KEYNES ECONOMICS NEWSLETTER
Edition 1
TABLE OF CONTENTS 03 05 07 09 13 16 21
WAR! What is it good for? The scam at the heart of the 2008 financial crisis South Korea and Human Capital Once Upon a Time marijuana was legal... RES competition essay - Fatima Rasheed RES competition essay - Cameron Graham UAE Excise duty: The Price of Pleasure?
A Short Editors Note
Rihana Al Nabhani, Yash Bhansali and Aryan Oberoi Welcome to the first edition of the Keynes economic newsletter this year. We would like to begin by thanking all those who have contributed to this publication and we hope it encourages all those reading to do so in the future. As John Maynard Keynes once said…’Economics is a method rather than a doctrine, an apparatus of the mind, a technique of thinking which helps its possessor to draw correct conclusions.’ This is what we, as the new heads of Dubai Keynes Society, aim to achieve for the upcoming year. The Society is an incubator for logical synthesis, which aims to analyze, understand and evaluate many of the underpinnings of our society. But economics goes a lot further than that, it is a tool that the society uses to explore our world as we know it, without tinted glasses, it gifts us with a clearer and truer view of our world and grants us the liberty to assess each situation based on it’s merit as oppose to preconceived biases. In the three short weeks that the club has been running this term we have already seen outstanding presentations on various topics from bit-coin, to music and the gender wage gap – the must controversial of the three. We look forward to all the talks in the future, which everyone is welcome to attend.
WAR! What is it good for? The popular connotation of war entails violence, bloodshed and terror. Though irony lies in the fact that, in addition to all this horror, war has proven generate ample amounts of growth, for example WW2. War is an extremely complex concept, thus it is equally complex to explain the impact of it. The Great Depression was the deepest and longest lasting economic downturn in Western history. This period witnessed the unemployment of (approx.) 15 million Americans, and the failure of several banks. Franklin D. Roosevelt launched several programs called New Deals that aimed to recover the economy. However, the only thing that seemed to fix the economy was the large-scale investment encouraged by the Second World War. It proved to kick American industries into high gear. Government spending skyrocketed drastically from $9.5 billion in 1940, to $72 billion in 1944. Therefore resulting a $75 billion expansion of the US nominal GDP. Additionally, WW2 contributed to paving the way for women to join the workforce. As large amounts of the working males were deployed, women were encouraged to join the workforce. This led to the decline in unemployment from 8.1% in 1940 to less than 1% in 1944. The war needed the total mobilization of the country; it desperately needed all the resources possible, thus inflating the economy drastically. Fundamental innovations were created during periods of war. Notably technologies like nuclear power, the computer, aircrafts and rocketry were developed and modified to for the sake of victory in the WW2, and the Cold War. The nature of war is urgency, and it seems to allow modernization of technology to allow modernization of technology to thrive.
By Fatima Rasheed
For example, the Manhattan Project took speedy 6 years to make a complete atomic bomb from practically nothing, in WW2. That is an extremely impressive triumph, considering the complexity of the project. It may be tempting to label war are economically progressive. It is true, the nature of war encourages unprecedented levels of government spending the works wonders. Conversely, it is also true that war creates incredible amounts of hardships that also act as a barrier in the economy. The kind of production, the quality of labour, the morale of the public, these all matter in the economy. Yes, the Second World War did take the US economy out of the biggest slump in history. But it also caused the premature death of 60 million soldiers and civilians in 6 years. This includes not only a lost human capital and labour input, but also fathers and mothers. It is questionable whether the superficially inflated GDP can be defined
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prosperous, considering the losses of this economic tragedy. The costs of war are not evident initially but it will soon be discovered that these disabled soldiers need healthcare and that the money borrowed to fund war will need to be returned. What fails to be advertised explicitly is that the US growth mostly accounted for the development defense technology. An ordinary person cannot use a military aircraft to take their family for a vacation. The reality was that the growth affected the military more positively than anyone else. Arguably, the main aim for any economy should be raising living standards. Productive output was sent to armies, while regular consumers suffered from falling living standards. As GDP levels were rapidly rising, peace declined and conflict arose, the environment worsened, social tolerance decreased, leisure time dwindled and morale diminished. These factors are not measured in the GDP. War, and it’s spending, is not consistently an economic remedy. The Iraq and Afghanistan war did not generate near to similar levels of growth. In fact they added over $1.4 trillion dollars to the deficit, providing not economically viable. Perhaps it was because the conflict was considered ‘too small’. If 210,000 civilian deaths (approx.) define a small conflict,
would the risk of a bigger conflict justify even more deaths? In an ideal world, you would be able to achieve the level of growth during war periods minus the war aspect. What would be required to replicate this growth and eliminate the war aspect? The government would be required to spend huge amounts of money without the enticing incentive of a war victory. Of course, to fund such large-scale investment, the government needs finances. This means higher taxation, and spending from huge budget deficit. It is clearly not sustainable to mimic the spending of wartime situation, nor is it justifiable to consider war as an economic opportunity. However, it is vital that government use Keynesian spending strategies to recover their own economies. Though it is unlikely they will achieve wartime figures, government expenditure is subjected to the multiplier effect. This means its positive benefits are reaped throughout the economy. A focus must be place on spending in are that provide high living standards. Economies would be better served with larger investments in merit industries like education and infrastructure.
The Scam at the Heart of the 2008 Financial Crisis By Victoria Tode
You’re sitting at the black jack table.
You have a jack and an eight, and the dealer has a seven. You have a good chance of winning, 87% in fact, and you’re on a winning streak. Everyone’s watching, certain you’ll win this hand.
How could you lose? You twist. The next card is a King. And you’ve just gone
BUST
This is known as the “Hot-hand fallacy:” for example, if one flips a coin and consecutively gets heads three times, one might expect the coin to more likely show tails on the next go. However, the probability of getting heads or tails is still 50/50. This probability does not change, regardless of previous events. This was like the housing market just prior to the financial crisis. During the real estate boom, markets were on an upward trend, going up and up, and everyone, even the chairman of the Federal Reserve himself, thought it would never go down. Everyone believed the market for homes was invulnerable: a big mistake. But there was something else going on, hidden in the shadows of the financial world that many people were clueless about, right up until the financial world plunged into chaos. Essentially, it was a gigantic counterfeiting operation; in other words, a scam. During the 2000s, the US housing market swelled to about $8 trillion more than it would have been if prices had followed historical trends. The leading cause of this: sub-prime loans. This, along with mortgage-backed securities, collateralized debt obligations, tranches... the American economy spun its way down a path that to present, has the economy still running far under capacity for eight years (the total value of the goods and services we could have produced but have not is over $7 trillion). Do these words bore you? Confuse you, perhaps? Don’t worry, they’re meant to. All this coma-inducing jargon is designed to make everybody else feel like only the Wall Street traders can do what they do. Even more, it’s an intentional strategy to make sure no one interferes. But don’t panic, it’s a lot simpler than it appears. So what are sub-prime loans? And where did they come from? It all started with Lewis Ranieri’s mortgage bonds, created in the 1970s. With these, the big banks made impressive profits, but pretty soon, they ran out of mortgages to put them in. After all, there are so many houses and so many people with good enough incomes to buy them, right? So the banks, seeking to keep the profits rolling in, started filling these bonds with riskier and riskier mortgages: this means risky loans were sold torisky people (those with a relatively low credit score and insufficient income). So subprime mortgages: bad idea.
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A mortgage-backed security (or MBS) is thousands of mortgages that's sold and traded like a bond. When you bundle a lot of mortgages, even sub-prime ones, suddenly, the yield goes up, but the risk is still small, because... well, they're mortgages, and who doesn't pay their mortgage? So the credit-rating on this bond: AAA! This links on to collateralized debt obligations (CDOs), which is important to understand, because it's what allowed the housing crisis to become a nationwide economic disaster. Mortgage lenders joyfully dished out loans that borrowers couldn’t possible repay, and then sold them on to investment banks, like Goldman Sachs. These money managers merged all these faulty sub-prime mortgages, knowing that they would default, and created CDOs and synthetic CDOs (CDOs-squared,) other fraudulent securities that he sold to investors as AAA investments. And this, is what people fell for. And so, the profits rained down on corrupt bankers, real estate brokers who sold sub-prime mortgages, and politicians, setting the world up for what was to be known as the greatest economic crisis since the Great Depression. So when house prices started falling and people stopped making payments on mortgages they couldn’t afford, it caused a chain reaction that nearly broke the financial system, collapsing two major investment banks, an insurance giant, and bringing the entire American economy to its knees.
But not only was the Financial Crisis an accident, not one out of the thousands of crooks at the core of this fraud were ever prosecuted. The Obama Justice Department had refused to prosecute anyone, because they all used a portion of their fraudulently obtained millions to make large contributions to the Obama campaign or projects sponsored by Obama. To sum up, this period of so called “joyous” economic boom, particularly between 1996 to 2006, was littered with fraud and deception, not just from bankers and dealers, but even from ordinary homeowners and investors alike. There were would-be home buyers who overstated their income on mortgage applications; lenders who looked the other way knowing they wouldn't be responsible for the clean-up; appraisers who overstated the value of homes; rating agencies who rubber-stamped securities to get business; traders who knowingly sold investors on securities they knew to be complete trash. And after crippling the American economy, evicting millions of ordinary people, stripping Americans of their jobs, and their livelihoods, no one ever faced charges.
South Korea and Human CapitalBy Isabella Lahdo Despite being founded in the late 1920s, Pigou’s theory of Human Capital only became relevant within the last 50 odd years. Gary Beaker, an American economist, developed his idea to explain how the investment in knowledge and education can be a significant component in the economic growth of any country. The prosperity of emerging Asian economies over the last few decades has made the Theory of Human Capital increasingly popular, as it highlights how it is possible for nations, with limited natural resources, to experience salient economic growth. One country that has greatly benefited from their proliferation of knowledge is South Korea. Why is it that South Korea appears to be one of few nations to fully exploit the positive spillover effects of this phenomenon? When answering this, one must consider the influence of Confucianism on modern-day South Korean society. To put it simply, Confucianism is a broad Chinese philosophy that is mainly founded on the values of respect for authority, collectivism and the acquisition of knowledge. The notion of the respect for education, has been the guiding principle of South Korean society (as well as of societies of many Asian countries with emerging economies). Similar to traditional Confucianism, great emphasis is placed on the ability to study and memorise. This is mainly due to the integral role that exams play in gaining admission to reputable schools and universities. Therefore, the typical South Korean student will often have their life oriented around preparing for the necessary exams which will aid them to gain desirable jobs. From 1980-2004 the South Korean economy grew at an average annual rate of 6.7%of which 1.3% came from the investment in human capital. Additionally, Total Factor Productivity growth (TFP) has been responsible for 39% of the country’s rise in national income over this same time period. The link between TFP and human capital is key when evaluating the synergy between education and economic growth. TFP can be defined as the proportion of output (GDP) that is not explained by the quantity of inputs used in production. Instead, its level is determined by how efficiently and intensely such inputs are utilized. The logical use of these factors of production thus requires specific knowledge- an asset that can only be derived from a respectable form of education. The South Korean Government has been successful in creating an environment which promotes the completion of education to a tertiary level. State spending on education represents 7.6% of the country’s GDP, while the OECD average remains at 6.1%. This places South Korea third among OECD countries (after Iceland and Denmark) with regards to the percentage of GDP spent on education. Additionally, 68% of the country’s adult population attains a post-secondary diploma, whereas this figure is a mere 30% in the US.
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In fact, the US is one of the two countries in which the percentage of high school graduates among young workers is less than that among their parents. The lack of sufficient property receipts in some of the poorest districts in America has meant that the nation lacks the financial resources to construct a quality education system. South Korea was confronted with a similar financial problem in the 1950s, following the end of the Korean War. However, imbued with a culture that revered learning, the government encouraged religious orders and wealthy intellectuals to start schools. These schools eventually converged into the nationwide education system that we see today. It is therefore evident that the South Korean’s government policy has resulted in positive spillover effects, ones which are likely to be further accentuated as a larger proportion of the population becomes more educated.
Although South Korea is yet to overtake the US in GDP/capita rankings (as well as in other measures of economic growth), its human capital undoubtedly fuels its prosperity as an emerging economy. The emphasis on education pervades South Korean society, and will lead to positive spillover effects- such as a rise in the interaction between well-educated people. This is therefore likely to translate into sustained levels of long run growth, given that external economic factors remain relatively stable. Thus, it can be concluded that in order for any country to reach such a desired long-run outcome, the investment in education should be made a focal point in government policy.
“Having more grammar schools would help raise education levels and opportunities”. Do you agree? Explain your answer. Fatima Rasheed The establishment of grammar schools, a previously long-standing norm in the UK, may have come from noble intentions: an opportunity for intelligent children from disadvantaged background, who could not afford private school, to embrace a new type of state school system that challenges them further-given they prove their worth through an entrance exam. Reignited conservative support for the grammar schools, under Theresa May, has raised question over the system’s ability for social cohesion. In a perfect world, grammar schools preform a distribution of opportunity. It appears as a perfect cure for academic, social and economic inequality. However, in reality bright children from disadvantaged backgrounds are more unlikely to get into a grammar school compared to children from wealthier background who do not preform as well (Weale S ,2017). Rather than improving aggregate education levels and opportunity, grammar schools may be hindering them.
Figure 1
The data from figure 1 suggest grammar schools are counterproductive in providing for disadvantaged children. The percentage poorer children from family incomes that are below median are consistent within different types of schools, whereas children from family incomes above median are heavily represented in grammars schools with 53% of the makeup (Richardson, H. 2017). There are flaws in the grammar school system that allows wealthier families to take advantage of it, hindering the success of children from poorer backgrounds.The entrance exam required for a grammar school, referred to as 11-plus, is a major area of error. Children from wealthier background, naturally, get tutoring services externally that give them a better chance at passing the exam. Despite the release of the ‘tutor-proof’ test launched in Buckinghamshire grammar schools, fewer disadvantage children are accepted into the
grammar schools. This is indicated by the data concerning free-school meals. The national average of children eligible for school meals is 18%, however in grammar school it is merely 3% (Millar, 2017). This is a strong indicator of social deprivation. In fact, it is speculated by grammar school head that parents from disadvantaged background would rather not send their children to grammar schools because of the elitism they encourage. Instead of providing opportunity, grammar schools are acting an educational barrier (Cribb et al, 2013). Besides ‘tutor-proof’ test, attempts narrow the inequality in entrance, between poorer and wealthier students, has been approached with quotas. A handful of grammar schools in Birmingham have used quotas, allowing more disadvantaged children to be accepted. However this has lead to a negligible difference in net effect. Clearly, grammar schools are not providing better opportunities to those that need it. The 1960s were seen as a period of significant upward mobility. Some believed it was due to the increase in availability selective education, like grammar schools. Plausibly, this meant bright children from poorer families had become more qualified and able to take of salaried jobs. However, this was not the case. Upward mobility was evenly seen, regardless of grammar school or secondary modern school. In fact, the post war period saw several open job placements. Employers needed to fill the vacant spaces, and were not prioritizing qualification. Thus the booming employment in this period of time is not telling of the ‘better educated’ grammar school students (Warner, 2017).
Figure 2: Financial Times
Additionally, the presence of grammar school may be personally beneficial however they pose a threat to society as a whole. When there is a strong selective school system present, primary school children who preform well but do not attend a primary school are less likely to get a good degree and more likely to drop out (UCL, 2017). Grammar schools attract better resources at the expense of the rest of the community. If a child cannot pass the 11-plus exams, he or she will be doomed to a comparatively subpar education because they do not have access to the same degree of resources as grammar schools. According to Fig 2, poorer children preform significantly worse in selective countries. Grammar schools do result in higher attainment in comparison to the national average however it is at the expense of education of children who did not get into grammar schools. Grammar schools worsen social mobility by badly affecting external children. Research shows that in selective areas the gap between attainment (5 A*-C GCSEs) of ‘free-school meal’ eligible children and other children is 34.1%, compared to 27.8%in non-selective areas (Andrews, Hutchinson and Johnes, 2017). The personal attainment achieved within a grammar school is offset by the negative impacts on the rest of the community. Therefore, grammar schools do not promote widespread social mobility for communities as a whole. Arguably, grammar schools have a relatively diverse makeup. The proportion of non-White students attending grammar schools is higher in comparison to other comprehensive schools (Cribb et al., 2013). It seems that many minorities are receiving entry allowing them to gain greater opportunity. However, this largely accounts of Asian races, whereas black students are proportionally lower in grammar schools than other comprehensives (Cribb et al., 2013). Lower attainting racial group were seen to be underrepresented in grammar schools including Black African, Black Caribbean, Bangladeshi and Pakistani, compared to their representation in their local areas (Bolton, 2017). These facts offset each other, so there is no aggregate progressive effect in terms of minority opportunity and education levels. Black students are subject to greater racial inequality by grammar schools. Race heavily influences a student’s educational outcome before they turn 11, making them generally less likely to pass the entrance exam. This means many black students are excluded from grammar schools selection process. Recent funding cuts on schools means black students living in deprived areas are worse of and their educational outcome is worse off (Joseph-Salisbury, 2017). Structural racism means that it is much more difficult for deprived minorities to attend grammar schools, leading to worse social division. As an institution, grammar schools may be seen as encouraging the toxic effects of this structural racism. On the whole, grammar schools successfully provide personal opportunity and upward mobility. However this is at the expense of the rest of the community. Thus in aggregate, there is no positive effect on the, current wide, inequality gap in the UK. The grammar school system wrongly imposes and reinforces social and racial divisions. The selection process is subject to many flaws that hinder its ability to encourage deprived students. Thus, it raises the education levels of those who do not need it the most. There are other measure that would be more success in increasing education levels and opportunity. Labour sponsored academies have reportedly had a more positive impact on a great number of ‘free-school meal’ (FSM) eligible children. Sponsored academies educate around 50,000 FSM eligible pupils, while grammar schools educate around 4,000 FSM eligible pupils (Andrews, Hutchinson and Johnes, 2017). Aggregate education levels would be able to prosper more in mixed ability schools. Fig 2 supports this, as non-selective countries lead to better education levels for the deprived. In a mixed ability school area, resources would not be concentrated into the hand of a few, and education could be equally accessible to all without discrimination. There the selective aspect of grammar schools pose a threat to raised education levels and opportunities.
A report (Hendryreview.wordpress.com) has recently concluded that it's worth investing in tidal lagoon systems even though the energy produced is expensive. What are the key judgements and assumptions which lead to this conclusion and how would you challenge them? Cameron Graham Tidal lagoons are a developing form of renewable energy production. The systems utilise the difference in height between high and low tide to generate electricity, as water rushes through turbines. Large areas out at sea or in tidal estuaries are enclosed by large walls where the incoming tide is held, and then it is let out again when the water level outside the wall is lower. This transfer of water turns turbines in the wall, and in turn generates electricity (Chris Kelsey, 2015). From a basic description, the proposition of such energy systems appears ideal in a time where non renewable fossil fuels are slowly becoming short in supply. Harnessing tidal power seems like it can reap benefits in the long run if this ‘first of a kind project’ can become a piece of established technology (The Hendry Review – Overview, 2016). Such systems represent a genuine opportunity for the development of green energy sources that will ensure security of energy supply, whilst reducing unemployment and initiating economic growth. However, the construction process, and maintenance of these unproven systems come at both high financial and social costs to all involved. It is clear that a cost-benefit analysis has been formulated, and will continue to expand as more research is conducted in this emerging field. There are key judgements that must be defined in order to reach a valid conclusion regarding how beneficial tidal lagoons are. As always with long term pay back projects, there will be underlying assumptions in place that can be picked apart and challenged too. In May 2016, Charles Hendry, the former energy minister of the UK, was tasked with investigating ‘the strategic case for tidal lagoons and whether they could play a cost effective role as part of the UK energy mix’ (Joshua Hill, 2016). Prior to this, he had already suggested that it would be ‘interesting to look at the scope for tidal lagoons’ (Emily Gosden, 2016), as potential methodology for producing renewable energy. Hence, one of the main advantages of investing in tidal lagoon systems is their environmentally friendly nature. When in use, no greenhouse gases are emitted which could otherwise lead to global climate change through the greenhouse effect. No harm will be done to the surroundings wherever the technology is put into place, making it an attractive option to environmentalists
The production of tidal energy is due to gravitational fields and the influence they have on the tide. As the Earth orbits the sun in our solar system, coupled with the Earth rotating around its axis, high and low tides are produced (Mathias Maehlum, 2013). These characteristics of our Earth will not cease to exist at any point in the foreseeable future, which surely poses the question of how the tide can be best employed as a foundation for energy production. Contrastingly, fossil fuels such as coal and oil are not theoretically inexhaustible resources. Worldwide, on an annual basis we currently consume over 11 billion tonnes of oil. If we carry on at this rate, without any increase in supplies to satisfy our growing population and aspirations, our known oil deposits will have been consumed by 2052. There will still be natural gas and coal left, yet if we increase gas production to fill the energy gap left by oil, then those reserves will only last a further eight years, taking us to 2060 (The End of Fossil Fuels, n.d.). Furthermore, the rate at which fossil fuels are being consumed is increasing as the world's population increases and as living standards rise in developing countries that previously consumed very little energy. This is a prime example of the basic economic problem of scarcity, and in this case the obvious solution is to look towards alternative methods of generating electricity such as tidal lagoons. As set out in legislation, the UK has decarbonisation targets in place for the future, and tidal energy can be seen as a great way to work towards these. With the assumption that the government will remain committed to these targets in years to come, the UK must undergo an electricity market reform. A reliable and effective primary way of producing energy must be implemented in order to work towards these targets. Decarbonisation of electricity generation will form a major part of total carbon reduction, and is essential before other sectors of the economy can successfully work towards reducing their carbon output. As part of the Climate Change Act of 2008, the UK must work towards reducing their carbon emissions by at least 80% from their level in 1990, by 2050 (Charles Hendry, 2016). As a result of the proposed £1 billion carbon capture and storage programme breaking down, the search to find a low carbon way of electricity generation is now more urgent than ever. ‘Tidal Lagoon Power’ is currently developing a fleet of six tidal lagoon systems across the UK, and aim to meet up to 8% of UK electricity demand (Patrick Mohr, 2014). Assuming these projects are successful, they then plan to horizontally integrate with newly formed foreign firms who share similar decarbonisation goals. They have already been granted permission to build the world’s first tidal lagoon system in Swansea Bay, Wales. Backed by the Hendry Review, the project provides a scalable blueprint for a low carbon, global power industry (Terry Macalister, 2015). Construction will commence at some point in the next year, with the exact timing dependent on whether a suitable subsidy can be negotiated with the government. It is inevitable that the new tidal lagoons will fuel economic growth in the UK. The multi-billion pound infrastructure assets will be appealing to both firms and individuals to invest in, whether this is domestically or through foreign direct investment. Since investment is an important component of aggregate demand, these injections into the economy will stimulate economic growth. This will only happen however if the multiplier effect remains positive, so this is an assumption that has to be made when considering the impact of the projects. The local economic regeneration will also be added to through decreased unemployment. It is estimated that 2,232 construction jobs will be sustained solely by the building process
in Swansea Bay, supporting many thousands of further jobs in the wider UK economy. Therefore, disposable incomes will rise, leading to additional consumption and investment within the UK. Assuming that average marginal propensity to consume does not massively fluctuate in the near future; more economic growth will take place. The Swansea Bay lagoon will mean the creation of two new manufacturing facilities in Wales, one for machining and pre-assembly of turbines and one for heavy fabrication of steel components. British firms will be at the heart of the project, which could accelerate the rise of a new global industry with significant export potential for UK manufacturers. Thus, the trade balance will be positively impacted. Moreover, it is likely that tourists will be attracted to the new technological feats. Tourism, an invisible export, will help bring more money into the economy, which will be sustained over a number of years due to the long lifetime of the lagoons. Overall, it is predicted that the Swansea Bay tidal lagoon will contribute £316 million in Gross Value Added to the Welsh economy during its construction, followed by another £76 million a year during each year of its 120 years usage. [Overview of Tidal Lagoon Power on official website, n.d.]. A final judgement which may have lead to the Hendry Report concluding that it is worth investing in tidal lagoons is the fact that the systems are highly predictable during their long operation time. Scientists have been able to monitor tidal patterns over the years, which ensures that the systems can be used to their greatest effect at all times. It also makes it easier to build the systems, as the optimum dimensions will be known, which will reduce the overall cost of the manufacturing process (Mathias Maehlum, 2013). It is thought that the tidal lagoon systems will be very long lasting, making them more cost effective. An example of tidal power having a long lifespan is La Rance in France, which opened in 1966 and still operates at near to full capacity (La Rance Tidal barrage, 2012). This barrage has been the subject of detailed analysis by Tidal Lagoon Power as they hope to emulate this success on a larger scale with their lagoons. Large scale systems like the six proposed ones by Tidal Lagoon Power, will be able to exploit economies of scale, such as purchasing economies of scale when it comes to the bulk buying of factors of production that are required. This will further reduce costs to the firm, so will reduce the final market price of the electricity. . On the other hand, there are drawbacks of tidal lagoon systems which can challenge the advantages of them. Firstly, the systems are obviously incredibly expensive to set up. So far, approximately £35 million has been spent on developing the concept of the first tidal lagoon, which has been predominantly privately financed. On top of this, £1.3 billion will be spent on capital throughout the building process in Swansea [Overview of Tidal Lagoon Power on official website, n.d.]. A government loan of over £150 million and a 90 year subsidy contract for Swansea Bay is also wanted (Emily Gosden, 2016). This sounds expensive at first, howeverupon further examination, a valid case can be argued that it is worth the investment. One concern regarding the high costs would be the impact on the budget deficit due to the projects being partially subsidised. This effect will be small in relative terms; however the energy produced will be expensive to consumers
Tidal lagoon electricity can be compared to other similar forms of renewable energy such as wind and solar, through the levelised cost of electricity (LCOE) equation, as shown. This is a standard measure that allows for the comparison of costs of different projects. It takes into account capital and operating costs(C), power output per year (V), the power plant lifetime (N), and the required rate of return needed for any potential investors(r). The variable ‘i’ represents a particular year of operation. When comparing tidal lagoon power to other energy sources, it must be taken into account that input assumptions are at play, such as fixed price bids for certain components of the work, and construction plans running smoothly. In a study of three tidal lagoon systems by energy economists ‘Pӧyry’, it was found that the levelised costs varied from £150/MWh to £90/MWh. The lower end of this range is similar to the costs of large-scale solar power, onshore wind power, as well as nuclear power. Whilst this may be criticized by suggesting only the cheaper end of the lagoon spectrum is on par with alternative forms of energy, it must be noted that the average weighted levelised cost of tidal lagoons is £100 MWh (Patrick Mohr, 2014). Given the many advantages of tidal lagoons, the fact that the average cost is slightly higher than other renewable sources is not a major drawback. It must also be considered that as with any original project, there are bound to be flaws in the system at first. As the lagoon starts to become established, the price of tidal generated electricity will drop throughout its 120 year lifespan due to lower production costs. The effects of the proposed tidal lagoons on the taxpaying consumer are understandably in question. The Swansea Bay tidal lagoon is forecast to increase an average household’s annual electricity bill by about 40p during the first 15 years of operation. This figure is expected to drop to 25p from 30 years of operation onwards (Charles Hendry, 2016). Since electricity is demand inelastic, consumers will have little to no choice to avoid these increases. When compared to offshore wind power and nuclear power, it can be seen that in the long run, tidal lagoons represent cheaper options to consumers than other alternatives in the electricity market. Whilst it is difficult to quantify the reductions in generation cost as the technology is refined, estimations by experts still provide great indications of what can be expected. However, these estimations are made with the assumption that most economic variables will remain constant throughout the operation of all the tidal lagoons (from 2021 onwards when Swansea Bay tidal lagoon is to be completed). There must still be effective competition in the electricity market in the future, if major cost reductions are to occur as planned. With this particular market being oligopolistic with regards to types of renewable energy, it is safe to
assume that competition levels will remain high. Therefore, costs will indeed be driven down so consumers will benefit from lower prices. Aside from costs, there are also other disadvantages of tidal lagoon systems such as the negative externalities generated by the construction process. There will be a lot of air and noise pollution, which may be of annoyance to locals. All six of the projects are to be built close to land, which will further increase the disruption. When the projects are complete though, the towns with them can can expect a rise in tourism figures, which appears a great benefit. However, the lagoons can be judged as looking unappealing to some, so they might actually have an adverse effect on tourism, as they could ruin coastal views. This is similar to the case with offshore wind farms, which are infamously known for disrupting scenic views in coastal regions. If this were to happen, then all projections made about the additional income for the towns will be incorrect, meaning the case for tidal lagoons must be reevaluated. Furthermore, marine life will be damaged during the construction, as their natural habitat will be destroyed. This will be of concern to industries such as fishing that are dependent on these natural resources.
Having considered the argument both for and against investing in tidal lagoon systems, I believe the investment is worthwhile. This is primarily because we are running out of fossil fuels, so are in desperate need of developing the renewable energy industry. Whilst there are other renewable options available, it must be considered that tidal lagoons are a new and innovative technology that is still being refined. On paper, they seem to be level with other possible options with regards to energy production and costs. However, when tidal lagoons become established in the market they will be so much more efficient at producing electricity. Then, the energy produced will not be as expensive as it initially will be. Therefore, the main drawback of the systems will be vastly reduced in the future. At present, fossil fuels are in an abundant enough supply to satisfy our needs, but in the future an alternative must be found. It is for this reason that I believe tidal lagoons should be invested in. By the time fossil fuels fall short in supply, the tidal lagoon solution will have been researched and developed enough to be an engineering masterpiece to be admired by all. Only then will the proportion of energy consumed from tidal power increase massively, and consumers will look to change their primary electricity source, as their original ‘status quo bias’ is forced to be overcome. At this point, the benefits will outweigh the negatives, so it is clear why the Hendry Report concluded that the systems are worth the large investment.
UAE Excise duty: The Price of Pleasure? by Yash Bhansali “There are no certainties in this world, apart from death and taxes”. It is common knowledge that as of 01/10/2017 a new UAE Excise duty has taken effect nationwide. This Excise duty is in many ways an ad valorem sin tax, levied on good and services that the government of the UAE deems to have high social cost and serious negative externalities. The government has declared that there will be a 50% tax on all carbonated drinks and a 100% tax on Tobacco and cigarettes etc. The levy of this tax may be attributed in part to the rising obesity levels that have long worried government officials. However, from an economics point of view, it is important to remember that whilst the price of these demerit goods may have risen, in some cases, by 100%, they still make up a very small proportion of the consumer’s income. For example, if a can of coke was AED2 prior to the tax, it should now be AED3. It is important to understand that whilst this is a 50% increase in the prices of the beverage, AED 3 is also a very small proportion of income, and thus the tax may not dissuade consumption as much as is expected. Another factor that makes demand for these taxable demerit goods price inelastic, is the addiction factor, the caffeine in Coca Cola and the nicotine in cigarettes create a necessity for consumption and compel consumers to spend more to satiate their needs for these drugs. It is thus that I believe that ,given the nature of these goods, a tax may not discourage consumption as significantly as is being hoped for. Along with this, there is reason to believe that the tax may have been initiated now, in some part, because of the low oil prices that have begun to bleed the GCC nations of their financial reserves over the past few months and lead to rising concerns regarding budget deficits as the GCC nations are finding it tougher to fund their spending. It is perhaps to avoid the accumulation of a large debt, that the UAE has decided to employ this fiscal measure, which creates an alternative revenue stream for the government, allowing them to be slightly less dependent on oil prices. This move comes at an important time… with the Expo 20202 nearing fast, Dubai will need to source funds for investment in infrastructural development, and with the help of the new Excise duty, the government should see its revenues rise by almost AED 7 Billion, which would significantly increase their spending power, putting the nation back on track and ready for 2020 when it comes around. It will also be interesting so observe how the suppliers react to this tax, will they find untaxable substitutes in order to protect their profit margins, or simply pass it on to you.. the consumer ?