The Federal Reserve, how federal is it?

Luckily Ben Bernanke and the his FED saved us from a second great depression.
At least that is what they want us to believe, but did they?

The American central bank did nog help us out, they did what they always do during financial meltdowns: pump money into the system.

When the dotcom bubble deflated the FED decreased the interest rates to 1%. They kept their interest rates on 1% for a very long time.

Now we are wondering why there are so many sub-prime and Alt-A products sold in the USA? Well, this is why!
Banks thought to become rich easily, being able to lean money for 1% and to lean it to other people for 6% is lucrative business.
The banks became rich because of the infinite moneyflow going to them for just 1%.

When we say the FED avoided the crisis, let's not forget to mention the FED was also a big part of the cause of this crisis.

The name of the FED - Federal reserve suggests that the bank is controlled by the government. But is this right?

Actually the FED is privately owned. The shareholders of the FED are private banks. The government does not have any shares in the Federal Reserve.

"Some people think that the Federal Reserve Banks are owned by the United States government institutions. They are private monopolies which prey upon the people of these United States for the benefit of themselves and foreign customers; foreign and domestic speculators and swindlers; and rich and preditory money lenders."
Louis McFadden, Chairman of the House Banking and Currency Committee in the 1930's.

So how was the FED created and why did the government agree with it?

The FED is created by seven top-bankers, led by John Pierpont Morgan (the founder of JPMorgan chase) who had a secret meeting at JP Morgan's private Island.
Those seven top-bankers represented banks that owned around 25% of all worldwide assets.

The bankers wanted to receive a monopoly for dollarcreation and wanted to make a central bank to the European model.

They thought of a reliable name which would sound like the bank was owned by the government and came up with: 'The Federal Reserve'.
Because of politician-friend the plan got through the house of representatives. The vote for the Federal Reserve plan was planned on Christas eve , this was done by purpose because a lot of people would not be there to vote.

Since the plan was written in difficult economic words and was written to not be understood by anyone who did not study economics the politicians available were not able to fully understand what they were voting for. Off course, all people who were involved in the plan were there on christmas eve to vote in favour of the plan.

The FED was a fact.

Let's get back to when the current global financial meltdown started.

In March 2008 the NY FED advanced the funds for JPMorgan Chase Bank to buy investment bank Bear Stearns for pennies on the dollar.
Turned out that the CEO of JPMorgan Chase, Jamie Diman, sits on the board of the NY FED and anticipated in the secret weekend negotiations.

So JPMorgan Chase was able to buy Bear Stearns for pennies on the dollar, and this dicision has been - partly - made by the CEO of JPMorgan Chase?!!!

Now that's a deal !!


So if the FED is not state-owned, where did they get the money from to advance the funds?

According to the associated press:
"The treasury department, for the first time in it's history, said that it would begin selling bonds for the Federal Reserve in an effort to help the central bank deal with it's unprecedented borrowing needs."

Yahoo finance reported:
"The treasury is setting up a temporary financing program at the FED's request. This program will auction treasury bills to raise cash for the FED's use. The initiative aims to help the FED manage it's balance sheet following its efforts to enhance it's liquidity facilities over the previous few quarters."

But it's not like the United States have savings left..


So government debt is used to allow the FED to take over the banks, but this is not the only thing the FED does to regulate and control the control the economy.
The FED has mentioned a few times that they "support" the financial markets.
Even in Oktober 1989, Robert Heller, governer of the American central bank, said in an article in the Washington post that the FED was "interested in supporting financial markets by buying futures."

In an acticle published by Reurters in June 2003 Alan Greenspan went even further. He stated that the measures once not acceptable - like the regulations in financial assets - might become normal.

Where is this world heading?
At school we always learn economists regard a free-market system to be perfect. Where is the the free market within those regulations in financial assets and takeover of banks?

I think it is far, far away...

Statistics' ability to lie.

In chapter 5 of your economics AS book it wil state there are six main economic indicators:

1) Economic growth
2) Unemployment
3) Balance of payments
4) Productivity
5) Inflation/deflation
6) Ex.rates

Today I will be talking about the (mis)calculations in indicators 1,2, and 5.

The site www.shadowstats.com shows that there are alternative ways of measuring inlfation. There is a pre-Clinton way of measuring inflation. This way produced a way higher rate of inflation than the calculations do nowadays.


Why can the government decide to change their models?
Awnser: Nobody knows exactly how inflation should be measured. What we do know is that within the transition from the old way of calculating inflation to the new one there have been serious aims to reduce inflation in mainly 4 ways:

- Hedonistic changes: This means that the price of goods are being adjusted for quality. The higher the quality gets the lower the price gets (even though the nominal price people have to pay for the goods is constant, this is in severe contradictory with the definition of inflation.)
- Intervention-analysis: This is being used to reduce the changes in the CPI by season-bonded changes in the CPI E.G. Food and Energy. What basically happens is that the weight for those goods drop.
- Geometric weights: The normal weights have changed into geometrical weights througout the years causing goods that decline in price to weigh more and goods that increase in price weigh less.
- Changing by cheaper alternatives: If a piece of meat gets too expensive, then it will be changed in the 'inflation basket' to cheaper forms of meat (like a hamburger) because it is predicted that people will start looking for cheaper alternatives. However, the nominal price change still is there.

Also: There are some doubts about the official unemployment figures. There are profound reasons to believe that the unemployment numbers are way higher than officialy stated which makes ordinary people believe the economy 'isn't that bad because of the - still - relatively low unemployment numbers.

This forecast of shadowstats.com shows that they think the actual unemployment figure for the USA is closer to 20% than to the officialy registered 10%. This all because of changes in the way of calculating the figures.
Note: If the shadowstats.com is right in the predictions they make, we are getting closer and closer to 1930's unemployment levels.



Now I've talked about unemployment and inflation, I would also like to point out the GDP figures. The officialy stated GDP level (Y-Y change) is around -4%, according to shadowstats.com it should be around -6%.
Also note that the blue line is almost always beneath the red line, since this is a Y-Y change diagram this means that cumulative this makes a big difference.

Chapter 5 summary

Market failure occurs when free markets, operating without any government intervention, fail to deliver efficient allocation of resources.

Market failure results in:

- Productive inefficiency. Firms are not maximising output from given factor inputs and is a problem because the lost output from inefficient production could have been used to satisfy more wants and needs

- Allocative inefficiency. Resources are misallocated when firms produce goods and services not most wanted by consumers, given their costs. This is a problem because resources can be put to a better use making products consumers value more highly so that more wants and needs are satisfied and economic welfare increased.

Markets can fail because of the following factors:

- Externalities either negative (eg pollution) or positive (eg public infrastructure) causes private and social costs and/or benefits to diverge

- Imperfect information means merit goods are under produced while demerit goods over produced

- Markets cannot make an ‘appropriate’ profit from producing public goods such as light houses and quasi-public goods such as roads

- Market power: imperfect competition results in market dominance such as the abuse of monopoly power to set prices higher than if the industry were competitive

- Factor immobilityeg geographical & occupational causes unemployment hence productive inefficiency. This aspect is not really relevant to transport economics

- Equity (fairness) issues. Markets can generate an ‘unacceptable’ distribution of income and social exclusion where people on low income – the relatively poor - are denied access to essential goods and opportunities considered ‘normal’ by a society eg food, clothing, housing, and education. Note that air rail and private cars are used disproportionately by the rich while those least off are more likely to use public transport

Marginal External & Social cost & benefit curves
Marginal external costs & social costs curves.

In the graph added:
- The marginal private cost curve (MPC) shows the cost of an economic activity to the decision maker eg a firm. MPC is given by the firm’s supply curve.
- The marginal external cost curve (MEC) shows the estimated cost of an economic activity imposed on third parties.
- The marginal social cost curve is the total cost to society of producing an extra unit of a good. (MSC= MEC + MPC)


Also, the MEC does not always have to remain the same. That’s because of an increase in quantity of car use might cause extra congestion making the negative externalities increase marginally.



Marginal external benefit & Social Benefit Curves.

Marginal social benefit (MSC) is the benefit to society of consuming one extra unit of a product and can be illustrated graphically.

- The marginal private benefit curve (MPB) shows the benefit of an economic activity to the decision maker eg a consumer. MPB is given by the market demand curve.

- The marginal external benefit curve(MEB) shows the estimated benefit of an economic activity enjoyed by third parties

- The marginal social benefit curve (MSB) is the total benefit to society of using an extra unit of a good ie MSB = MSB + EMB

It’s like the same as the cost curve shows above.


The efficient allocation of resources requires output to be increased up to the point where social marginal benefit equals social marginal costs.


Note: The supply curve S shows the firm’s marginal private cost of production but ignores the negative externalities. (MPC=S) Given negative externalities such as pollution, marginal external costs must be added to the MPC to give the Marginal social cost curve. (MSC= MPC + MEC) Given no positive externalities the demand curve is D=PMB=MSB
Neg externalities result in MPC differs from MSC, positive externalities result in: MPB differs from MSB.


The equilibrium level of output delivered by a free market, Qmkt, is allocatively efficient. The market is socially efficient at Qeff (SMB=SMC). So the market is overproducing (Qmkt-Qeff)
The overproducing results in the welfare loss triangle(JKL and LMN) which measures the loss to society when markets are allocatively efficient.
So:
In free unregulated markets, externalities cause private and social costs or benefits to diverge so that the equilibrium and allocatively efficient level of output are different and markets fail.

- Negative externalities mean social costs exceed private costs resulting in overproduction

- Positive externalities cause social benefits to exceed private costs resulting in underproduction

Externalities cause market failure because they cause private and social costs and benefits to diverge



Note:
- The J off peak is less than the capacity of the road so there is no congestion. The marginal social cost of each extra journey is constant at P1.
- Beyond J capacity the roads become congested causing negative externalities.
- The marginal external cost is a monetary estimate of the externality imposed on third parties by rush hour motorists and operates beyond Jcapacity. It diverges because as extra cars join, the degree of congestion increases.
- The government needs to take measures to reduce congestion to J eff, where MSC=MSB

Markets do not only fail because of allocative efficiency, they also fail because of information failure, this is mainly caused by:

- Misunderstanding over the true costs and benefits of a product. (EG the health benefits of cycling)
- Uncertainty about costs and benefits. (EG hybrid car technology)
- Complex information (EG choosing between petrol or diesel requires specialist knowledge of cars.
- Inaccurate or misleading information (EG some advertising may ‘oversell’ the benefits of private motoring)
Information failure faces two kinds of goods:
1) Merit goods , a product (EG education) of which the government believes consumers undervalue because of imperfect information. A merit good is ‘better’ for the consumer than the consumer might realise. (EG measles inoculation, transport such as walking and cycling which is next to transport also and exercise)

Merit goods’ market failure looks like this:


Note: Consumers Undervalue merit goods! So the welfare loss triangle quantifies the amount of welfare loss resulting from under consumption

2) Demerit goods . This is a product, like tobacco, that he government believes is overvalued by the consumers. A demerit good is ‘socially undesirable’ and ‘worse’ for a consumer than the consumer realises.
This causes the Demerit goods’ market failure to look like this:


Note: Consumers overvalue this product. So the welfare loss triangle quantifies the amount of welfare loss resulting from over consumption


Market failure may also be caused through market dominance.

Market dominance occurs when a firm acquire monopoly power. In the UK monopolies are defined as occurring when firms more than 25% of the market. Monopoly power can result in:
- Productive inefficiency : firms do not minimise costs.
- Allocative inefficiency: the market under produces.

Unregulated dominant firms can be inefficient because of a lack of competition, they don’t need to be efficient. The lack of competition allows them to:

- Produce goods at a quality and price largely determined by the firm. Consumers face restricted choice and have no alternative supplier eg Network Rail.
- Have less incentive to maximise outputs from given inputs causing productive inefficiency.

Monopolist firms seek to maximise profits so they seek to the quantity where MR=MC. The resultant price (SMB) does not equal SMC. The result is market failure because of allocative inefficiency.

Some transport industries are monopolies and so have the potential to abuse their market power. Eg:
- Natural monopolies such as operating the rail track infrastructure.
- Legal monopolies such as Train Operating Companies with an exclusive contract to offer rail tickets over a route.
The market failure through market dominance is graphically illustrated as:


A monopoly will make their output Qmkt, which is where MR=MC, to optimise profits. However, the socially efficient level of output occurs where MSC=MSB, so on Qeff. Market failure occurs because of under production. The loss to society from under production is given by the welfare loss triangle JLM.

Governments try to correct market failure.
In a free market economic system, governments take the view that markets work. Laissez faire approach dominates.

Where markets fail to deliver an efficient allocation of resources there is an argument for government intervention to correct market failure. Governments seek to internalise the external costs & benefits.

There are a few policies the government may use to intervene in a market to attempt to correct market failure:
- Legislation eg laws that prohibit large lorries crossing London at night; parking bans.
- Regulation eg government appointed utility regulators who impose stricts price controls on privatized monopolists eg Train Operating Companies.
- State provision either through:
1) State production eg (re)nationalised Network Rail
2) State funding eg the government might pay private sector bus companies to run late night services to rural areas
- Fiscal measures (financial intervention) that use the tax and benefit system to alter market prices or affect income distribution:
1) Indirect taxes to raise the price of demerit goods and products with negative externalities ie petrol taxes or subsides to lower the price of merit goods and products with positive externalities eg rail journeys
2) Direct taxes on the ‘rich’ and benefits in cash or kind for the poor to improve the distribution of income eg free bus passes for senior citizens


SUMMARY GOVERNMENT INTERVENTION OPTIONS FOR EACH CAUSE OF MARKET FAILURE


The government tries to intervene in mainly two ways: by demand side policy and supply side policy.
Demand side policies include:

- Use taxes (road) and subsidies (rail) to affect the relative price of journeys and encourage commuters and freight to switch from road to public transport eg rail.
- Congestion charging equal to external marginal cost. Cause peaking where demand exceeds supply to raise price to encourage motorists to:
1) switch to substitutes eg buses and rail
2) or travel at off peak time when peaking is not an issue - especially freight. However where motorists divert to non-toll roads congestion is simply displaced to another geographical area
- Workplace parking charge: tax employees who have a parking space at work
- Introduce quotas to limit the number of cars that can be owned.
- More/improved park & ride schemes (P&R) Cause ineffective integrated transport so locate P&R near motorway nodes
- Improve public transport capacity & quality Cause no substitute to car so make train, trams or buses as convenient as using a car.
- Subsidise substitutes Cause substitutes too expensive so lower price eg increase subsidies or offer tax relief on train/bus season tickets
- Use planning regulations to halt new out-of-town super stores and build houses near work
- Encourage teleworking where employees work from home through tax incentives

Supply side policies include:
- Build more roads Cause too little supply. However, new roads generate extra traffic and new roads are unsustainable.
- Enable constant traffic speed to reduce congestion caused by stop-start driving eg variable speed limits.

Sustainability is very important in transport, to maintain sustainability we will need extra roads. This gives some sustainability issues like:
- It uses up non renewable resources and impacts on land use
- The pollution generated by increased traffic threatens the environment eg contributing to global warming
- New roads mean visual intrusion, loss of land for current and future generations.
- Increased car usage depletes world stocks of fossil fuels and contributes to global warming.
- It is an expansion of Heathrow sustainable? An extra runway at requires the demolition of three villages and 5,000 houses, and will further increase noise pollution.

There are real sustainable forms of transport, like walking and biking because these forms of transport do not use any fossil fuels, causes no negative externalities in use and have very small infrastructure needs.

Chapter 4 mindmap transport

Click on the picture:

Chapter 4 summary AS

- Aggregate demand: The Total demand for a country’s goods and services at a given price level and in a given time period.
- Price level: The average of each of the prices of all the products produced in an economy.
- Consumer expenditure: Spending by households on consumer products.
- Investment: spending capital on goods.
- Government spending: spending by the central government and local government on goods and services.
- Exports: products sold abroad.
- Imports: products bought from abroad.
- Net exports: (X-M)

So: AD=C+I+G+(X-M); standard Keynesian formula.

- Transfer payments: money transferred from one person or group to another not in return for any good or service.
- Job seeker’s allowance: a benefit paid by the government to those unemployed and trying to find a job. (Is not included as Government spending)
- Trade surplus: (X-M) = positive
- Trade deficit: (X-M) = negative
- APC: Consumption quote
- Consumer confidence: how optimistic consumers are about the future economic prospects.
- Rate of interest: the charge for borrowing money and the amount paid for lending money.
- Net savers: People who save more than they borrow ( clever people )
- Wealth: a stock of assets, e.g. property, shares and money held in a savings account.
- Inflation: a sustained rise in the price level
- Distribution of income: how income is shared out between households in a country.

- Saving: Real disposable income minus spending

There are mostly seven things that influence savings:

1) Real disposable income. Rise in real disposable income will make the APS and the nominal savings rise.
2) The rate of interest. A rise of interest rates makes the reward for saving higher and people will start saving more.
3) Confidence and expectations. Households and firms tend to save more when they get more uncertain about the future.
4) Saving schemes. Some saving is contractual, like pension schemes.
5) Range of financial institutions. When people feel confident on placing their money into a bank they will feel it’s more usual to save money.
6) Government policies. (E.G. things like tax-free saving schemes)
7) The age structure of the population. Young people save very few, middle-aged people save most and old people mostly dissave ( spending more than disposable income) drawing on savings to maintain their living standards when they retire.
- Average propensity to save(APS): savings quote= savings ratio- Target savers: people who save with a target figure in mind.( E.G. someone wants to have total savings of 100,000)

- Investments is mostly influenced by the following eight things:

1) Changes in real disposable income. Real disposable income makes consumption rise and firms will react on the increase in demand by increasing supplies. New machinery is needed, making investments rise.
2) Expectations. Firms are much more likely to invest if they feel optimistic in the future.
3) Capacity utilization. Firms are also more likely to invest if they are operating close to full capacity. ( So now in the current rece(/depre?)ssion the investments probably won’t go up that much because the demand still is lower than before this all started)
4) Current profit levels. High profit levels can encourage investments in two ways. They provide, at first, the finance to invest. And also they are likely to make the firm more optimistic about the future.
5) Corporation tax. (corporate tax) Cuts in tax increases the profit and might increase investments. (more money left to spend)
6) The rate of interest. A higher interest rate makes borrowing more expensive and borrowing is mostly used to finance investments. Also, the higher interest rates will increase the opportunity cost of the investment because the return at the bank is getting higher. Finally, a higher interest rate tends to reduce the demand for shares. This might lead to lower share prices, so the firm is able to raise less funds for future investments.
7) Advances in technology. When there is new – revolutionary – machinery on the market, firms might feel forced to replace the machinery. This will always be to try to reduce the unit cost ( average cost per unit of output) and therefore increasing the profit.
8) Price of capital equipment. A reduction in the price of capital equipment may also increase investment. It will become affordable for more firms to buy new machinery.

- Retained profits: profit kept by the firms to finance investment.


- Government spending is mostly influenced by the following four things:

1) The government’s view on the extent of market failure and its ability to correct it. In countries where governments rely on the free market system the percentage of AD is lower because of fewer investments. (E.G. 27% for Sweden in 2007 and 12% for Chile in the same year)
2) The level of economic activity in the economy. High unemployment would increase government spending(more AD so more Employment, because employment – within the Keynesian theory - is calculated by: AD/productivity per unit of labour) and high inflation would reduce government spending.( less consumption-based inflation)
3) A desire to please the electorate. Politicians would like to get some votes in the next term, mostly this is on the things that hit people’s perceptions and feelings. (E.G. Education, health care, infrastructure)
4) War, terrorist attacks and rising crime.

Net exports are mainly influenced by the following five things:

1) Real disposable income abroad. A rise in income in countries abroad. (Consumers in those countries will have more money to pay for imports, increasing the Net exports for the country we’re looking at.
2) Real disposable income at home. A rise in income at home may result in a fall in exports. This is because firms may divert some products from the export market to the home market to meet the rising domestic demand.
3) The domestic price level. If the domestic price level rises relative to the price levels in the country’s trading partners the value of exports fall and the value of imports rise. So if domestically produced products become more expensive, firms and households at home and abroad will switch from them to products made in other countries.
4) The exchange rate.(price of one currency in terms of another currency) A fall in a country’s exchange rate will reduce the price of exports and raise the price of imports. Due to this the value of exports will rise and imports will decrease. Net exports increase.
5) Government restrictions on free trade. A country’s net exports may rise if other countries’ governments remove trade restrictions. (EG, if the USA would remove the tarrifs( a tax on imports) on Chinese steel there would have been way more import from China.

The relationship between AD and price level.


Note: We are talking about the level of inflation so the price level of all goods, not just the price level of one single good.

There are three main reasons for the downward sloping AD curve.
1) The wealth effect .
When the price level is low you can buy more with our money.
2) The rate of interest effect.
A rise in the price level means that some people will sell financial assets, such as government bonds(a financial asset issued by the central or local government as a means of borrowing money), to obtain more money to pay the higher prices. Making the price of government bonds decrease. Due to the fact that the interest on a bond will nominally stay the same the amount of interest rises. (5 on 100 makes 5% but if the price falls 50% to50, the interest rate will increase from 5% to 10%.) A higher interest rate is likely to reduce consumption and investments making the AD value lower.
3) The international trade effect.
A rise in price level in a country will make your country more expensive for foreign countries so exports will fall. Decreasing AD.

Shifts in the AD line:

A change in any of the components will cause a shift of the AD curve, while a change in the price level causes a movement along the AD curve.
Examples of things that influence the AD curve to shift: Changes in expectations, changes in government policy, changes in the exchange rate and a change in population size.
A fall in share prices worldwide would lead to a fall in the AD because people will become less wealthy(so consume less) and firms will have more problems raising funds for investments. (so invest less)



If the AD shifts to the right (AD increases) there are three main possibilities:
1) When there is spare capacity left within an economy, the AD is likely to raise the output of the economy, reduce unemployment and leave the price level unchanged.


2) When there is not that much spare capacity left within an economy or there are shortages of resources, the increase in AD will increase the price level and the real GDP.
- If the economy is already operating at full employment level, with no spare capacity, an increase in AD will be purely inflationary.



- Aggregate supply: the total amount that producers in an economy are willing and able to supply at a given time period.
The shape of the AS curve is influenced by the level of the capacity in the economy.


When output and unemployment is high, as shown over the range 0 to Y in figure 4.3, AS is perfectly elastic. This means that more can be supplied without raising the price level. Any increase in output can be achieved by offering unemployed workers jobs at the going wage rate and paying the going price for raw materials and capital equipment. Between Y and Y1, AS is at first elastic and then it becomes increasingly less responsive to changes in the price level. Ass resources become scarcer, producers have to employ les efficient workers and machinery. This pushes up unit costs of production and the price level. At Y1 all resources are employed and AS becomes perfectly inelastic. At full capacity it is not possible to produce more, irrespective of how high the price level rises.

Shifts in the AS curve.

In the short run the main reason for a shift in the supply curve is due to the change in the costs of production. (EG due to wages, price of raw materials)
In the long run, the two main causes of shifts in the AS curve, which alter productive capacity, are changes in the quantity and quality of resources. (EG by education increasing the quality of labour and therefore increasing productivity)



When the AS curve is changing there are mainly two possibilities:
1) When the economy is at, or close to, full capacity the output of the economy will raise and lower the price level.



2) When the economy is initially operating at a low level of ouput with a high level of unemployed resources. In this case, the increase in AS will increase potential output but not actual output and will leave the price level unchanged. The increase in AS will have NO impact on the economy.


There may also be a combination of both, a change in AD as well as a change in AS. There are again a few possibilities:
1) An increase in AD and AS in the same rate will increase Y and does not have inflationary pressures:



2) An increase in AD and AS, but AD increases more than AS. This is also known as overheating, causing inflationary pressures:



- Output gap . The difference between an economy’s actual and potential real GDP.
The output gap is ab in the next graph:



- Macroeconomic equilibrium: A situation where aggregate demand equals aggregate supply and real GDP is not changing.
- The circular flow of income: The movement of spending and income throughout the economy.
- Factor services: the service provided by the factors of production.
- Leakages: Things that reduce AD; things like imports, savings and taxes.
- Injections: additions of extra spending into the circular flow of income.( consisting of: Investments, Government spending and Exports)
If injections equals leakages there will be a macroeconomic equilibrium.
- Multiplier effect: The process by which any change in a component of aggregate demand results in a greater final change in real GDP

Peak-Oil

Collin Campbell (Retired BP geologist who studied in oxford :-)) : "The term peak oil refers to the production of oil in any area under consideration, recognising that it is a finite natural resource, subject to depletion."

What is oil?
Oil, also known as the 'black gold', has been coming from the ground for century's and is per liter cheaper than milk.
Oil is known for a very long time. Arrows from the 7th century have been found with oil on top of the arrows.
So oil is known for a very long time already, however, the start of the oil production has officially begun in 1859, when the first source of oil has been drilled.

The world has become addicted to oil, the global demand for oil is around 31,000,000,000 barrels of oil a year.
We are actually using that much oil that according to the EIA(Energy Information Association) the demand for oil is exceeding supply since the beginning of 2006. In the beginning of 2008 the gap between demand and supply was one million barrels per day.

The main problem is that the big oil-producing companies are having more and more trouble finding new big oil fields, causing peak oil. ( There are two types differentiated in big oil fields. Giants which have a capacity of more than 1 billion barrels and super giants of more than 5 billion barrels)
The avarage oil field found these years contains 100 million barrels. If you reflect that to the annual demand for oil of 31,000,000 million barrels everyone is able to understand we are getting into trouble regarding oil production...


The production is some countries has already hit its peak, for example:

The USA hit its peak in 1970; Canada in 1974; Romenia in 1976; Indonesia in 1977; Egypt in 1993; Argentina in 1998; Venezuela in 1998; the UK in 1999; Australia in 2000; Norway in 2001 and Denemarken in 2004.

These are just a few examples of countries that already reached peak oil, there are actually way more.


There are two main kinds of oil: Conventional oil and unconventional oil.
Coventional oil is oil that easily comes out of the ground and therefore costs little. 96% of the world's supply of oil consists of conventional oil.
Unconventional oil is oil that is way harder to get and therefore way more expensive.

The oil companies try to find as much conventional oil as possible in relation to unconventional oil simply because it's way cheaper.
However, the big companies are having trouble finding the conventional oil: Chevron and Shell conclude: "The era of cheap oil is over."



Production of unconventional oil is rising due to projects in Canada using steam to extract the oil from the sand. In Venezuela there are projects using "very heavy oil" which is oil that's (nearly) solid bound to rocks. This oil has to be diluted by using steam to make the oil pumpable. This only happens on relatively large scale in Venezuala. There are 600,000 barrels per day produced via this method in Venezuela.

Is the mixed-sand in Canada the soultion to the worldwide shortage of oil?

No. According to a research dne by the Swedish University of Uppsala the production of oil from the sands in Canada may reach 6 million barrels a day by 2035. That would be 2,190,000 barrels per year equalling 7,1% of the world demand for oil. So it is centainly going to contribute to the world supplies but it is not enough to get us out of trouble.

Also: There are quite a few problems involved in the canadian sands oil production like:

1) The production of oil requires a lot of water. The current activities require more water in Canada than all other activities in Canada together.
2) There is a lot engery required to steam the oil out of the sand. You roughly need one barrel of oil to produce three barrels.
3)There are also some environmental problems: the amount of carbondioxide emitted when producing one barrel of 'sand-oil' is two to three times as much compared to the production of one barrel of conventional oil.

Is Oil-shale the solution?

Oil-shale are rocks that contain the organic material kerogen (which is a mixture of organic compounds). By heating the kerogen to 500°C, without any air involved in the chemical process, the kerogen will become some sort of crude oil.


Note: In- Situ means that the rocks are being heated underground.

There are estimates of usable oil from oil-shales reaching 3300 billion barrels. Enough oil for roughly nine years of world demand!
Over 60 per cent of those oil-shales are situated in the USA, lucky americans....
Nevertheless there are also big opportunities for oil-shales in E.G. Ukraine, Brazil and Australia.

Concluding: The world demand for oil is exceeding supply. However, due to the recession the problem has become a bit less because of a slight decrease in the demand for oil. This does not mean the problems are over, they are less severe for now. We, all countries together, should think of opportunities and possibilities to solve this problem and making us less addictive to oil.
Meanwhile we should focus more on the interesting possibilities of unconventional oil like oil-shales.

AS chapter 3 summary

Definitions:
- Productive efficiency: where production takes place using the least amount of scarce resources.
- Economic efficiency: Where both allocative (demand based) productive efficiency are achieved.
- Inefficiency: Any situation where economic efficiency is not achieved.
- Free market mechanism: The system by which the marke forces of demand and supply determine prices and decisions made by consumers and firms. If the free market mechanism fails to achieve economic efficiency there is market failure.
- Information failure: A lack of information resulting in consumers and producers making decisions that do not maximise welfare. (E.G. sigarettes, alcohol) Result of: misleading packaging; persuasive advertising resulting in consumption levels that are not in the best interest of consumers.)
- Asymmetric information: Information not equally shared between two parties. (E.G. Health care, Environment(we know few about pollution), consumer purchases(bad deals))
- Costs and benefits.
There are three types of costs and benefits.

1) Private costs and benefits; these are experienced by the people who are directly involved in the decision to take a particular action. E.G. Take the case of an airport expansion. The private costs are the development costs are paid by the owners of the airport. The private benefits in this case are the revenue received by the airport’s owners and the pleasure that is gained by the additional passengers as a result of being able to travel by air from that extended airport.
- Private costs : The costs incurred by those taking a particular action.
- Private benefits: the benefits directly accruing to those taking a particular action.

2) External costs and external benefits; These are consequence of externalities that arise from a particular action. In the case of the airport expansion, people who live on the flight path of the airport will experience additional noise pollution problems. An external benefit could be if some flights transfer to the expanded airport elsewhere, resulting in less noise pollution for those people who live on the flight path of that airport.
- External costs: The costs that are the consequence of externalities to third parties.
- External benefits: The benefits that accrue as a consequence of externalities to third parties.

3) Social costs and social benefits; these are the total costs and benefits incurred by or accruing to society as a result of a particular action. By definition, the definition, they consist of private costs and benefits and any external costs and benefits that arise.
- Social costs: The total costs of a particular action
- Social benefits: The total benefits of a particular action
- Externalities consisting of:1) Negative externalities, E.G. Air pollution while driving; Illegal dumping of waste; chewing gum and binge drinking (damage or pollution caused by drunk people)
2) Positive externalities, E.G. Inoculations against flu; crossrail ( London’s transport project); Education and training.

- Merit goods: These have more private benefits than their consumers actually realise. (E.G. inoculations. ) Merit goods tends to have positive externalities. Information failure! People don’t know enough about the positive externalities.
- Demerit goods: their consumption is more harmful than is actually realised. (E.G. the excessive consumption of alcohol.) Demerit goods tend to have negative externalities. Information failure! People do not know it’s that harmful.
- Public goods: Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry. Public goods are goods that most people would like to have but are not affordable in the free market. (E.G. street lightning, Fire service) Public goods have the defining characteristics:
- Non-excludability: Situation existing where individual consumers cannot be excluded from consumption. All people use the service, like police. Not everyone is paying for it indirectly through taxes ( eg foreign visitors) but are receiving the service, this group is freeriding.
- Non-rivalry: Situation existing where consumption by one person does not affect the consumption of all others.
- Quasi-public goods: Goods having some but not all of the characteristics of a public good. (toll-roads)

Government interventions to correct market failure:

- Negative externalities. Government intervenes by charging or giving information. (E.G. the ‘bin it’ campaign for chewing gun) Same for Demerit goods.
- Positive externalities. Government intervenes mostly by giving more information, avoiding information failure. Same for Merit goods.

- Public goods: Goods that are collectively consumed and have the characteristics of non-excludability and non-rivalry. The defining characters of the public goods are:
1) Methods that involve some manipulation of the market mechanism – subsidies, indirect taxation and the provision of information.
2) Non-market methods – direct provision and various forms of regulation and control.
- Direct tax: One that taxes the income of people and firms and that cannot be avoided. (E.G. Income tax)
- Indirect tax: a tax levied on goods and services. (E.G. VAT.. Mostly used to discourage the production and consumption of demerit goods.)
With indirect taxes the government tries to make the polluter pay, this way the external cost is internalized to the producer. This is the polluter pays principle, there are four main problems that occur when applying this principle:
1) There are problems in determining the exact amount of tax, since it is invariably difficult to estimate the cost of the negative externality.
2) Producers may not always pay the full amount of the tax. They might charge the consumer for the tax they have to pay.
3) The PED for most demerit goods tends to be inelastic, so by making the price higher the demand won’t fall that much.
4) Better quality information for consumers might also be used to further reduce consumption.

- Subsidy: A payment, usually from government, to encourage production or consumption. A subsidy is designed to keep prices down while increasing production and consumption. Makes the supply curve move to the right. (EG payments to train-operating companies to operate franchised services, payments to local bus companies to run loss-making services in rural areas, university education )
- Governments do not only correct market failure by using the price mechanism(making demand increase or fall by decreasing or increasing price) but also in the form of regulations, standards and legal controls. E.G. :

1) Environmental – legislation relating to the emission of pollutants into the atmosphere, for the handling, storage and disposal of chemicals, noise levels from pop concert.
2) Transport – legislation governing the compulsory use of seat belts, the construction and use of motor vehicles.
3) Professional – regulations relating to the qualifications of doctors, dentists and nurses, academic qualifications and those for lawyers and accountants.
4) Use of demerit goods – restrictions on the scale of tobacco products and alcohol, various types of dangerous drugs.

- Tradable permits: a permit that allows the owner to emit a certain amount of pollution and that, if unused or only partially used, can be sold to another polluter.
The price of the permits are being determined by the market, the quantity supplied is being set by the government. When there are more firms that want to pollute, demand will increase for the tradable permits which will make the price go up.

How to write marketing plan

How to write a marketing plan?



There are several things you need to do while writing a marketing plan:
- Look at: What is the business about?(business mission)
- Decide which customers to target, which market segment? (Where do the customers come from already? This is mostly the most important segment to focus to.) This way the company will win new customers.
- Keep existing customers happy. (By providing A.S.S. for instance)
- Set our clear objectives. These objectives should be realisable and measurable. (E.G. increase sales by 10 per cent within a year)
- Insure your plan to become reality.
- Make full use of Free resources.

Not only say what you want to happen but also describe each step to make sure it happens.

Layout
- Executive summary ( Write on the end), this should give a quick overview of the main points of the plan.
- Introduce the main body of the plan with a remainder of your overall business strategy, including:
1) What business is about.
2) Your key business objectives.
3) Your broad strategy for achieving objectives.

- Main part including:

1) What environment does this business operate in? ( PEST analysis)
2) What are the businesses strengths and weaknesses? (SWOT analysis, this might help to find the most promising customers to target.) (How do we differentiate from competitors?)
3) Marketing objectives. (Which should always be SMART)
4) How will your marketing strategy become reality? (7 P’s )
5) Provide a budget for each marketing acitivity. (what resources do you need?)
6) The schedule of tasks.

Homework economics

Let's talk about the benefits and costs of the biggest ship in the world!


benefits:

There will be less pollution per unit carried (decreasing social costs), because the ship is able to carry a lot containers. Because of the massive amount of units this ship is able to carry the Avarage Total Costs will decrease (assuming the ship is fully loaded). Due to this the price for the consumer will fall. Also, it is more labour-efficient because the crew only consists of 13 crew-members.
Fuel costs per unit carried are reduced because of the capacity of the ship.

costs:

Building the biggest ship in the world costs alot and requires a lot of resources. Also, the size of the ship brings a lot of problems. For trade from China to Europe the ship would have to use the Suez-Canal. However, due to the size of the ship the ship is not able to pass through the Suez-Canal and will have to sail all around Afrika. Also for the trade with the eastern part of the United States the ships normally go through the Panama-Canal but the ship wouldn't fit through that canal aswell.
Therefore the ship will have to seek for other places on the west of the United States to unload. The goods will still have to be in the eastern part and therefore way more railway is required.
More problems in the size of the ship is that it would not be able to mount at a lot of seaports because the ship simply is way too big and that the ship will be very slow because of its size. The transport time will be greater than with normal ships.

UK trade with China



Benefits (for UK):
It may create jobs for the transport sector. Also, because of the lower import prices the inflation will fall. Profits for company's may increase because of the lower import prices.
Manufacturing will move to China, which gives the opportunity to the UK to specialize in high value-added products. The intellectual property rights will make a lot of money for the UK if the UK starts specializing in high value-added goods. (And assuming company's in China will respect the IPR's)

Costs (for UK):
Because of the manufacturing moving to China the unemployment rates will rise causing a negative multiplier effect.
Also, there will be - ceteris paribus - a lower GBP because of increasing trade deficit. Lower currency rates increase the costs for companies who need to import factors of production. (Land, labour, capital and entrepreneurship) Lowering the profits of UK company's causing - again - a negative multiplier effect.

Because of the huge amount of import from China the UK might become too dependent.(the other way around the UK is only 2% of the exports China.)

The original:

Let's talk about the benefits and the cost of use the biggest ship to transport!
benefits:
I think there will be less pollution for unit carried, also massive the capacity, because they can transport a lot containers. Also it will reduce the price to consumer, because the cost of transport will decrease by the big ship. low labour cost as well, because there are only 13 crews which this case study mentioned. Also low fuel cost per container carried.
costs:
Build a biggest ship must cost a lot, also if a ship is very big, the speed will be reduce because when they want to pass some canal, for example Suez canal, they will use a lot of time. Also ore railway line needed. If they want to save money, the capacity of this ship must be full.
Then, I would like talk about if UK trade with China.
If UK trade with China, they can spend less money to import, also when they transport some products from China to UK, they can creates jobs for transport. Also it leading to lower cost push inflation, because the products from China is cheap which reduce the price of goods. However, trade with China might reduce the manufacture job in UK.

Cost benefit analysis

Kopied this, think it all is very important - Chapter three transport post of yesterday improved and longer :-)

Cost Benefit Analysis
Governments face difficult choices: do we build new roads or new rail track? Given limited resources how can government decide which projects to prioritise and build and which to reject?

Cost Benefit Analysis (CBA) offers a systematic framework for measuring and evaluating the likely impact of public sector project, takes into account both private and external costs and benefits over the entire life of the project.

Cost benefit analyses was used in the original M1 motorway, the third London airport, London's Victoria Line underground, and more recently Birmingham Northern Relief Road

CBA Worked Example: a project to build a toll bridge over a river:
CBA seeks to measure the value to society as a whole of the resources used by, and the benefits created by, an investment project such as a new toll bridge over a river over its expected life eg 25 years

Step 1: Economists identify all costs and benefits – both private and external:

Private Costs borne by the supplier eg construction costs, operating costs and maintenance costs

External Costs incurred by non users eg pollution, noise, loss of countryside,

Private benefits to consumers

- direct ie the amount consumers are prepared to pay eg the tolls paid as shown by the demand curve

- indirect ie consumer surplus – the difference between the toll and the maximum consumers are prepared to pay for a crossing

External benefits ie benefits to non users eg time savings for all travellers and fewer accidents

Step 2: Place a monetary value of costs and benefits

Height is measured in feet or metres. Economists measure benefits and costs using money as a unit of account. Economists estimate:

- Private costs eg Construction costs: £5,000, 000 to build the bridge; operating costs: say £200,000 a year; Maintenance costs: Repair and maintenance say £5,000 a year
- External Costs are more difficult to estimate. How do we value the effects of negative externalities such as congestion, accidents, noise, loss of countryside and air pollution?
- Private Benefits eg

1) Direct 1,000,000 journeys each paying £1 toll = £1,000,000 a year

2) Indirect consumer surplus eg £500,000

External Benefits eg time savings. What value do we place on work time saved or leisure time saved? Is the time saved worth the same to everyone? If 100,000 hours are saved and valued at £4 per hour, benefit = £400,000 Fewer accidents. Economists value human life using money! One life = £750,000. One limb = £80,000. If the bridge reduces accidents and saves on life a year, annual benefit is £750,000

Step 3: Estimate Future Costs and Benefits
The major costs of the project occur straight away eg £20m in Year 1
The benefits occur over the life of the project eg If the expected life of the bridge is 25 years consumers benefit by £1m a year now and for the next quarter of a century. However, how do we value now £1m of benefit in 25 years time? Economists use a technique called discounting to establish the present value of future benefits.

Present discounted value PDV is the value today of an expected stream of future net benefits ie costs – benefits for each year of the project discounted using the equation PDV = (B-C)/(1+r)n
The net present value of a future amount of money is the maximum amount you would be willing to pay today for the right to receive that amount of money in the future. Eg you may pay £100 today for the right to receive £1,000 in 10 years time.

Step 4: Is a Project worth Undertaking?

This involves establishing the present discounted value (PDV) of future costs and benefits
Present discounted value PDV is the value today of an expected stream of future net benefits ie costs – benefits for each year of the project discounted using the equation PDV = Σ(SB-SC)/(1+r)n where Σ is the sum of; SB is social benefits; SC is social costs; r the discount rate of interest used eg 5% and n the life of the project.
A project is worth undertaking if the stream of current & future benefits, exceed current & future costs ie PDV is positive.
If the government has to choose between competing prjects then the ones with the highest positive net present value should be undertaken.

The Limitations of CBA
A CBA is simply a money value estimating the value today of all the costs & benefits, both private and external, associated with a given investment project such as a new runway for Heathrow. The following qualifications need to be taken into account:

- Have all relevant costs and benefits been included? COBA ignores environmental impacts and so is not comprehensive

- Many external costs and benefits are hard to measure using money. What is the value in money terms of loss of a species of butterfly? For this reason, Dept of Transport Appraisal Summary Tables AST’s use qualitative indicators

- Is it better to use ex ante or ex post valuations? In the ex ante willingness to pay (WTP) method, £1 is assumed to be of equal value to different people. Equity issue: £1 means ‘more’ to a poor person than a rich one.

- What rate of discount is appropriate? Do current market interest rates reflect long-term social opportunity cost of borrowing?

- Uncertainty. How reliable are the forecasted costs and benefits? Is there a significant margin of error or risk in figures and projections used? Sensitivity analysis is used to try to take account of future uncertainty. This result in a rang of valuations depending on best and worst case scenarios

- CBA ignores the effect on income distribution of a project that creates ‘winners and losers’. CBA assumes the value of £1 is the same even where the rich gain at the expense of the poor from a proposed project.

Summary transport chapter 3

In the UK decisions in the transport are made by the private sector and by the government. The government decides about infrastructure investments and the private sector decides about the services.

Governments face mainly 5 problems in transport:

1) Capacity: current road, rail and air networks are unable to meet current demand at peak times.
2) Sustainability : Projected increase in car usage is unsustainable
3) Infrastructure: pas under investment means that public transport is badly maintained and characterized by poor quality and lack of choice.
4) Use of buses falling outside London. Mergers of bus companies following deregulation means a lack of competition, reduced services , higher fares and local monopolies.
5) The government is unsure if the electorate will accept road pricing or if the satellite technology for charging will work.
To face these problems governments make transport strategies. There are three main central themes where those strategies are based on:
1) Sustained investment over the long term. Spending by the Department for Transport is to rise by an annual average of 4,5% in real terms between 2005-8, a growth in real terms of 2,25% each year through 2015.
2) Improvements in transport management by:
- “Reorganising the rail industry to improve performance, drive down costs and get better value from public spending.”
- “Better traffic management will ease congestion on our road network.” By adding capacity to the road network, “sympathetic to the environment”. Options include road tolls and (stimulating) carpooling.
3) Planning ahead. “We cannot build our way out of the problems we face on our road networks. And doing nothing is not a option. So government will lead the debate on road pricing.”

Economic efficiency is about making:
- The best possible of resources ( productive efficiency) to
- Satisfy the maximum amount of wants (allocative efficiency)
There are kinds of efficiency that relate to time periods for efficiency:
1) Static efficiency is about how resources are used and products allocated at a given moment in time
2) Dynamic efficiency is about how resources are used and products allocated over time .
Productive efficiency in the short run
Productive efficiency can be defined alternatively as:
- Using the least amount of resources to produce a given good or service or
- Output is being produced at the lowest possible unit cost.
Productive efficiency occurs when unit costs of production are minimized and firms are producing on the lowest point of the lowest Short Average Cost (SAC) curve.



Production efficiency implies forms are using:
- The least costly labour capital and land inputs in both the short and long run.
- The best available technology
- The best production processes
- Exploiting all potential economies of scale and
- Minimise the wastage of resources in their production processes.
Productive efficiency in the long run


In this economies of scale the LAC curve slopes down until the Minimum Efficient Scale of output is reached and all potential economies of scale are exhausted. In the long run a firm can move from SAC1 to SAC2 by increasing the amount of capital used. In the diagram above, B is productively efficient; A is not
An important issue is at stake here: static analysis can ignore potential dynamic efficiency gains through economies of scale in capital intensive transport with a high minimum efficient scale and R&D for innovation

Allocative efficiency

Allocative efficiency:


Three types of allocation can occur:
- under allocation Occur on Qty of 10 units because the wants of the people are not being satisfied.
- Optimal allocation of resources. Occurs on Qty of 20 units because that’s exactly the market’s demand. (MPB=MPC= GBP 2)
- Over allocation . Occurs on Qty of 30 units because then there is being produced when MPC>MPB.

Allocative efficiency occurs when: PMB=PMC

Private marginal Benefit (PMB), the value consumers place on a good ie price , equals Private marginal cost , the cost of resources used up in producing that good ie marginal cost
Transport markets fail because:
- Operators and users fail to take account of significant externalities.
- Imperfect competition in a transport market eg in some regions local buses are a monopoly.
- Roads are a quasi public good ie to some extent non-excludable and non-rival.
- Railways are natural monopoly so a regulated monopoly is the best solution.

Integrated Transport

Integrated transport occurs when passengers and freight can easily switch between different modes of transport in a given journey. (E.G. Oxford’s Park&Ride)
Integrated transport policy:
- Helps passengers and freight switch easily between different modes of transport in a given journey. E.G. encouraging park&ride schemes outside towns and the use of containers to minimise inconvenience when switching model from ship to lorry or rail.
- Seeks to shift travel from the less to more sustainable transport modes and improvements within each mode eg cleaner fuels.
Private sector funding of transport
There are a few characteristics of transport investment:
- Transport investment especially in infrastructure is very expensive and measured in GBP billions
- Infrastructure has a life of 25+ years ie is long term
- The costs mainly occur in the early years while the benefits are spread over the life of the project.
- Transport infrastructures also create positive externalities.

Public Private Partnerships (PPPs) are joint ventures between private sector firms and public sector agencies. The Private Funding Initiative (PFI) is an example of PPP where:
- Private sector firms: Design, build and finance new projects.
- Public sector pays an annual charge for the completed project for 25-30 years; operates the network and ensures safety although the government is now proposing private sector management.

Arguments for Private Funding
The arguments for the Private Funding Initiative include:

1) Finances expensive projects that might otherwise not be undertaken. The government can invest in transport infrastructure, in the current time period, without raising taxes, increase borrowing or diverting expenditure from other priority areas such as education and health.

2) Offers better value for money than public funding by encouraging greater control of costs over the project's lifetime. Unlike public sector organisations, the private sector is motivated by the profit motive. There are incentives to be more technically efficient than the public sector resulting in cost savings. Eg:

- Penalty clauses act as an incentive for firms to finish projects on time and within budget
- As contractors are responsible for maintenance costs there is an incentive for initial high quality construction.
- Private sector firms are ‘better managers’ who can improve labour productivity.
- Transfers risk from the government to firms. Profit is the reward for risk taking. All engineering projects face uncertainty. Under PFI firms assume that risk.

3) Arguments Against Private Funding

1) Offers poor value for money. Private sector firms require high profits for assuming high risk Critics argue that increased profit margins exceed the potential savings from greater efficiency.
2) Increase the cost of borrowing. The government can borrow money at lower rates of interest than the private sector because there is less risk of default. PFI means higher interest repayments than if the cash had been borrowed by the Treasury. Eg London Mayor, Ken Livingstone argues that a £13m bond scheme is a cheaper source of finance than PFI.
3) Private sector firms seek high profits to cover risk. Engineering uncertainties often result in costly project delays or even failure. Critics argue the risk of over budget run is simply transferred back to the government by increased profit margins demanded by contractors to compensate for high risk
4) The government must act as ultimate guarantor. Ultimately the government has to intervene when private sector firms fail in transport. Liability for failure ultimately rests largely with the state. Eg
5) NATs After 11 September a 40% fall in long haul flights meant the government was forced to make a loan of £40m or risk a vital public service becoming insolvent.
6) Railtrack: the government has offered £500m to compensate shareholders having place the plc into administration

Fixed costs and variable costs in taxi company:



Operating costs are affected by:
- Load factor. The higher the load factor, the lower the average costs.
- Economies of scale. Fixed costs form a high percentage of rail sea and air operations. A large lorry or airplane allows fixed costs to be spread over a higher number of passengers or freight.

Calculating Private, External & social costs

Private cost Is the cost for someone. So for someone who drives to work it might be: variable costs such as petrol, depreciation from mileage and estimate the value of time used.
But there are a lot externalities involved. The external costs is the effect actions of someone has on third parties. E.G.:
- A car journey by a commuter causes congestion; air pollution; noise; accidents; climate change.
- Infrastructure projects such as a new motorway link can result in loss of rural land for current and future generations (sustainability issues); loss of natural habitat for animals; intrusion of landscapes.

Externalities :
- Are generated by first parties (consumers and producers)
- And affect third parties (someone who is not directly involved)
- The first party doesn’t pay an appropriate ‘compensation’ to others who are affected by their ‘selfish’ actions.

There are also positive externalities like a commuter switching from road to rail travel. (causing less congestions)


social costs



opportunity costs measures the cost of any economic choice in terms of the next best alternative foregone.

Private benefit has two components: Direct and indirect:
- Direct private benefit is measured by the total amount consumers pay. (price*Qty demanded) In this graph at 500*60 = GBP 30,000
- Indirect private benefit is measured by consumer surplus – the difference between the ticket price and the maximum consumers are prepared to pay for a seat – estimated in the graph at (100-60)*500*0,5 = GBP 10,000
The overall private benefit = Direct + indirect private benefit = 30,000+10,000 = GBP 40,000
Social benefits are calculated in the same way as social costs are:



There are two methods used to estimate the ‘price’ of externalities:
- Ex- ante (before the fact) valuations estimate the amount of money consumers are prepared to pay to avoid an externality.
- Ex-post (after the fact) valuations estimate the cost of putting right to the externality.