Are taxis an unfair market?

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An article discussing whether taxi companies are destroying consumer surplus (what consumers are willing to pay for a good and the market price).

Taxis have long been a mode of transport that have helped the relatively wealthy move from place to place. From back in the Victorian age with a growing middle class where taxis consisted of horse-drawn carts, to now in Oman where they are using Ferrari Enzo’s. With a further growing middle class in most countries the demand for taxis is likely to increase.

In the UK regulation on taxis is controlled by the council and to start-up a taxi company you need an operating license. You also need to comply by the laws of the local council, for example in London which is operated by the Transport For London (TFL) (who controls the ‘black cabs’ of London) makes licensed cab drivers take background checks, medical tests and they have to pass a “topographical skills assessment test”. All this regulation increases the cost not just to the cab driver but it is passed on to the consumer, in the form of higher fares.

The main reason they do this is safety. Unlicensed cab drivers commit 11 sexual assaults in London a month, and TFL with the use of posters such as the one below put off the use of unlicensed cab drivers for the general public.

CabWise

I think this is a very valid point, and sexual assault should not be found in any society. However I do feel there maybe other solutions to the problem such as organizing deals with local cab drivers, booking the taxi before going out, the use of messaging the customer with the car and number plate and when it has arrived, cracking down on sex assaulting cab drivers and more information in public places allowing people to gain access to numbers that are reliable and safe.

If you think of why you would pick an unlicensed (or what you thought was licensed) driver over a black cabby it would be usually due to the price. Lots of people just have that in mind rather than the potential negative implications which could take place getting in an unlicensed cab. Therefore if the TFL wanted to reduce sexual assaults they should monitor the price the black cab drivers are charging, as more consumers would then pick them over unlicensed cabs.

Furthermore most taxis in local councils in the UK are also incredibly fuel-efficient with cars such as the Toyota Prius being a common sight on roads. Yet taxi prices have stayed the same or in some cases increased (potentially due to wage inflation). These high prices put off consumers, potentially reducing spending in the economy, creating the negative multiplier effect.

Another argument against the deregulation of taxis is that they maybe seen as a demerit good due to the increase in congestion (with more taxis on the road) and the more pollution given off. Both these negative externalities are used often promoting the regulation of taxis, however as mentioned in the previous paragraph cars such as the Toyota Prius are also highly environmentally friendly and give off very little pollution in the form of greenhouse gases. Therefore this may dismiss the pollution externality. Congestion due to more taxis on the road is highly valid but I do not think that should be an underlying factor at why the price of a taxi is so high.

In my local area, I asked to get a taxi 300m up a hill, the car was a Toyota Prius and the rate was £7.00. It wouldn’t even cost £1 to get up the hill in petrol and would take 3 minutes max. I understand there is a fixed cost pricing system of the wage of the driver, the training he has to go through and the initial investment of buying a car, but I do not feel that a sufficient reason to charge £6 for a 1 and a half-minute drive there and back. I then asked him ‘why it was so high?’, in which he responded with ‘it’s the meter mate, it starts off at £3.50’. The meter on a taxi is meant to prove how fair a taxi driver’s charge is, yet initially it isn’t fair.

This article is not against taxi drivers, who on average have a salary of around £23,000 after expenses working a 40 hour week according to easier.com, which is no investment banker’s salary but is still a large amount of money. This article is against the colluding taxi company owners and the local council for reducing the levels of competition and allowing them (a few individuals) to benefit out of the abnormal profit they receive. There needs to be change to allow for an increase in consumer surplus and also to help benefit the actual taxi drivers who see little of the abnormal profit obtained.

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Shale Gas Exploration should be welcomed by Britain

Great Britain is on the verge of an energy crisis. Current forecasts predict energy prices to continue to outstrip inflation for another 17 more years, each year an estimated 25,000 people die in their homes from the cold and we are now warned that the country could face blackouts as soon as 2015/16. As North Sea oil and gas supplies have steadily dwindled year upon year political rhetoric has focused on renewable energy sources, such as wave power and wind farms. However renewable sources have  proved to be too inefficient and impractical to provide enough energy to sustain the country on a day-to-day basis. Britain sorely needs a new long-term energy strategy.

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The future of energy for Europe looks likely to be a combination of mostly nuclear and renewable sources and countries such as France are benefiting from some of the lowest energy prices in Europe, thanks to significant investment in nuclear fission reactors. It will take decades for Britain to catch up with this level of nuclear energy production and it is clear that something needs to be done in the short-term to prevent the looming energy crisis.

A shale gas revolution is what Britain needs. We want energy costs lower, both to ease the burden on squeezed households and also to drive growth in the economy. In 2012, energy prices in the United States were a quarter of those in Europe thanks to their shale gas revolution and this has encouraged many American businesses to relocate back to the country bringing both growth and employment. Shale gas has a host of benefits to bring and rigorous scientific research has shown that the environmental impact, associated with the hydraulic fracturing or ‘fracking’ of the gas, can be minimal if proper safety precautions are taken.

Fracking is controversial for good reason. The chemicals used in the process can contaminate water supplies leaving locals without drinking water and even more worryingly, the water used in the process can bring up radioactive isotopes from deep below the ground into the biosphere which leads to carcinogenic chemicals entering the food chain. However studies have shown that safety breeches are not common place, a study undertaken by MIT showed that only a handful of wells drilled in the previous decade have led to contamination. The environmental impact of fracking has been shown to be minimal when proper safety precautions are taken and there is no substantial evidence that the process causes earthquakes.

If the anti-fracking lobby wishes to be taken seriously then they need to put forward a better alternative to fracking, because it is clear that a solution to the energy crisis is sorely needed. Fracking that is properly regulated should be welcomed in Britain; energy prices need to be reined in, not the least to buy the government enough time to get a proper long-term energy policy in place.

Government regulation on companies – good or bad?

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This article discusses to what extent should governments control markets via taxes and regulations.

Lots of developed countries are damaging their economies due to the regulations on companies in the short term, this gives them a fiscal surplus (making them look like good politicians), however in the broader picture it damages the economy, this is due to firms relocating to other countries where they have lower average costs and therefore higher profits. This therefore means that they are earning no money either in the form of direct taxation or indirectly via income tax (people who would be employed by the company and the negative multiplier effect), investment and spending.

Government don’t just regulate it to make themselves look good, if they are efficient, they should redistribute it to reduce income inequality across the country and promote sustainability (economically and environmentally). Therefore there should be some form of regulation to stop a handful of people owning a large proportion of the wealth and to protect the environment. However this is contradicted by the recent data from Oxfam, that the top 85 people in the world own 50% of the world’s wealth. This is further emphasised by most of these 85 individuals being in developed countries.

Governments can restrict companies via taxation, there are numerous different forms of taxation ; corporate tax, payroll taxes, property taxes, sales taxes and environmental levies. All these provide a disincentive to invest and also a disincentive to possibly start up a business (however in the UK there has been over 500,000 new businesses started in 2013). This change in the UK is partly due to a contraction in the size of taxes on businesses and as David Cameron outlines in the video below, the cutting of red tape.

The whole tax avoidance scandal has still barely changed corporation tax within 30 years of OECD countries. Companies reduce the negative effects of the taxation by having higher prices for consumers (cigarette market), lower wages for workers or by lowering dividends for shareholders of the company. All this shifting of the taxation has lots of negative externalities as society suffers economically.

A further point is that a high tax rate does not necessarily mean a higher tax take, this can be seen in Ireland which received more taxation from it’s 12.5% corporate tax level than France with it’s 30% corporate tax level. Ireland is a great example of a country that has thought of an initiative to help it’s economy stabalise by increasing foreign direct investment from trans-national corporations such as Amazon and Google.

It is often certain regulations such as Obamacare which are always brought up by the media as ‘providing a disincentive for investment’, however there are rules such as:

“the EU is considering requiring nearly all companies to appoint a data-protection officer to safeguard customers’ details. The cost would be monumental.”

Data protection is a massive social issue of the 21st century but having an individual officer to protect customers’ details is illogical and absurd.

In conclusion, I feel there is too much regulation and red tape around numerous business ventures, but I still think there should be some form of regulation. In economics we are always taught about magnitude, and in this case the magnitude of regulation needs to fall, yet still be strong enough to allow governments to step in when they need to. I feel governments and businesses should work together with one another rather than seeing each other as enemies, it not only holds back the business but the whole economy.

Buffettology – Book Review

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Book review on Mary Buffett’s book on Warren Buffett (most famous value investor of all time and ranked 4th on Forbes Rich List).

Summary : This book gives the perfect insight into long-term investment.

It is a relatively simple read unlike numerous business books, and even if you are not comfortable with your mathematical ability this has a very clear step by step guide of figuring out the formulas.

If you have had no experience in investing in shares this is a fantastic way to get an understanding of how the system works. Yet at the same time if you carry a knowledge of the share market it may be useful, as it could influence your share portfolio.

The fundamental idea it publicises is Compound Annual Growth Rate (CAGR), this is a great way of predicting the future value of a company in years to come, therefore giving you a low risk decision to either invest or not invest. It is built on two main principles, the price of the share and the ‘business economics’ of the company.

In the price of the share principle it goes through a process using earnings per share (EPS) and the price-earnings ratio (P/E) to predict the future value for the investment, and it uses numerous examples, which makes it relatable and not just a hypothetical theory. The examples produced contain a mixture of Warren Buffett’s moves in the market and additionally other applications the long-term idea may be used in. Furthermore it includes issues which long term investors face (taxation and inflation), and presents how the value of the shares circumvent these barriers.

The other principle of selecting a company with good ‘business economics’ is key. Mary Buffett shows the way in which Warren avoided risky businesses by employing certain rules, such as not investing in commodity companies, or aiming to pick a company which contains monopolistic properties.

A major feature in this book is the unfavourable view on Wall Street short-term ‘gambling’, it suggests the reason why this long term investment works is due to the short term fluctuations. It reiterates the idea that the undervaluation and overvaluation of shares comes from the short term risk takers.

A possible issue with this book is that it mainly covers American companies in American markets such as Coca-Cola. However it can still be easily interpreted and used in other markets across the world.

All in all this book hits the nail on the head with its easy-read format, use of numerous life examples, tackling issues which the long-term investor faces and incredible story of how Warren Buffett created a $53,000,000,000 empire by just starting off with $100,000. I hope you enjoyed this brief book review but if you want more information go out and buy it! But I leave you with this joke:

Q: Why did God create share analysts ?
A: In order to make weather forecasters look good.

International trade – Free trade, Protectionism, WTO and Trading groupings

Protectionism

Globalisation has led to a massive increase in world trade and world trade has led to a massive increase in globalisation. These two synoptic elements both help one another to increase in scale and efficiency. And from human’s very beginnings with tribes like the Minoans (a civilisation on the land of Crete) who were master traders, shipping olive oil to Egypt and pottery to Italy, to modern day in which New Zealand Lamb is shipped and flown 11,426 miles to the UK.

The pattern of world trade

This has changed over the years as well, with most goods and services being traded in the west up until the 1960’s, where there was a shift to developing countries such as China and India in the east. This is partly due to untapped markets and low labour costs.

Another major influence affecting world trade is booms and busts, for example since 1970 world trade has grown by 6% per annum but when the 2008/2009 recession took place world trade fell by over 9%

Free Trade

Definition : The unrestricted purchase and sale of goods and services between countries without the imposition of constraints such as tariffs, duties and quotas. (taken from Investopedia)

Benefits

  • By specialising in goods where countries have a lower opportunity cost, there can be an increase in economic welfare for all countries. This manipulation of the comparative advantage causes increased employment, higher incomes and trade account surplus’ which establish a higher standard of living.
  • Specialisation creates economies of scale which lowers the average cost in the long run. This means money can be redistributed into other areas such as wages or employment of staff.
  • Increased competition due to new markets forces firms to cut costs and increase efficiency, benefiting the consumer.
  • Trade is a factor which influences growth and therefore the expansion in trade of about 7% per year from 1945 has helped economic growth across the world.
  •  Trade creation, when consumption switches from high cost producers to low cost producers.

Protectionism

Definition: Government actions and policies that restrict or restrain international trade, often done with the intent of protecting local businesses and jobs from foreign competition. Typical methods of protectionism are import tariffs, quotas, subsidies or tax cuts to local businesses and direct state intervention. (taken from Investopedia)

Reasons for protectionism

  • Protecting Infant industries (businesses that have just entered the world markets).
  • Protecting geriatric industries (industries that may need time to restructure and rationalise in order to compete again).
  • Ensures employment protection.
  • Prevent dumping    –  Refers to exported goods sold at a price below the average cost of                                       production. (Form of predatory pricing and is illegal under WTO).                                   –  One of the few arguments supporting protectionism that can be                                         justified by economic theory due to unfairly distorting the                                                    comparative advantage.
  • Correcting balance of payments by reducing imports and promoting exports.
  • Health and safety laws in developing countries are non-existent therefore giving them a competitive advantage, protectionism benefits the domestic market with a side effect of reducing damage to environment.
  • In times of war, countries do not want to be reliant on imports as it could cause famine and the reason why they lose the war.
  • Tariffs made may be a source of tax revenue for the government.
  • Retaliation may take place due to restricted imports being held against a trade partner. 

Protectionism and Free trade are forever competing against one another and up until 2008 free trade was storming ahead. This was partly due to the work of the World Trade Organization (WTO).

World Trade Organization

Primary aim of the WTO is to liberalise trade. To do this they provide a forum for negotiating trade agreements to lower trade barriers. Since 1947 when the General Agreement on Tariffs and Trade (GATT) was created (predecessor of WTO) there have been eight rounds of talks with the ninth round (Doha Development Agenda) still being negotiated (since 2001).

WTO also performs the settlement of disputes between member countries and the provision of system trade rules. When agreeing to joining the establishment you agree to its principles:

  • Most-favoured nation principle: Implying countries cannot discriminate betwwen their trade partners.
  • National treatment: imported and locally produced products must be treated equally once foreign goods have entered the market.

Has the WTO been successful?

It has massively reduced tariffs on manufactured goods (in industrialised countries tariffs just averaged 4% on industrial goods by mid 1990’s).

However it has been less successful in the reduction of trade barriers in services and there has been an increase in non-tariff barriers such as administrative regulations. These factors could be seen to have offset the reduction in tariffs on goods.

4 types of economic groupings

Free trade areas:

  • Barriers are removed between member countries but individual members can still impose tariffs on countries outside the area
  • Example is North Atlantic Free Trade Area (NAFTA) which consists of free trade between USA, Canada and Mexico

Customs unions:

  • Characteristics include free trade between members and also a common external tariff on goods imported from outside the bloc.
  • Example is European Union which has 28 members.

Common markets:

  • Like customs unions but also factors of production (especially labour) may also move freely across borders.
  • Possibly what the European Union is turning into especially with the increased movement of labour from Eastern European countries such as Bulgaria and Romania.

Monetary unions:

  • Customs unions that have common markets (possibly) and adopt a common currency.
  • Example is Euro zone which has 18 members and has the same currency of the Euro which is regulated by European Monetary Policy.

Consequences of trading blocs – Trade creation and trade diversion

Trade creation:

Occurs due to the reduction in trade barriers which in turn promote specialisation and economic welfare by utilising the comparative advantage.

Trade diversion:

Occurs due to member countries now purchasing goods and services from other member countries rather than non-members due to the lack of tariffs. Therefore there is an inefficient allocation of resources.

International trade is all around us, just look at at any object in your house and see where it is made. It’s incredible how connected the world is not just economically but also socially and politically.

Growth in companies (integration)

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Article explaining motives for growth and expansion of growth mainly via integration of companies.

Firms all have 5 main different motives for growth, these include:

  1. Profit motive: Grow to achieve higher profits to benefit incomes (possibly increase standard of living).
  2. Cost motive: Increase in economies of scale means that there is a reduction cost which in turn increases profit.
  3. Market Power motive: May wish to increase market dominance which in turn increases profit in long run.
  4. Risk motive: Viewing other markets and taking a risk in order to seek a reward, in most cases it is profit.
  5. Managerial motives: Behavioral strategies to either benefit the company’s profit or benefit themselves.

They all come back to the main motive of profit. You could argue that there are other motives such as becoming a legacy, having the largest positive impact on other people’s lives or fame, but the general view is that companies expand due to profit. In order for companies to expand they have a selection ways to grow.

First of all there is organic (internal) growth, these consist of:

  • Expansion of existing production capacity via new technology.
  • Developing and launch of new products.
  • Growing a customer base through marketing (global branding).

But today I am focusing more on inorganic (external) growth which consists of mergers and takeovers.

Mergers are when two firms join by agreement.

Takeovers are when a company buys a set amount of shares of another company listed in the stock exchange (usually over 50%). These can be friendly takeovers, in which the board of directors recommends the offer to be accepted by the shareholders. However they can turn hostile, and the management and share holders can refuse a takeover, creating a difficult situation for the bidder.

Both takeovers and mergers are forms of integration, to complicate it more there are also different forms of integation (This isn’t even maths!)

Horizontal Integration

When the products are complementary or competitive to one another then companies can merge to monopolise more of the market share.

Examples include — Nike and Umbro — NTL and Telewest (Virgin media).

Advantages:

  • Increases share of market.
  • Increase in economies of scale, reduction in costs and therefore improved profits and competitiveness.
  • One large firm may need fewer workers and therefore process of rationalization (cutting jobs) achieve cost savings.
  • Mergers often justified by existence of synergies (1+1 =3).
  • Increase range of products (diversification).
  • Opportunities for economies of scope, which is the lowering of average cost by producing two or more products.

Vertical Integration

Advantages:

  • Greater control of supply chain – reduction in costs and greater output.
  • Improved access to raw materials.
  • Greater control over retail distribution channels.
  • Economies of scale in long term.

Vertical backward integration

When a company purchases a supplier company. So they can control the price and either damage competitive companies or increase revenue in the long run due to economies of scale + diversification.

Examples include – Glaxosmithkleine which was from a service sector business and outsourced into the manufacturing sector.

Vertical forward integration

When a company purchases a consumer company. So they can influence who they supply the products to to increase production and get more of a share of the general market.

Examples – Glencore which is a mining company but it has expanded into the manufacturing sector.

Lateral (conglomerate) Integration

Companies joining together which have similar properties but are not competitors due to different markets.

Examples include — Microsoft and Skype — Google and Youtube — Richard Branson with Virgin.

Advantages:

  • Economies of scale.
  • Increases capital of companies for possible investment in other companies.
  • Greater spread of risk.

In conclusion companies grow mainly for the profit motive and they do this by organic or inorganic growth. These different ways in which to grow give the firm a choice of how to maximise their revenue and deflate costs. As you can see mergers is one of the best ways as it contains numerous advantages including monopolising the market, reducing long run costs and increasing output.