Rocket and Feather

Crude oil price over the last month:

Heating oil price over the last month:

Just sayin'.

Confusing two separate issues and tbus drawing the wrong conclusion

It is generally accepted (whether entirely true or not) that

a. Energy, mobile phone, broad band and insurance companies offer new customers discounts and overcharge continuing customers. Some people waste hours every year switching to a different company; and the companies then have the added hassle of closing old and opening new accounts. This is not proper price competition and does not make the companies/the economy more efficient, it just wastes a load of time.

b. Energy companies in particular enjoy a monopoly-cartel position and overcharge generally.

Problem a. is solved by banning new customer discounts i.e. expecting companies to offer the same price to new and continuing customers. This seems fair enough to me. Whichever companies have the most competitive price/service will gain market share naturally, as it should be.

Problem b. is easily fixed with a price cap. It's not difficult to set the price of electricity, gas or water so that providers still make a reasonable return, and the original privatisation was done on this basis. The most efficient companies will still be the most profitable. I don't see how this applies to mobile phones, broadband or insurance, that is proper competition IMHO.

Sam Bowman went off on a tangent in yesterday's City AM:

Even if you’re a savvy customer who remembers to switch insurance and energy providers every year, and cancel your mobile phone contract once you’ve paid off the handset, it’s a near-certainty that you have relatives and friends who aren’t. To many people, it’s too much of a hassle to switch, and the gains are too uncertain to bother checking.

This practice seems like a rip-off, and that was the motivation behind the energy price cap proposed by Ed Miliband and implemented by the May government at the start of this year.

No, that's confusing issues a. and b, which is where he goes wrong.

As critics of the policy predicted, the energy price cap is now being ratcheted downwards, so that more and more customers will be caught in it and the price discounts that energy companies can offer will become smaller and smaller. In telecoms, Ofcom has just reached an agreement with most of the mobile operators to curb loyalty penalty pricing in mobile phone contracts.

This may sound like a good thing, but trouble with price caps and contract regulations is that customer switching is good for efficiency overall. Customer switching forces companies to compete with each other and try to find ways of doing business more cheaply. Diminishing the rewards for switching means that fewer people will be willing to shop around, which weakens the incentive these companies have to improve.

Even if domestic electricity prices were fixed at a uniform price, companies would still have every incentive to generate electricity/supply gas as cheaply and efficiently as possible.

'Contract regulations' just means no new customer discounts/loyalty penalty. This reduces the amount of entirely artificial and unnecessary switching, but there would still be the incentive to switch to a cheaper/better provider. The overall competitive pressure would focus on price/service and not on pricing/marketing gimmicks.

The current regulatory approach tries to protect non-switchers by hurting switchers. That’s a dead end, making markets affected by it sclerotic, uncompetitive, and less innovative in the long run.

Neither policy a. nor policy b. 'hurts switchers'. They are entirely neutral.

A better approach may be to make switching easier, or even entirely automatic.

Agreed, but that is complementary to policy a. If companies aren't allowed to penalise existing customers with a 'loyalty penalty', they can't be allowed to penalise them with a 'leaving penalty' (to cancel out the other company's new customer discount). Gym's stay in business with savage leaving penalties, and that is not a healthy business model.

Or, they could just buy "male" razors...

From the BBC:

A Lib Dem MP wants to stop items such as razors or deodorants from being priced differently based on whether they are marketed at men or women.

On Tuesday Christine Jardine will introduce a bill to Parliament banning what she calls "a sexist tax"...

An investigation by The Times newspaper in 2016 found that women and girls were charged on average 37% more for clothes, beauty products and toys.

In the same year, a petition accused Boots of charging £2.29 for an eight-pack of women's razors compared to £1.49 for a 10-pack of male razors.

Roaming charge fun.

From the BBC:

A European Union (EU) law to abolish roaming charges for people using mobile phones abroad comes into force today [15 June 2017]. The new rules mean that citizens travelling within the EU will be able to call, text and browse the internet on mobile devices at the same price they pay at home.

I'm always wary about govt intervention in such matters, but in this instance, fair play to the EU, I can't see a downside.

We know that the price which people are willing to pay exceeds the actual cost of the satellites, or else mobile companies would not be prepared to pay such huge amounts of money for the radio spectrum. The surplus is 'unearned' income or rent. The question is, who gets the surplus - best is the government (as licence fees, quasi LVT); next best is the consumer (via capped prices) and worst is letting private companies collect it.

This has been a long time coming, from The Guardian, three years ago:

Roaming charges for using a mobile phone abroad will be abolished from December 2015 in proposals expected to be voted through the European parliament on Tuesday, but operators have warned that bills could rise domestically to pay for the change...

... a coalition of networks representing 45m consumers has warned that the legislation is so badly designed that the cost of domestic calls could rise to pay for it.

"There is a risk that domestic tariffs for European consumers will increase," according to the roaming coalition. "Roaming might not be subject to surcharges anymore, but the overall level of tariffs would increase, and non-roaming customers might effectively foot the bill for roaming customers."

Yeah right. We've covered that - prices are set by what consumer is willing to pay, not by costs. Domestic users are prepared to pay £x and not a penny more. They don't care what other people pay and for what.

The mobile companies have had years advance warning that this would happen, so if they are right, they would have been nudging up prices in anticipation. Have they?

Nope. Prices have been drifting downwards for years, see recent Ofcom report.

Disclaimer - I've no downer on mobile phones and mobile phone companies, they are brilliant. While they share a monopoly, between themselves they appear to be highly competitive. It's the landline people who take the piss.

Embedded rents

Continuing my occasional series, from The Daily Mail:

Retailer WH Smith has reported a two per cent sales increase in the first quarter of this year due to the success of its shops in airports, train stations and motorway services.

Sales across the newsagent's 750 outlets at transport hubs rose eight percent, including a two per cent boost from the weak pound on revenues at overseas stores.

This offset falling sales on the high street as same-store sales fell four per cent from March 1 to June 10, leaving like-for-like sales flat.

Which is the general trend - at airports, stations and so on you have a captive audience and can charge higher prices. The more mobile people are, the more potential customers you have. The selling price of consumer goods generally is fairly flat wherever you buy them, and the mail order internet companies are gently pushing down the base line price of normal consumer goods.

This applies to consumer goods that can be transported but not for services/goods consumed on the spot...

The wife and I watched Supershoppers on the telly yesterday.

It started with a good sequence on cinema ticket pricing, which illustrated all this. Cinemas charge more for films when they are first released than when they are near the end of their run; they charge more in the evening and at weekends and less during the week; they charge more in higher income areas than in low income areas (there's even a measurable difference between Richmond and Putney!); and finally, they charge more in the centre of large cities, so in London Leicester Square was nearly twice as much as in the Manchester Trafford Centre, which in turn was nearly twice as much as in Bristol.

The knock-on of this is that rents are correspondingly higher in areas where cinemas can charge large premiums. The higher rents don't lead to higher ticket prices; it's the other way round.

Wheeler Dealers - a good illustration of price setting mechanisms

We know that these programmes became more and more staged with each successive series, and the numbers don't add up etc, but there is still a lot of truth in them. Let's assume that they are true to life, the three stages are a good illustration of monopoly and competitive price setting.

Stage 1. Mike goes to see some 'classic car'. These aren't being made any more, so supply is fixed (and gradually dwindling) and prices are set purely by demand.

It's a variation of the normal supply/demand thing, the only reason why some of the cars they buy and sell are worth that much is because they are so rare. In one episode they sold a Bond Bug for £8,000, FFS. I assumed they'd jumped the shark, but if you look online, that's what the best ones sell for.

So Mike haggles quite ruthlessly. The seller only has one car to sell and wants/needs cash, Mike has cash but can walk away and buy something else instead.

(When Mike sells the car at the end of the show, it's exactly the same situation, no need to cover that one separately).

Stage 2. Mike gets the wheels refurbished and Mike or Edd get the seats reupholstered and/or the car body sprayed etc. They hardly ever haggle on the price because they know full well that if they fail to offer the market rate for labour, expertise, use of plant machinery and supplier's profit, then the work simply will not get done. Presumably they go to the supplier with the best price/quality mix, and the supplier knows it. When they make a half-hearted attempt at haggling, the supplier tells them to piss off, so they always cave in and pay asking price.

Stage 3. Finally, there are always some bits and pieces like a bumper or some trim which need to be replaced with original parts. The monopoly boot is now on the other foot with a vengeance. The stockist who happens to have an original bumper for exactly that model is in no hurry to sell, it's been on a shelf for years and could stay there indefinitely; but the stockist knows that his bumper is the only one available.

Mike sells cars to purists for top whack, but he can't sell the car to a purist without the pukka original matching bumper. Without a non-original bumper, he can sell for £10,000; with the bumper he can sell for £15,000, so the stockist who happens to have it can take a large chunk of the £5,000 uplift.

If you broke the car down into all its components and apportioned the £15,000, the bumper would be worth nowhere near £5,000 of course, more like £150, although he can easily sell it to Mike for £1,000.

Market forces, differential pricing, general hilarity

From the BBC:

Supermarket chain Tesco has cut the price of women's disposable razors to match that of a similar product for men. The move is a victory for campaigners who demanded an end to what they saw as sexist pricing on the high street.

Last year campaigners highlighted the higher price of many toiletries marketed at women compared to the lower price of similar goods for men. All of the big four supermarkets were criticised.

The mind boggles.

Do people genuinely not know that all disposable razors are more or less exactly the same (the only real difference is the number of blades), it's just that razors marketed at women are made with pink plastic rather than boring white? If some people are prepared to pay extra for the ones with pink handles, then why shouldn't retailers charge more them? If I were a woman unhappy with paying over the odds for the pink ones, I'd just buy the white ones instead rather than mounting some campaign.

Economic Myths: Cost-plus

The point of the post Economic Myths: Business Rates hike may force UK's shops to raise prices is that prices are set by where marginal revenue and marginal costs per unit happen to cross on the supply-demand chart.

Fixed costs quite simply have nothing to do with it. In the very long run, most fixed costs are actually variable costs. It is a question of fact and degree. But clearly rent and rates are a fixed cost for these purposes (from the point of view of the tenant).

The chart showed the supply-demand curves for monopolistic competition, but the same principles apply wherever a business is on a sliding scale between perfect competition and absolute monopoly. Most businesses are somewhere in the middle.

(Land ownership is a not a business for these purposes, that is a pure monopoly. By putting up and maintaining buildings, land owners act like businesses of course, they have a dual role and it helps if you don't confuse the two distinct functions.)

From the comments:

Dinero: However I don't see the relevance of the chart from Economics help.

Me: A change in variable costs per unit = changes the optimum price/output level. A change in fixed costs = has no effect. Business Rates and rent = fixed cost = have no effect. That is why the linked chart and article ONLY mention variable unit costs (or marginal costs or whatever you want to call them).

Dinero: The chart is a diagram of profit maximizing price setting for a monopolistic supplier (1). Retail is competitive market (2), where prices are a competitive level of profit plus variable costs (3) plus fixed costs.(4)

Wrong on so many levels.

1. Even with perfect competition, the market clearing price is where revenue and marginal costs per unit happen to cross on the supply-demand chart. Same for monopolistic competition, cartels and a pure monopoly. Fixed costs have no impact on prices; they affect profits.

2. Yes, bricks and mortar retail is competitive, but not that competitive. Most shops have their own niche, customer base or brands etc. And by occupying space (and crowding out competitors), most shops have some degree of local monopoly. Even if it were competitive, see 1.

3. That misses the whole point of the article and pretty much everything else you need to know about economics. With most industries without absolute barriers to entry and even with cartels, abnormal or super profits are competed away, so that prices end up at a level of what looks like cost-plus. This is not because each individual business decides to aim for cost-plus, it is because of the competition.

4. For 'fixed costs' read 'rent'. Rent is not a 'cost' in economic terms, it is an appropriation of the earned profits of the business. Profits (or the profits of potential other tenants) are what dictates rents, not the other way round!

I've done this one dozens of times.

Imagine a partnership running a business, the two partners share profits 50/50. One partner might secretly consider himself the senior partner and consider the other partner's profit share to be a 'cost'. It might be a cost to him personally, but it is not a cost to the business. Perhaps they change the profit share ratio to 60/40. Does that change what customers are prepared to pay or the optimum level of output of that business?

Does it heck.

In the same way, maybe this year, the landlord is taking half the profits in rent and next year ups the rent to 60% of the profits, makes bugger all difference to prices and output. That's a dispute between the business owner and the land owner.

In the same way, the local council takes a slice of the rent from the landlord (Business Rates). The business tenant, as 'customer' of landlord (who provides the building) and the local council (which provides pretty much everything else) couldn't care less how they split up the rent between them. Each tenant has his own pain threshold, if landlord and local council demand more than he is prepared to pay, that's it, he vacates the premises, end of.
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UPDATE: Dinero: And so the opportunity to set a price using a profit maximizing policy , marginal revenue vs marginal costs, is more or less removed by competition, and so the suppliers to the market are left with selling at the minimum acceptable profit plus the costs.

To reiterate: in a reasonably competitive market with sufficient reasonably well-informed consumers the market clearing price is still set by the basic rule tends to settle at, price = marginal revenue = marginal cost + 'minimum acceptable profit'. This happens to be the point at which - given the competition - an individual business (or indeed the whole industry) maximises its gross profit. Prices are NOT dictated by fixed costs. Gross profits dictate 'fixed costs' i.e. rent.

Nobody move or your holidays get it!

From BBC Reality Check:

Claim: Leaving the EU would make an average holiday for four people to the EU £230 more expensive in two years.

Reality Check verdict: It would be reasonable to expect a weaker pound to make foreign holidays more expensive, but it is hard to predict a precise figure.

We do not whether and by how much GBP would fall (or rise) relative to EUR post-Brexit, if it were to fall, then yes, the GBP price of holidays in the Euro-zone would go up slightly. Big deal. The amount you spend on a holiday is a fairly arbitrary figure, you can always go self-catering instead of full board; or camping instead of a hotel; or eat McDonalds not a four-course with wine; go for a walk or to a museum instead of to a theme park etc. Over the years, GBP has been a lot lower relative to EUR than it is now, and people still went.

But exchange rates are just one factor in the price of holidays.

As we well know, resorts set prices according to demand, and it is significantly cheaper during term time than during school holidays, so we could more than alleviate this perceived problem by having more flexible term times, i.e. having school holidays at a time when most other European countries don't.

Which brings us to this article from The Daily Mail:

Tourists are facing a shortage of sunshine holiday spots this year as British families turn their backs on previously popular destinations.

Travel agents say that thousands have switched to ‘safe haven’ resorts such as Spain, Portugal and Italy – apparently in response to terror attacks elsewhere.

However, there are simply too few hotels, apartments and villas to cope with the surge in demand. Even if people can find a holiday in Spain, analysts suggest they are paying a ‘safety premium’ of up to 20 per cent compared to destinations including Tunisia and Turkey.

Surely this will also push up prices and by considerably more than fluctuations in exchange rates?

Economic Myths: "House prices slashed to lure foreign landlords"

Emailed in by MBK, from The Times:

Housebuilders are offering discounts of 15 per cent to 20 per cent to entice investors into the British residential property market amid fears of a slowdown prompted by the buy-to-let stamp duty premium and forthcoming EU referendum.

Chris Lacey, head of residential investment at CBRE, said he had recently been involved in “three or four” deals in central London with a gross development value — value when built — of between £150 million and £250 million, in which institutional investors had bought packages of 100 apartments or more at a discount of up to 15 per cent.

For a start, they are talking primarily about flats, not houses and 15% - 20% is not 'slashed' in a market where prices have been rising at 10% a year for decades.

The main point is that this is quite normal practice for speculative builders.

The article mentions that the developer can "de-risk" (i.e. he doesn't have to worry about future price fluctuations, which is part of the reason for the discount, an equally important factor is the interest saving.

Developers have to finance the construction somehow. They could pay the bank ...% interest each year for the two or three years that the development takes or they can just pre-sell at a 15% - 20% discount meaning they get more of the sales proceeds up front (usually staged payments as buildings are completed).

A further point to note is that developers like bumping up official asking prices to above market values and then giving notional discounts or offering "Stamp Duty paid and free carpets" or whatever.

Finally, it has nothing to do with 'foreign landlords' either, they'd be happy to give anybody that sort of discount, especially if they are buying in bulk.

Ocado - Fun With Numbers

From The Telegraph:

Ocado has posted a jump in its first quarter sales but failed to provide an update on its renegotiations with Morrisons or its postponed overseas technology deal.

The online grocer, which also sells Waitrose goods, posted a 13.8pc rise in sales to £252m during the 12 weeks to 21 February.

"We are pleased with the steady progress in our business, maintaining double digit sales growth in a retail environment that remains challenging, and post period end we shipped over 250,000 orders in a single week for the first time”, said Tim Steiner, chief executive.

The average number of orders a week also rose by 16.9pc during the quarter to 214,000. However, the cost of an average basket fell for the tenth quarter in a row by 2.9pc to £111.41*.

So what if the average order size fell? Stick those numbers in a spreadsheet and work backwards, you could say that Ocado's retained its existing 191,600 weekly orders @ £115 each, and added another 22,400 @ £83.

This might well be an example of price skimming, i.e. early customers are prepared to place larger orders, so if Ocado then drops its delivery charges, it can gain additional customers for whom it is worthwhile placing slightly smaller orders. As long as the new smaller orders are still profitable, then good for Ocado.

* I'm not sure that's even true. In September 2014, Reuters reported as follows:

British online grocer Ocado reported gross retail sales rose 15.5 percent in its fiscal third quarter but average order size fell as competition increased in the business. Gross sales rose to 218.5 million pounds ($354 million) in the 12 weeks to Aug. 10, compared with a rise of 15.6 percent in the first half, while average order size fell 1.7 percent to 111.64 pounds.
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On a related note, Her Indoors mentioned recently that Tesco have higher delivery charges depending for more convenient delivery times. My son (who is good as spotting these things) pointed out that this was just like airline tickets - very early and very late flights are much cheaper. I inevitably added that this was a pure rental charge.

Good article about demand-priced parking.

From Xerox.com:

Why does parking matter so much? What’s the impact of parking on city architecture and quality of life?

In most cities, the footprint of parking is bigger than that of any other land use. Parking spaces are also the most uniform and most frequently rented pieces of land on earth…

Cities should charge the right prices for on-street parking because charging either too little or too much can do great harm.

If the price is too low and no on-street spaces are vacant, drivers searching for a place to park will congest traffic, waste fuel, and pollute the air. If the price is too high and many on-street spaces are vacant, adjacent businesses will lose customers, employees will lose their jobs, and cities will lose tax revenue.

Consequently, the right price for on-street parking is the lowest price that can keep a few spaces open to allow convenient access for motorists. This is the Goldilocks principle of parking prices.

The London Green Party's "fair fares" idea.

This idea has some appeal:

Our three key measures are:
* the phased introduction of a flat fare structure, making zones a thing of the past, with the immediate abolition of zones 6 and 4,
* justice for part-time workers, with a daily cap that matches the rates paid by monthly season ticket holders
* a new 'ONE Ticket' allowing changes across all modes to close the gaps for people who currently pay twice when changing from bus or train to the Tube as well as ensuring that people changing buses pay only once for their journey.

"It's not fair that people in outer London pay so much more to get to work in the centre of the city - especially as it's also easier for people in the centre of town to use even cheaper or free alternatives such as hire bikes, cycling or walking," says Sian Berry, the Green candidate for Mayor of London.

Instinctively, it makes sense to make people pay more if they travel longer distances, but with local transport, people aren't paying for the distance as such, they are paying to get to work, mainly in Zone 1 or 2, or to get into Zone 1 for an evening out or to go shopping.

Currently, annual season tickets cost this much:

Zone 1 only - £1,296
Zones 1-2 £1,296
Zones 1-3 £1,520
Zones 1-4 £1,860
Zones 1-5 £2,208
Zones 1-6 £2,364

That's pretty flat already - a journey within Zone 1 is probably less than a mile, from the outer reaches of Zone 6 into Zone 1 is about fifteen miles, but it only costs twice as much.

But people don't pay to sit or stand on a train or a bus. It's a burden rather than a pleasure.

You could easily argue that Zone 1-2 prices should be higher than Zone 1-6 prices. If Journey A gets a commuter into town in five or ten minutes, then that's a much better service that Journey B which takes three-quarters of an hour to get you into town. That's exactly the same as rents being higher nearer the middle of town - people are paying their landlord for shorter commute times; why not have them pay the body actually providing the transport?

But it would be interesting to see what happens if there were a flat season ticket price of averaged out £1,860 or something. I strongly suspect that the behaviour of people in Zones 2 to 3 would not change that much, they would just pay the extra £300 or £600. Perhaps a few people in Zone 1 would walk to work instead? I also doubt that a £350 or £500 annual saving would encourage many more people to commute in from Zone 5 or 6. The only way to find out is to do it.

Another thing worth mentioning is that Transport for London's income is roughly half ticket sales and half subsidies. Rental values are a function of ticket prices, so a subsidy to travel is a subsidy to landlords. If the subsidies were abolished, an annual season ticket would cost around £3,500 a year (wild guess).

That would push down rental values by the same amount, i.e. instead of a working couple paying £18,000 a year rent and £3,500 for two annual season tickets, they would end up paying £14,500 rent and £7,000 for tickets. This effect would be stronger near the centre and less so on the outskirts, so abolishing the subsidies would be an indirect and slightly crude form of Land Value Tax on London landowners, as well as being a corresponding saving for taxpayers everywhere else in the country. So win-win, I think.

Burger King's rather puzzling pricing policies.

Yesterday I bought a "Bacon double cheese XL burger" meal*, which is £6.99, plus 60p to 'supersize' it, in other words get a few extra chips and a drinks cup the size of a bucket.

It wasn't really enough, so today I just got two of their £3.79 "Big King" meals, as a result I got a lot more food (four burgers and even more chips) for one penny less. The lass behind the counter happily swapped the two normal sized cups for a bucket-sized one.

Strange. You'd expect the reverse to apply.

* Off limits for Hindus, Jews and Muslims!

"Danny Alexander to call for fuel price cut"

From the BBC:

Major petrol and diesel distributors are to be called on by Chief Secretary to the Treasury Danny Alexander to drop their prices further in light of recent declines in the cost of oil…

"The public have a suspicion that when the price of oil rises, pump prices go up like a rocket. But when the price of oil falls, pump prices drift down like a feather."

While no research supports this, the thought of this effect creates ill feeling, he will say.

To their credit, the BBC give comparative figures for then and now, as follows:

Oil/barrel (159 litres) - $115, $84
$ per £ - 1.72, 1.60
Pump price/litre - £1.36, £1.24

So in GBP terms, one litre of crude oil cost 42p in June 2014 and 33p now, a drop of 9p. Pump prices should fall by 20% more than that = 10.8p. Prices have actually fallen by 12p.

But the Ginger Rodent is addressing the "Highlands & Islands Branch of The Energy Institute". From personal observation, pump prices appear to be inversely proportional to population density*, so quite possibly people in the Highland and Islands are seeing smaller price falls**?

* Because of (in no particular order) higher transport costs; smaller rural garages having to spread the same fixed costs over smaller sales volume; there being fewer competitors. It's quite bizarre. We drove along a five mile stretch of road out of London last Saturday, petrol is £1.20 a litre at one end and £1.26 at the other.

** Richard T in the comments confirms: "If you travel north on the A9 beyond Inverness, you will notice that by some magic of the fuel market, petrol and diesel suddenly become up to 10p a litre dearer once the Dornoch Firth is crossed."

Seems fair enough to me.

From the BBC:

Drivers are being charged different prices online for the same car rental based on where they live in Europe, the European Commission has said.

Charges vary for some motorists, even if they are picking up the same vehicle from the same location and from the same hire company.

The Commission said that price discrimination based on residence broke the rules of the EU's single market...

The Commission highlights one case in which a German driver searched online for a vehicle to hire in the UK. When the driver filled in Germany as country of residence, the price doubled.

OK, car hire companies make a reasonable profit (£50 a day? 100 a day? It's ages since I hired a car) from the well behaved drivers who return the car on time and without damage. Clearly, that income has to be averaged out over days when the car remains on the forecourt, and they can only get top whack for hire cars which are fairly new, so knock off depreciation etc.

The problem is, it only takes a pinch of shit to spoil a bucket of porridge. If a car hire company loses one car in ten every year (or one in five, or whatever it is), that eats up most of their profit from the well behaved drivers.

These companies have records on which cars went missing, or were badly damaged but the driver disappeared and we can safely assume that these records show that 'foreign' drivers are a worse risk (remembering that British drivers are foreigners in most countries). That extra they have to pay is like an insurance premium.

If this were not the case, then the companies would undercut each other down to the level where the premium for foreign drivers is lower.

Or possibly they are operating a cartel and genuinely ripping people off? Who knows?

A solution to the passport problem

From the BBC

Hundreds of passport workers across the UK have gone on strike in a dispute over staff numbers and pay.

The Public and Commercial Services Union (PCS) said the action was a "bid to end staffing shortages that have caused the ongoing backlog crisis".

Home Office data suggests about 360,000 applications are being processed - but it is not clear how many are overdue.

The Home Office said 875 PCS members had walked out and warned the action could jeopardise people's holidays.

Well, of course the PCS wants more (unionised) passport workers. The government would like less of them, but the passport application creates a backlog.

So, here's an idea: have a "summer" price for a passport and a "winter" price for a passport. Make it say, £5-10 cheaper if you buy one between September and March than April to August. Many people don't bother until just before they go and have no incentive to do otherwise. Give them an incentive, they might get a passport earlier and stop the crazy queues. And anyone who suddenly desperately needs a passport in July can easily get one.

Reader's Letter Of The Day

From City AM:

[Re: Holidays cost more at peak times. The reason is basic economics, yesterday]

My argument is that companies don’t charge “extra” during school holidays. That’s the normal price. Instead, they offer discounts out of season.

Mark Wadsworth

I would have normally put a :-) at the end of that, but it didn't seem appropriate.

"Facebook 'praise' for term-time discounts sparks campaign"

From the BBC:

With about 250 friends on Facebook, childless Paul Cookson did not expect "praise" he posted to have much impact. He wrote that he was "delighted" to be offered "discounts" by tour operators who reduced their prices outside school holidays and other peak times.

A few friends agreed, and followed his request to "share this post if you have also taken advantage of term-time discounts". It soon went viral, and more than 143,000 people have shared it so far.

"It's more fun behaving like a big kid when there are no actual kids watching!"

Supporters also began signing an online petition calling for the government to recognise the industry's achievements in the New Year Honours List and this has now gone far beyond the 100,000 signatures needed for a possible debate in Parliament.

Mr Cookson's initial post, entitled "In praise of term-time discounts", noted that non-parents were "rewarded" for doing the right thing and not taking their holidays during the busy school holidays. It came about after he got a great deal on a holiday for him and his long term girlfriend, with whom he has no children.

"Term-time discounts and no screaming kids? What's not to like?"

He told the BBC he was stunned by the response on Facebook, with many people encouraging him to "carry it on and fight". So the 41-year-old set up a Facebook group called Term Time Discounts, in which many other childless people - young and old alike - have shared examples of great value getaways.

One of the group's members posted a link to the e-petition, which is entitled: "Thank holiday companies for giving us cheap breaks during off-season!"

Land, oil, gas, rents, price caps etc

1. The knee-jerk industry response to Red Ed's musings about price caps for energy prices was that "We can't help it if world market prices for oil and gas go up, if you impose price caps that's tantamount to forcing us to sell at a loss and we'll have to shut down".

Well, maybe they would, maybe they wouldn't, but that is only if the UK were to do this in isolation. Because while the world market price (WMP) for oil or gas (O&G) is whatever it is, that price is far in excess of the actual cost of getting it out of the ground (AC); so any price cap which Labour dream up would be lower than WMP but higher than AC.

But what if most governments formed an oligopsony and agreed a universal price cap: nobody is allowed to pay more than $x for a unit of imported O&G? As long as $x is in excess of AC, then we can assume that exporters will continue exporting as they can still make real profits.

2. This leads me to my next topic, which is the truism that when the economy does better, demand for O&G increases disproportionately, and because supply is relatively price insensitive in the short or medium term, O&G prices increase super-proportionately.

Which is a vicious circle for importing countries. Let's say that at current GDP levels, 5% of our GDP output (call it £1,500 billion a year) is spent on importing O&G (call it £75 billion a year).

If GDP goes up 10% to £1,650 billion, then O&G prices go up by a lot more, say 20%, so we are now importing 10% more OG at a 20% higher price, £75 billion x 1.1 x 1.2 = £99 billion, which is 6% of our GDP; or £24 billion of that extra £165 billion GDP (15%) disappears abroad, to be recycled when exporting countries buy up assets in the UK.

3. Economists tend to see land/location rents and O&G prices as two separate topics (apart from those insane economists on far left and far right who deny that land rents even exist), although they both come under the same general heading of "land" or "natural resources". Land Value Taxers agree that both are suitable subjects for taxation, but also tend to see them under separate headings, or suggest taxing them for subtly different reasons.

But remember that land/location rents are merely a function of average net wages minus the costs of a basic minimum living standard; so a small percentage increase in GDP or wages leads to a much larger percentage increase in land/location rents - even though the landowner's actual costs (AC) have not changed and what he is providing has not changed (he is sub-licensing the same government-granted exclusive right to access to land).

Similarly, O&G prices are a function of how well the global economy is doing, and the costs of extraction are fairly fixed, so a small % improvement in global GDP leads to a larger % increase in O&G selling prices and, mathematically, an even larger % increase in the pure profit/rental element (WMP minus AC).

So ultimately it is the same thing - if the economy grows, landowners get a larger and disproportionately larger share; and O&G exporters get a larger and disproportionately larger share. If your landlord is a Russian or Saudi Arabian, it's all the same as far as he is concerned.

4. Finally, price caps.

Let's apply the logic from Part 1 above to land/location rents. Although most housing market commentary talks about changes in selling prices, it is rental values which drive the markets, they are the Maypole around which house prices dance.

We know that while rent caps work in the short term, in the medium and long term they lead to all sorts of unwanted side effects.

But what if the boot were on the other foot? What if we look at the demand side, not the supply side?

In other words, instead of the government preventing individual landlords from charging "market rents" (being average local net wages minus basic living costs), the government made it illegal for any tenant household to spend more than 10% of its gross income on rents, or for first time buyers to spend more than 10% of their gross income on monthly mortgage repayments?

It wouldn't actually need government action if tenants/first time buyers themselves would wake up and organise themselves, i.e. form an oligopsony and agree among themselves that "nobody pays more than ten per cent on rent"?

5. For the sake of this discussion, let's assume that the average tenant household in the UK pays £9,700 in rent and the average tenant earns £28,000. On average, a tenant household has one-and-a-half earners, so has gross income of £42,000.

If only a small number of tenant households did it, then they would have to downsize, but what if every tenant household did it? They can't all be forced to downsize. Every landlord would want to attract the highest-earning tenant household (as at present) but the highest-earning tenant household in turn would want to live in the nicest house.

So our high-earning tenant household with gross income of £100,000 now know that they only have to pay £10,000 a year in rent instead of £20,000 or £30,000. Their landlord will be a bit miffed, and when the tenancy comes up for renewal, he will try and find a tenant household earning £110,000; but that even higher earning household will only be paying £11,000 for something much nicer so won't want to down-size etc.

The upshot of all this is that gross rents will fall by half or so; our average tenant household will be paying £4,200 for an average sort of house which costs the landlord a lot less than £4,200 to maintain and insure, so he is still making some money; but pure land/location rents, the excess of gross rents over actual costs will fall disproportionately (to a few hundred pounds per home per year in most places).

But - and this is the important point - very, very few tenant households would end up moving. The highest earners remain in the nicest homes, the average earners in the average homes and the lowest earners in the cheapest homes. So the allocation would still be a free market allocation - if you want to live somewhere nicer, then try and get a better job or a promotion, or do more overtime etc.

6. Remember, this is a cultural thing.

There is no hard and fast rule on what a basic minimum standard of living is, we can only work out the annual cost thereof by observation, even though we do not know what this basket includes (and it is almost certainly different things for different households).

If it simply became tradition or custom that "nobody spends more than ten per cent on rent" then the amount spent on "everything else" would go up accordingly and over time, this would become the new basic minimum. We know that output would increase (less money disappearing into the LMBH) and with higher output, unit costs would decrease (same fixed costs divided by larger number of units of output).