UK have received subsidies since 2001 to provide universal free entry to consumers with the intention of boosting public visitor numbers. Museums educate the public, increase patriotism and widen horizons thus providing wide ranging private and external benefits; museums could therefore
be labeled merit goods. Since subsidies have been issued, museum visits have increased by 184%.

Other examples of subsidies to solve market failure; 2) Electric Cars 3) Solar Panels 4) Home Insulation UK 5) Public Transport (Buses and Trains) 6) R&D 7) In Work Training 8) Adult Training

Question 24

Regulation and Market Failure - Plastic Waste

Answer 24

Dealing with plastic waste is a global fight. 90% of
ocean waste is plastic affecting food supply, sanitation
, and drinking water when plastic is dumped into natural resources. In the UK a variety of regulations have been drawn up to fight back against plastic waste including banning plastic stirrers and restrictions on the availability of plastic cotton buds and plastic straws but also a proposed, innovative deposit recycling scheme where consumers pay extra when buying an item with
recyclable packaging (as a deposit) and only receiving it back after successfully recycling the item.

Question 25

Regulation and Market Failure - Road Space Rationing Beijing

Answer 25

To reduce pollution levels for the 2008 Beijing Olympics, authorities in Beijing introduced a series
of regulations known as ‘road space rationing’ policies having identified excessive car use as the
biggest contributor to air pollution in the city. These
policies included; i) The odd even license plate
policy, where cars were only allowed on the road if
on a given day their license plate ended in an odd or
even number. ii) The end number license plate
policy where drivers could drive their cars on certain
days of the week depending on the end number of
their license plate. i) The yellow sticker label policy
where heavy vehicle emitters would be labeled with a yellow sticker banning them from driving on certain roads in the city and iv) The vehicle lottery where for households to purchase a second car, they would have to enter a monthly lottery draw. These policies were strictly enforced and reportedly reduced daily air pollution levels by 40%.

Question 26

Regulation and Market Failure - Other Examples

Answer 26

Anti - smoking regulation in the UK:
* Age Limits - must be 18 or over
* Advertising Bans
* Public Smoking Ban from 2007
* Compulsory warnings on packaging
* Compulsory graphic imagery on packaging
Cigarettes sold behind closed counter
Compulsory plain cigarette packaging

Others:
* Age Limits for Alcohol - must be 18 or over * Forced Calorie Content on Menus (USA)
* Forced Nutritional Info. on Packaging
* Traffic Light Nutritional System
* Energy Drink Bans and Junk Food Advertising Bans for Children
* Compulsory Vaccinations (Italy)
* Quotas on Fishing and CO2 emissions (EU)
Ban on new petrol/diesel cars from 2030 (UK)

Question 27

State Provision and Market Failure - The NHS

Answer 27

Free market for healthcare could fail due to two main reasons; firstly with large positive externalities that would be ignored in the free market, healthcare would be significantly under-consumed and underprovided. Furthermore, given the essential nature of healthcare
services, it can be argued on the grounds of equity that no person should be denied access to healthcare. The NHS (National Health Service) in Britain is an example of free at the point of consumption healthcare provided by the state to overcome the issues of under-provision and inequity in the free market funded entirely through taxpayer’s funds. Whilst largely successful on these two fronts, state provision of healthcare in the UK does have many of the issues economic theory suggests. Funding costs the taxpayer £110bn a year, large excess demands put undue pressure on the system and workers within it, and large X-inefficiency exists given the lack of a profit motive.

To reduce some of the pressure on healthcare services, normative considerations have been made to delay ‘non-essential’ operations and alow large waiting lists for emergency services. When the market si unable to ration resources, the problems of excess demand are notoriously difficult to deal with. Both before and during the Coronavirus pandemic, NHS A&E wait times and cancer treatment start time targets have regularly been missed with a record number of patients on NHS hospital waiting lists.

Other examples of state provision to solve market failure; 2) Education and UK State Schools 3) Free School Lunches for vulnerable students in the UK

Question 28

Tradable Pollution Permits and Market Failure - The ETS

Answer 28

The ETS (emissions trading scheme) in the EU is a cap
and trade response to the Kyoto
Protocol where countries agreed to reduce carbon emissions in a fight
against climate change. In the ETS, EU countries are set a
cap on allowed levels of pollutant emissions with firms
faced with a choice of either finding a way to reduce
pollution or if they pollute beyond their allowed level to
purchase permits (equivalent to one CO2 ton) from firms
who has successfully reduced pollution more than needed? At the end of each year, firms must trade in their permits and face heavy fines if actual pollution exceeds the number of permits they hold. Since the scheme’s introduction in 2005 carbon emissions across the trading bloc have fallen and are 21% lower in
2020 compared to 2005 levels.

Question 29

Minimum Pricing and Market Failure - Alcohol in Scotland

Answer 29

In June 2018 the Scottish government announced a minimum price of 50p per unit of alcohol as a radical way of reducing the consumption of alcohol. In Scotland, every adult on average drinks 20 units of alcohol a week, much more than the maximum recommended level of 14 units with almost half of all alcohol in shops priced at less than the 50p per unit before the minimum price was enacted. The burden of alcoholism on hospitals, and employers through absenteeism and low productivity is significant hence the introduction of the minimum pricing policy.

A year on, minimum pricing has reduced alcohol consumption in Scotland by around 3% with the highest reductions in consumption seen amongst the heaviest drinkers and for the cheapest, strongest forms of alcohol; beer, cider, and spirits. Towards the end of the year, consumption trends started to increase, raising concerns over the potential long-term impact of the policy. Alcohol minimum pricing is now also being used in Wales, Australia’s Northern Territories, and is proposed in Northern Ireland.

Key facts:
Minimum Price of 50p per unit of alcohol
* Alcohol responsible for 2 deaths and 697 hospital admissions per week
* Most deprived areas see hospital alcoholism
burden 8 times greater
* Alcohol-related admissions are 4.4 times higher than in the 1980s
* Excess revenue kept by retailers

Question 30

Maximum Pricing and Market Failure - Rent Control

Answer 30

Rent control has been used in cities such as New York, San Francisco, Berlin, and Paris to control the rate of rent increases where those on lower incomes would otherwise be squeezed out of the market and forced to move, a process known as gentrification. In San Francisco and New York, excess demand has resulted where landlords have reacted by building apartments that are exempt from the policy but also because those who are eligible for rent control tend to stay in those apartments for significantly long periods of time. In Berlin, landlords hike up rents after a tenant has moved out as they are not forced to disclose previous rent rates; often resulting in much higher than equilibrium rent paid. Research of the effectiveness of rent controls in San Francisco found that the number of rent providers decreased so substantially that city-wide, rents had to increase by 5% to control excess demand.

Question 31

Government Failure

Answer 31

1) Due to heavy cigarette duty and strict smoking regulations, the black market for cigarettes in the UK is worth 2bn a year. Similarly, due to alcohol duty and alcohol regulation, the black market for alcohol in the UK is worth £1.8n a year; unintended consequences of these policies.

2) Compulsory household recycling has pushed the UK to one of the highest recycling rates in the world at 45.7% but the UK is not able to handle the full scale of plastic waste for recycling. The result is huge exports of plastic waste to countries like China and more recently India, Malaysia, Thailand, Vietnam, and Indonesia. Most of this plastic is not recycled due to impurities, ending up in landfills or burned in open fires creating huge environmental issues. Even plastic that is recycled has a large carbon footprint given the transport
distances and processing involved.

3) As a result of the EU’s Common Agricultural Policy, large sums of money are paid to farmers to leave land aside to avoid the problems of excess supply. This is a huge waste of resources representing a large cost of the policy as well as a serious unintended consequence. Before the EU government proceeded with this action, huge amounts of excess butter, milk, and other products were bought up and stockpiled or destroyed representing another large government failure. Once more, the EU’s Common Fisheries Policy is a quota system to deal with overfishing yet results in a major unintended consequence as dead fish are thrown back into the water due to fisherman exceeding their catch quota.

4) The UK government’s state provision of education and healthcare causes major
unintended consequences in the form of large wait times at accident and emergency, non-essential surgeries and treatment being purposefully delayed, and primary school class sizes becoming excessively large given the excess demand issues of state provision.

5) The UK government after coming across new information about diesel cars in 2016 found that they are net, worse for the environment than their petrol counterparts and have thus decided to increase taxes on diesel cars, remove incentives to purchase them, and to phase them out by 2030. A good example of how government policy when ruled by imperfect information can invoke more cost than benefit.

6) Crossrail and HS2 rail infrastructure projects in the UK, have suffered from both poor information and spiraling costs with delays, poor management, contract scandals, and excessive salaries to blame. Crossrail is currently delayed to 2021 with the HS budget regularly ballooning out of control.

Question 32

Law of Diminishing Marginal Returns

Answer 32

Coffee shop chains like Starbucks and Costa operate in the short run where there are two fixed factors of production; land and capital. These stores face the problem of the law of diminishing returns if they over-employ staff during busy times. More baristas are confined by a lack of workspace and a lack of machines to make beverages ordered whereas more waiters employed are confined by a lack of walking space and tables in the store. Labor productivity, after a point, will fail with each worker hired reducing marginal product.
The same argument holds for pizza shops, restaurants, fruit and vegetable picking farms, and factory-based manufacturing.

Question 33

Economies of Scale

Answer 33

1) The hyper-competitive airline industry is known for large exploitation of internal economies of scale. Bulk buying of fuel and planes (purchasing economies), financial economies with loans, managerial economies, and marketing economies all play a significant role in reducing unit costs.

2) UK supermarkets compete largely on the ability to achieve the greatest economies of scale especially technical, purchasing, managerial and financial economies of scale.

3) The big six energy companies in the UK are able to out-compete their smaller rivals by building large
barriers to entry in the form of huge economies of scale. Purchasing large quantities of energy well in advance of expected price rises is one way to beat the competition who cannot afford to follow such practices as well as these firms benefitting from significant technical economies of scale.

Question 34

Diseconomies of Scale

Answer 34

1) The failure of travel agent Thomas Cook was partly blamed on ineffective control from management.

2) Prior to 2010, PepsiCo’s growth strategy of acquiring smaller companies led to a lack of coordination between departments, stifling innovation as a result. To overcome this, PepsiCo decided instead to bring certain tasks, like marketing, in-house or outsource them to start-up
companies without acquisition.

3) Following the Kraft and Heinz merger, staff complained about poor culture and lack of motivation.

4) The growth of Yahoo created communication problems between directors, managers, and workers leading to arbitrary worker reviews and strategic failing grades to try and improve performance with no direction given as to the motive/objective of such reviews.

Question 35

Profit Maximisation

Answer 35

1) Pharmaceutical companies have a clear profit maximization focus given their need to develop new drugs and the huge research and development cost this involves. To come up with a new drug is so lucrative as it can be patented giving the firm monopoly power, therefore these companies strive for maximum profits in order to fund the research and development necessary to come out with a new product. The average cost of research and development spending for each new drug from development to launch is approximately $2bn.

2) Major technology and electronics companies also have a profit focus given large research and development costs and the desire to come out with new products with patent potential. Companies like Huawei, Panasonic, Intel, and Microsoft file for the most patents in a year indicating the importance of profit to fund investment in research and development.

Question 36

Profit Satisficing

Answer 36

Walmart is one of the largest companies in the world as well as one of the largest employers. In 2018, Donald Trump announced a large corporation tax cut in the USA benefitting large firms like Walmart who are now able to keep more of their profits. Walmart reacted to this policy by paying their workers higher wages and also offering employee bonuses of up to $1,000. This is a good example of putting stakeholder satisfaction above profit maximization to ensure good stakeholder relations in a modern business environment.

Question 37

Revenue Maximisation

Answer 37

1) Twitter up until 2018 was focused on satisfying shareholders with a revenue-focused approach rather than a goal of profit maximization. Twitter used huge revenue numbers to justify business success to shareholders, citing that high revenues implied strong advertising demand on the site driven by a large active user base. In 2018 this focused change towards making profits and providing dividends to shareholders who are no longer satisfied purely from user account growth and revenue increases.

2) Revenue maximization can also be used as a predatory pricing strategy to undercut rivals and drive them out of the market. In 1996 Rupert Murdoch was found to purposely reduce the price of The Times newspaper to only 10p on Mondays, deliberately selling at a loss in order to drive out competitors.

3) Bus companies have also been found to use predatory pricing to drive out competitors from the market. In 1996 Stagecoach used these tactics in the North East of England to undercut rivals, driving out Darlington Bus Company in the process. In 2007, Cardiff’s largest bus company Cardiff Bus were investigated for using predatory pricing tactics, pricing below cost to drive out rival Travel PLC.

Question 38

Sales/Growth Maximisation

Answer 38

1) Costa Coffee in the UK has a clear sales maximization drive with the aim to get ahead of key rival Starbucks by opening more stores. The number of Costa stores is more than double that of Starbucks in the UK clearly suggesting that Costa is striving for brand recognition and brand loyalty, flooding the UK market with stores and their products before moving towards a profit-oriented strategy.

2) Netflix for the first decade of its operation had a focus on building a large user account base willingly offering deals to lure in first-time customers. In the last two years, after achieving the sales maximization goal very successfully both in the USA and internationally, Netflix has moved towards a profit-driven strategy by raising monthly fees more regularly. Spotify is another notable example of this.

3) Amazon like Netflix focused heavily on building the number of consumers with Amazon accounts and maximising sales with low prices offered. For two decades Amazon profits had rarely verged away from breakeven but more recently, this focus has changed to a profit focus to satisfy shareholders. The introduction of Amazon Prime and postage fees are some examples that illustrate this change.

4) Supermarket discounters Aldi and Lidl are pursuing a growth objective attempting to open many new stores in the UK to bring in more shoppers and gain market share.

Question 39

Survival

Answer 39

1) In both the USA and the UK, the fast food market is extremely competitive, and difficult for new firms to enter and quickly become profitable. Despite this, new firms have entered the UK market such as Five Guys and Shake Shack but in such instances, firms will often have the short-term objective to survive the start-up phase, developing brand awareness before changing business strategy. The UK courier, airline, and clothing industries are other good examples where new firms joining the market would look to survive in the short term.

Question 40

Corporate Social Responsibilities (CSR)

Answer 40

1) The Walt Disney Company pride itself on the strength of its CSRs, focusing on labor
standards, conservationism, and charitable giving as well as promoting their own employees to give time towards volunteering.

2) Starbucks ensures they pay coffee bean producers a fair wage to support their livelihoods through a protecting farmer fund as well as committing themselves to sustainable coffee production by planting coffee trees and through the training of farmers.

3) The Body Shop commits to ethical responsibilities by not testing any of its products on animals.

4) Ben and Jerry’s is a company renowned for their CSRs with a commitment of 7.5% of their pre-tax profit dedicated to philanthropic giving.

Question 41

Perfect Competition

Answer 41

Though there are no real-life examples of markets that are 10% perfectly competitive, there are some good examples that come very close:

1) The market for Tuks Tuks in countries like India and Thailand fit many of the characteristics of perfect competition. There are a huge numbers of buyers and sellers each selling homogenous services at the same prices with perfect information. The only characteristic that doesn’t fit the theory of perfect competition is no barriers to entry with Tuk Tuk driving, a license to operate is needed as is the finance available to either buy or rent a Tuk Tuk. This market also follows the theory of static efficiency being achieved but not dynamic efficiency over time.

2) Large fruit and vegetable markets and fish markets also are very close examples of perfect competition. With a high number of buyers and sellers each selling the same produce at their stalls often from the same farmers, these sellers are definitely price takers. There is excellent information available in the market but again there is a small barrier to entry in the form of a permit to operate.

3) The market for foreign exchange is another good example with many sellers in existence each selling identical products (an international currency is exactly the same regardless of where it is purchased from). The information in the market is excellent with the internet allowing consumers to easily work out any differences in exchange rates offered and barriers to entry are very low but not non-existent with regulations in force and licenses needed for firms to start up.

Question 42

Competitive Markets

Answer 42

1) Ever since deregulation in the early 1990s, the market for airline travel in the KU has become intensely competitive. Specifically, short-haul travel has seen a large number of carriers both enter and exit the market with supernormal profit and subnormal profit acting as incentives for new firms to enter and struggling firms, such as Monarch, WoW Air, and Flybe to leave. Established brands like EasyJet and Ryanair have had huge success with low-cost, low-priced short-haul travel, which has attracted new firms such as Norwegian and Level into the market. The end result has been very low fares and a high number of routes offered to consumers with large exploitation of economies of scale at minimal waste - i.e. the achievement of static efficiency.

Other examples of highly competitive markets in the UK; 2) Fast Food 3) Supermarkets 4) Takeaway Delivery 5) Retail 6) Travel Agents

Question 43

Competitive Markets - Loss Making Industries

Answer 43

1) UK High Street Restaurant chains like Jamie’s Italian, Prezzo, Frankie and Benny’s, Pizza Hut and Pret a
Manger are in a highly competitive market but have struggled immensely due to Covid lockdowns and the rise of takeaway delivery services like Deliveroo and
Uber Eats has made sit in dining a more luxury offering for consumers rather than a regular
experience. This fall in demand has led to a complete collapse of many of these brands or the closure of many restaurants nationwide.

2) Well-known UK high street retailers have been forced to shut down given tough battles with online shopping substitutes. Companies like Toys RUs, New Look, Maplin and Poundland, John Lewis, Debenhams, Clinton Cards, and Thomas Cook have either completely closed their branches or have significantly reduced the number of stores in existence due to the lack of ability to compete with online trade - coronavirus has accelerated this trend. The same issue has plagued The Daily Telegraph newspaper, suffering from plummeting profits as they struggle to compete with alternative ways of accessing news rather than in print form.

Question 44

Monopoly Power

Answer 44

1) Google Search has a global market share of 92%, a clear leader in the search engine market with significant monopoly power. Investigations by the European Competition Commission found search results to direct consumers specifically to Google products or products of firms who advertise on Google regardless of good value for consumers. Amazon and Apple have also been accused of using their global monopoly power to discriminate against 3rd party sellers with Apple also charging higher prices for their own Apps on the App Store.

2) In 2019, 50% of all online US sales were made through Amazon indicating significant monopoly power for the retail giant which has been known to use this power to price discriminate in the past.

3) Gazprom is a Russian state-owned monopoly provider of gas and electricity across Eastern Europe. In 2017 it was investigated by the EU Competition Commission for charging unfair prices to its consumers with false justification of increases in costs. After hearing the conclusions of the investigation, Gazprom made several concessions but in this region remains dangerously the dominant monopoly provider of energy; a necessity with high price inelastic demand.

4) Stagecoach has near monopoly control of bus services in Cambridge and has been proven to exploit that power by raising fares regularly and only offering a small number of services.

Other examples of monopoly power; 5) Durex UK 6) Merlin Attractions UK 7) Tesco UK 8) DHL Globally

Question 45

Oligopoly - Price Fixing Cartel (Overt Collusion)

Answer 45

1) Truck maker Scania was fined in 2017 for its part in organizing a price-fixing cartel, colluding with five other truck companies in a scheme that lasted for more than 14 years. The EU Competition Commission fined Scania €880m. In 2007 British Airways and Virgin Atlantic colluded to fix airfares using fuel price rises to justify sudden fare surcharges. Virgin eventually broke the agreement and disclosed the collusive activity to competition authorities landing British Airways with a huge fine and reputational damage.

2) OPEC is a legal oligopoly consisting of major oil-exporting nations such as Saudi Arabia, Venezuela, and Iran. The organisation is known for regularly altering the price of oil by raising or cutting output, depending on the needs of their respective economies.

Question 46

Oligopoly - Price Leadership (Tacit Collusion)

Answer 46

1) The big six energy providers in the UK control 94% of the market and rarely engage in meaningful price competition. What is seen far more commonly is price leadership where one firm will make a move either to increase or decrease prices by a certain percentage before the other companies follow with a very similar price change. Prices are quick to rise but for prices to fall often requires intervention by the industry regulator Ofgem, a clear indicator of a lack of significant competition.

2) Supermarket fuel providers have dominant control of the UK fuel market and are known for informal agreements not to engage in price wars. Like with the Big Six energy providers, price leadership is a common feature of this market with one firm normally announcing a price change in the media before the other providers follow. Again prices are very quick to rise but much slower to fall with changes in oil prices, a clear indicator of a lack of real competition in the market.

Question 47

Contestable Markets

Answer 47

The examples below are clear cases of contestable markets as the threat of firms entering the market became real proving that barriers to entry are low enough to allow such entry to take place.

1) The global hotel market has changed dramatically due to the entry of Airbnb revolutionizing the nature of travel and accommodation. Technology allowed Airbnb to come up with a unique way of competing with the established hotel model making the market highly contestable.

2) Airline travel has proven to be a highly contestable market
despite its boom-bust nature and reputation for a large range of
business failures. Since the deregulation of the industry in the early 1990s, barriers to entry were reduced allowing firms to realistically compete with national providers, especially for short-haul flights. Entry into the market of Easy Jet, Ryanair, and more recently, Norwegian and British Airways’ rival to the low-cost carriers Level is proof of the contestability of the market, which is now starting to branch into longer haul travel too. Recent entry could however be hit-and-run competition that won’t last in the long run with Wow Air and Flybe having left the market and Norwegian in financial trouble.

3) Since the entry of Aldi and Lidl, the supermarket industry in the
The UK has transformed from a dominant and closed oligopoly to a
highly contestable market with potential for disruption and new
entry. These firms entered with a unique way of competing with large and well-established rivals, offering their own brands of
grocery staples at much lower prices allowing them to collectively now have approximately 14% combined industry market share. To prove the contestability of the market, Tesco opened their version
of ‘discounter’ shops to rival Aldi and Lidl called Jacks but with little success to date.

4) The entry of Uber into the taxi market has opened up the market dramatically to new competition. The use of technology to receive cab rides provided Uber with a highly lucrative way of disrupting the market paving the way for rival brands like Lyft, MyTaxi, Careem, Dett, and Didi Chuxing to also enter the market and compete internationally.

5) Takeaway delivery is now a hugely contestable market with Deliveroo disrupting the pre-existing dominant and stagnant market consisting of Just Eat and Hungry House. New firms like Deliveroo, Uber Eats and many smaller rivals have since entered proving the large threat of entry that exists.

Other examples of contestable markets with recent entry; 6) Fast Food 7) Film and TV Streaming (Disney) 8) Shaving (Dollar Shave Club and Harry’s Razors) 9) Travel Agents (Jet2)

Question 48

Monopoly Regulation - Energy Price Gap

Answer 48

The big six energy companies in the UK are known to have dominant control of the market but also to tacitly collude together and restrict meaningful competition. From January 2019, prices for energy on variable rate tariffs are capped to protect consumers, especially those most vulnerable with low incomes, from significant increases in energy tariffs. In the UK there are two different ways of
paying for energy; a fixed tariff, where the prices of gas
and electricity are fixed at a given rate for a year and
consumers pay for what they use at those rates and secondly a standard variable rate tariff, where prices of gas and electricity can change at any point during the
length of the contract. Variable rate tariffs are poor value for the consumer as they always charge a significantly higher unit rate for both gas and electricity than fixed rate deals and become the default tariff for consumers who do not search for the best deals when a contract ends. Entering 2021, the price cap has been lowered to have a more meaningful impact on consumer welfare and yearly savings and will last at least until the year-end. So far typical households have saved £75-£100 per year on energy bills with little impact on market competition (whether up or down) but smaller companies may be forced to leave the market in the future as they struggle to make the required profit to continue operations.

Key Facts:
*Typical households are saving between £75- £100 a year on energy bills
* Cap for the typical energy user lowered from £1,137 to £1,042 per year ni 2021
* The number of fixed tariff deals below £1,000 a year has fallen since the price cap started

Question 49

Monopoly Regulation - Rail Fares RPI Price Capping

Answer 49

Private train operating companies in the UK are responsible for the operation of consumer services on the track. Each company bids for a franchise, a section of the track where they are the sole provider of services, essentially providing these firms with monopoly control. To prevent excessive, monopoly price increases each year, the OR (rail regulator) caps yearly fare rises by RPI for peak journeys. This is a stricter regulation than the prior RP+1% cap. The aim of this price cap is to protect commuters from fare increases beyond inflation and to force companies to make efficiency savings however, using RPI rather than CPI ensures that fares still rise considerably every year, hurting commuters.

Question 50

Monopoly Regulation - Heathrow RPI - X Price Capping

Answer 50

The airports and airlines regulator, the CAA (Civil Aviation Authority) has imposed a price cap of RPI- 1.5% on landing charges at Heathrow Airport given the airport’s dominant control of the market and potential to use its monopoly power to increase landing charges excessively which would ultimately increase passenger fares. The price regulation is particularly strict to protect passengers from significant hikes to fares and to force the airport to make much-needed efficiency savings to remain profitable.

Question 51

Monopoly Regulation - Water Companies RPI+K Price Capping

Answer 51

Water companies in the UK are natural monopolies; with very high fixed costs of building and maintaining pipe infrastructure as well as water treatment infrastructure allowing them to benefit from large economies of scale. Given the essential nature of clean water, companies are heavily regulated by water regulator Ofwat who in the past used RPI+K price regulation to keep prices affordable for consumers but also ensure enough profit to re-invest in infrastructure maintenance. Currently, the price cap used is RPI-K to promote efficiency savings but still provide profit for re-investment.

Question 52

Monopoly Regulation - Cross Channel Ferry Crossings

Answer 52

Four companies used to run ferry crossings across the English Channel; SeaFrance, MyFerryLink (owned and operated by Eurotunnel), P&0, and DFDS Seaways . I n 2012 , SeaFrance went out of business with
MyFerryLink buying its 3 ferries. In 2014, the CMA banned Eurotunnel’s MyFerryLink from operating ferry services across the channel on the grounds of excess market control over the crossing given the train services the company also offers. The company had to sell off assets to
rival companies and cease operation leaving a current duopoly in the ferry crossing market.

Question 53

Monopoly Regulation - Performance Targets/Quality Standards

Answer 53

1) Train companies and airlines both have performance targets to restrict the amount and length of delays that affect consumers. Train companies are forced to pay compensation to passengers if their train is delayed by 30 minutes or more and airlines are forced to pay compensation if flights are delayed and passengers arrive at their destination 2 hours or more later than scheduled.
The problem with this type of quality control regulation is that companies game the system, increasing the scheduled length of journeys on tickets to minimize the risk of paying compensation if delays occur.

2) Energy companies are regulated where they cannot cut off gas or electricity supplies in the winter to vulnerable households (the elderly and those on low incomes).

3) Internet service providers are forced to pay automatic compensation to consumers if there are faults with broadband services or sudden blackouts that go unrepaired for 2 days or more.

Question 54

Monopoly Regulation - Merger Policy

Answer 54

1) In 2018, supermarket giants ASDA and Sainsbury’s proposed a merger that would have given the two firms a combined market share of 30%. Whilst these firms argued that consumers could have faced lower prices and 124 higher quantity given the monopsony power this merger would have resulted in, the CMA blocked its go-ahead given serious competition concerns in 463 areas of the UK. Even the prospect of selling stores in these areas did not convince the CMA of this merger being in the public interest.

2) In 2019, the UE Competition Commission blocked a proposed merger between train manufacturers Alstom of France and Siemens of Germany given serious competition concerns against the public interest and higher prices expected for both signals and trains that the firms produce. The merger would have created a company with €15bn of annual revenues but was blocked to ensure that lower-cost non-EU producers such as those in China would not be able to compete in the EU ahead of domestic firms.

3) In 2016, the merger between Celesio AG (the company that operates Lloyd’s Pharmacy group) and Sainsbury’s Pharmacy was approved but flagged for the lessening of competition in 13 areas in the UK. Branches of pharmacies had to be sold off in those areas as a result of the regulation. A similar rule resulted from the CMAs’ investigation of a merger between high street betting companies Ladbrokes and Coral in 2016. The merger was given the green light but only on the condition that 400 shops were sold off in local areas where competition would be significantly lessened.

Question 55

Privatisation - Royal Mail

Answer 55

In October 2013, the conservative government decided to privatize
Royal Mail, is a company specializing in letter and parcel delivery. Prior
to privatization, Royal Mail was loss-making to the taxpayer, in serious decline, and highly inefficient. The sale to the private sector aimed to re-vitalize the company with funds, a profit-oriented strategy, and efficiency savings to modernize the company and make it more competitive, whilst also raising revenue for the government.
Privatization raised approximately 2bn for the government and has seen a dramatic turnaround in the fortunes of Royal Mail which now focuses more on the lucrative parcel delivery sector where large profits can be made and excessive costs have been cut allowing the firm to make regular profits. With strict regulation from Ofcom (the telecommunications regulator), the Universal Postal Service requirement has remained with Royal Mail committed to delivering letters and parcels to any postcode in the country within three working days for six days a week and the price of stamps is regulated too.

Key Facts:
* The traditional letter market is in large decline with volumes 25% lower than in the last decade
*
The Universal Postal Service is a regulated requirement to deliver letters and parcels to any address in the UK 6 days a week
* Since privatization, Royal Mail has focussed more on parcels with sizeable profits made
* Lucrative dividends are paid as well as strong re-investment back into the company
* Cost-cutting measures in key areas have allowed the company to remain profitable despite strict price regulation

Other examples of privatization: 2) UK Rail Operating Services 1994

Question 56

Deregulation - Airlines EU Open Skies

Answer 56

In the 1990s, airline deregulation also known as the EU Open Skies policy took effect taking away state control of fares and service routes and allowing EU airlines to offer services without the requirement to land at or take off from a home airport. Inspiration came from US Open Skies deregulation in the 1970s, which resulted in markedly cheaper fares, a greater number of routes offered, and a huge spike in passenger numbers.
EU deregulation took a few years before significant competition was seen and positive impacts were experienced but it has since become a huge success story with a variety of benefits to the consumer. Multiple airlines now compete on several high-profile routes allowing consumers to benefit from very low fares, large numbers of routes, and regular services from numerous airports. Deregulation has given birth to low-cost carriers such as Easy Jet, Ryanair, Flybe, Norwegian, and most recently Level which has forced down fares of established firms in the market as well.
Those who are critical of EU Open Skies deregulation complain of routes that exist with one dominant supplier controlling the service and airlines that try to operate in a now cutthroat competitive environment are susceptible to losses, bankruptcy, and redundancies. Critics also show concern about cost-cutting in dangerous areas such as safety through safety records post-deregulation have improved markedly albeit it is true that several low-cost carriers have cut costs by reducing the comforts of flying and have forced extra charges on necessary complements to flying. However, most would agree that the positives of deregulation to the consumer have far outweighed the negatives.

Question 57

Deregulation - UK Buses

Answer 57

The UK bus market was deregulated in the 1980s with the abolition of road service licensing whereby firms had to obtain a license to operate a route from the local council. This theoretically created a contestable market and meaningful competition as multiple bus companies could offer services on the same route. The intention was to improve allocative efficiency, reducing fares towards marginal cost levels and increase the number of services offered incentivising more people to use bus transport rather than relying solely on their car. This deregulation however proved to be ineffective, many would argue because of a lack of regulation of incumbent firm practices. Existing firms in the market used their size and presence to drive out new firms from the market using anti-competitive strategies like predatory pricing, heavy advertising, and flooding routes with buses causing dangerous driving conditions, congestion, and pollution. Several areas currently are left with local monopoly or oligopoly providers like ni Cambridge where Stagecoach has almost complete monopoly control of the market charging excessively high fares with limited services. The overall market is an oligopoly controlled by five firms and since deregulation bus usage has declined. Critics often compare outcomes to the London bus market where Transport for London manages services and usage has increased by 5% in the same period as deregulation.

Question 58

Nationalisation - UK Railways

Answer 58

UK train operating services were privatized in the early 1990s following a period of a huge decline in passenger numbers, safety issues, quality concerns, a low number of services offered, and a drag on taxpayer’s funds. The intention of privatization was to make the running of rail services more efficient with competition driving reductions in fares, increased routes and passenger
numbers, better quality provision, and greater investment back into the railway. The model chosen
was franchising where the entire track infrastructure
was split into chunks (franchises) with private train operating companies bidding to win the right to operate services as a franchisee on that part of the network. The government would choose the winner based on the money bid and on the quality of services the firm had planned to deliver, in this sense, the competition lay in the bidding process as opposed to physically on the tracks.
Privatisation via franchising has delivered increased passenger numbers, with services created to meet demand. Competition via franchises where successful has led to limited fare rises but overall it is generally accepted that the current privatisation model of rail franchising has not been as successful as hoped. Fares have had to be capped by the ORR to prevent monopoly pricing, delays are common with quality poor during peak times, investment has been limited with profits instead going to shareholders and certain routes in demand are not offered due to a lack of profitability. The taxpayer also has to share the burden of running train services with subsidies of up to £4bn a year going to train operating companies to keep them afloat.

The UK Labour Party has made the case therefore for rail nationalisation citing the East Coast Mainline Case as evidence for nationwide nationalisation. East Coast Mainline has been run by private firms three times since the 1990s yet in each case, the franchise failed to make a profit requiring subsidies before
eventually returning to state control. Most recently
in 2018, Stagecoach and Virgin relinquished the V trains franchises to the state due to a lack of profitability. When in public hands, the franchise was profitable, providing a return to the taxpayer with limited delays
and problems previous owners had seen. Proponents
argue that the same results can be seen across the rail network through nationalization along with greater investment in the railway as Network Rail, which is in charge of track, station, tunnel, and signal infrastructure are already in public control. As of 2021, given the impact of the Coronavirus pandemic on rail use, train companies have been reliant on state funding to stay afloat with the UK government announcing an overall end of the franchising model but what will follow has yet to be announced.

Other industries the Labour Party has suggested should be nationalised; 2) Water 3) Gas/Electricity 4) Royal Mail 5) Broadband (High Speed Internet)

Question 59

UK Labour Market in Action

Answer 59

Demand Shift Right and Higher Wages - Software Engineers, Web/App Developers, Online Security

Demand Shift Left and Lower Wages - Retail Workers, Airline staff, Hospitality Workers

Supply Shift Right and Lower Wages - Dental Nurses, Holiday Reps, Leisure/Theme Park Attendants

Supply Shift Left and Higher Wages - Lory Drivers, IT Workers/Programmers, Construction Workers, Health and Social Care Workers

Question 60

Monopsony Employer

Answer 60

1) Doctors, Dentists, Nurses, and other NHS staff. 88% of the UK population relies solely on NHS-provided healthcare with the NHS being the world’s fifth largest employer, employing 1.5million workers.

2) The UK government is a monopsony employer of teachers with 93% of UK schools in the state sector. Private school salaries are higher but wage-setting state pay scales impact private sector wages too.

3) Walmart employs 1.5 million workers in the USA and is the third largest employer worldwide, whilst McDonald’s employs 1.9 million workers globally (including franchisees), the fourth largest employer.

Question 61

Trade Unions in the UK

Answer 61

Trade Union density in the UK was 23.5% in 2019 compared to more than 50% in 1970s. Public Sector density is 52.3% compared to 13.3% in the private sector, not surprising given the monopsonist power held by the state. Sectors with the strongest unions and the highest density are education, public administration, health, and social work whereas sectors with the weakest unions are accommodation and food services. Studies have shown the mark-up (difference between union and non-union wages) to be around 5%. Unions have also bolstered various labour-related legislation but they have slowed employment growth and significantly burdened businesses with higher costs and less flexibility.

Question 62

Minimum Wage in the UK

Answer 62

Minimum wages were introduced in the UK in 1999, currently taking two forms; The National Living Wage for those 25 and older and The National Minimum Wage for those under the age of 25 in various tiers up to the under 18 category with a separate category applying for apprentices. As of April 2021, the National Living Wage stands at £8.91 per hour with any changes to the figure taking effect annually. This figure is expected to rise to £10.50 per hour, considerably more than inflation, over the next five years.

Since its introduction, the headline minimum wage has increased by 40% above CPI inflation boosting pay for those on low incomes who now receive £2.70 per hour more in real terms than without the minimum wage. This is a difference of £5,000 per year for a full-time worker.

While pay has risen for those on the lowest incomes, evidence shows no net impact of employment reductions due to the minimum wage going against theoretical conclusions but smaller businesses have been burdened by higher costs. Instead, their response has been to either accept lower profit margins, raise prices to cover higher costs, or change their business & workforce structure to keep costs low. There are large employment concerns if the minimum wage is raised further with economists predicting the point where employment reductions take place is not far off. Many jobs face the threat of automation such as retail and manufacturing with higher minimum wages accelerating that process.

Question 63

Wage Differentials - Pay Gaps and Inequalities in the UK

Answer 63

1) The gender pay gap among full-time employees stands at 8.9% down from 30% ni the 1990s. The largest gender pay gaps can be found for workers over 50 years old which isn’t surprising given inequalities in educational opportunities in the 1970s/80s era and cultural differences where women would often take large breaks from the workforce or not even look to enter it at all.

2) The under-40s full-time gender pay gap is almost zero at 3%. Education opportunities are now equal and given how crucial education is for earnings, with female education outcomes better than males and with changing attitudes to work/family, female earnings could soon overtake men in this category.

3) Regarding the ethnic pay gap, employees of Chinese and Indian ethnicity had higher median hourly pay than White British employees in 2019; while Pakistani and Bangladeshi employees had the lowest median hourly pay. Differences in education, productivity, and the English language explain this difference.

4) There is a regional pay gap in the UK with workers in London and the South East earning approximately £650 a week compared to £540 for the North East, North West, East, and West Midlands.

5) CEOs in the UK earn 117 times more than the average UK full-time worker with an annual salary of £30,000. The average salary for an investment banker is £77,000 and for a Premier League Footballer si around £4m compared to £36,000 for a nurse and £38,000 for a teacher.

6) The UK’s Gini Coefficient is 0.346 down from 0.386 in 2008 indicating less income inequality. A progressive income tax system with welfare benefits results in the 95 percentile of earners making only 5 times more than the 5th percentile; a lower multiple than many other comparable countries.

7) UK wealth distribution is more unequal than income with a 0.62 Wealth Gini Coefficient compared to a 0.346 Income Gini but this is not unusual with inclusive societies like Denmark and Sweden reporting more unequal distributions than this. Wealth is the total value of assets owned e.g. pensions, property, financial (bonds, shares, savings) & physical (antiques, artwork, vehicles, etc). Wealth inequality is the unequal distribution of assets, with the greatest value of wealth being pensions and property in the UK.

8) The top 1% of earners in the UK (earnings > £188,000) contribute 30% of total income tax revenue (£59bn), an increase from 25% since 2010 despite a reduction in the top rate of income tax in this time.

9) 42% of all income earners pay no income tax at all due to rises in the income tax-free allowance currently standing at £12,500. Furthermore, the bottom third of income taxpayers contribute only 0.01% of total income tax revenue (£2bn), a clear indication of a progressive income tax system at work.