With ever increasing global focus on shifting energy production away from non-renewable energy sources to sustainable and renewable energy production, tidal lagoon systems have the potential to revolutionize the UK renewable energy sector. In essence, the Swansea project will be the world’s first ever tidal lagoon system, functioning through the utilization of incoming and outgoing tides in order to rotate a bank of 16 hydro turbines, a process that will generate enough electricity for 150000 homes (The Guardian, 2017). Harnessing the potential energy provided through abundant tidal resources could prove particularly beneficial for the British economy in the long run with employment creation, exports and economic growth all likely economic benefits arising from the development of the technology. However, critics argue that the short term cost of producing electricity through a tidal lagoon system places the average consumer at a disadvantage by virtue of increased unit costs of electricity in the short term that will arise because of the initial capital investment. Additionally, the elevated price of electricity will considerably expand costs of production for firms, providing a major disincentive for business growth in a UK economy already struggling for private sector investment (Telegraph, 2013), a scenario that could be detrimental for the long run welfare of the British economy. Tidal lagoon systems also have their own undesirable effects on wildlife and coastal habitats (Messenger, 2016) which may hurt industries that rely on the raw materials provided by the coastal ecosystem, including fishing and tourism, a negative externality that the U.K simply cannot afford in the current economic scenario. The potential government investment in this project therefore must require a careful analysis of the true social benefit and social cost of tidal lagoon systems to the domestic economy, as well as a definite focus on whether to prioritize the long term gain over the short run costs.
One of the key judgements in favor of investment in tidal lagoon systems is the external benefit of job creation in the renewable energy sector. The initial investment in the development of six tidal lagoon systems is expected to contribute an average of 12700 direct full time equivalent (FTE) jobs over the 12-year construction period, while operating these lagoons would create up to 240 direct FTE jobs in operations and maintenance per site (Cebr, 2014). Furthermore, the raw materials are expected to be locally sourced and the supply chain will be domestically orientated, meaning that the economic benefits generated from the construction will be felt within the Welsh economy. The advantages of this job creation for the economic welfare of the UK are apparent, with growing consumer incomes and higher levels of discretionary spending in the economy providing a major boost to flagging UK aggregate demand in the form of increased consumption of goods and services. An exponential increase in consumption can lead to the development of a multiplier effect, enhancing the productivity and profitability of many sectors within the British economy.
A point of contention is that boosting the level of aggregate demand in the UK through enlarging consumption levels may have a negative long term impact for a British economy that seeks to place more emphasis on private sector investment due to the fact that increased private sector spending on capital goods and labour retraining schemes in the short run is balanced out in the long run by an increase in aggregate supply because of an increase in the quality of factors of production, whereas developing consumer expenditure is not accompanied by the same direct growth of the economy’s potential output. Nonetheless, it is increasingly obvious that the UK requires additional government spending and consumption in the short run to boost economic welfare in a flagging economy, especially when taking into account that the relatively high average Marginal Propensity to Consume of U.K. citizens at 0.43 (Bunn, 2012), a value greater than the majority of the UK’s European Union neighbors (D.Carroll, 2014), means that there is high possibility of both an increased multiplier and accelerator effect in the nation, factors that will lead to both short run and long run net economic growth
Careful management of the investment in tidal lagoon systems can benefit the macro-economy through a dual increase in aggregate demand and long run aggregate supply for the UK, therefore this policy can be seen as both a supply side initiative and as a fiscal stimulus. Despite this, the key assumption in the scenario is that the spare labor capacity in the UK economy is suited to employment in the newly created jobs. The benefits are clearly felt if the assumption is correct, however if the local labor supply for these jobs is not enough to meet the requirement there will be excess demand which may prove detrimental for both the project itself and the UK economy. A reduction in quality and efficiency are both possible outcomes because individuals may be shoehorned into jobs that they do not possess the required level of specialization for and trained workers may be forced to work longer hours to allow the success of the project. Furthermore, there is the additional macro-economic effect of inflation which is not accompanied by an increase in the productive potential of a country, which may lead to potential stagflation, as rising price levels can lead to a negative multiplier because a consumer’s marginal propensity to save increases during periods of high inflation, and the resulting stagnant aggregate demand will have its own long term effect on the aggregate supply of the UK economy, exacerbating the negative effect.
The U.K has faced a consistent trade deficit since 1994 and currently faces a deficit of around £3.7 billion (Trading Economics, 2017). Imports of fuels for the production of energy accounts for a large proportion of the UK’s imports, with around 47% of the UK’s energy supply made up of imports (Office for National Statistics, 2016) and as the demand for electricity begins to increase after a period of decline the UK’s reliance on fossil fuels such as coal and gas to produce their energy will cause their trade deficit to worsen. Therefore, an argument for tidal lagoon systems is that they provide the UK a critical chance to become increasingly self-supporting in terms of energy production. It is estimated that the renewable energy produced by the tidal lagoon systems could reduce fossil fuel imports by as much as £0.5 billion per year by 2030 (Cebr, 2014) and the increased self-reliance on energy is a clear positive for the UK. Energy security, especially in the face of current geo-political situations within Europe and the Americas, can lead to substantial benefits for the United Kingdom in terms of sustainable economic growth and inflation, meaning that the government will be able to exercise more control over their macroeconomic objectives, which have historically been dependent on the economic conditions of the European Union and other energy exporting nations.
There is also a valid possibility of increased exports from the U.K, especially from the manufacture of steel and machining components, in fact it is predicted that efficient energy production could even lead to export revenue generation of around £0.28 billion by 2030 (Cebr, 2014). Investing in the system now can ensure that the UK becomes a pioneer in a burgeoning industry, just as Germany was able to become a leader in wind energy production. Current energy exports from the UK amount to approximately $33.4 billion (OEC, 2015), however the majority of these exports are refined petroleum, crude petroleum and petroleum gas extracted from the North Sea, and the production of these sources of energy will decrease in the long term as easily accessible crude oil sources deplete. The development of renewable energy resources, such as tidal lagoon power, that are available for export are a key source of economic growth and have long term upside, as the developed world continues to seek more renewable energy production (Bapna, 2016) to quell the risk of an environmental crisis.
However, while it is apparent that the investment in the tidal lagoon systems may provide an opportunity for a balance of trade on the current account in the long term, focus must be placed on the short term cost in order to allow this to happen. At present the projected statistics from the Swansea Bay project show a cost of approximately £22 million per Megawatt of energy (Mearns, 2017). In comparison, Hinkley C, a notoriously expensive nuclear power station, has a projected per unit cost of £6.6 million (Mearns, 2017). The difference in costs highlights a potential problem for the U.K, in the short run the price of the energy produced from the tidal lagoon systems will be far higher than other alternatives, including other renewable energy sources, and in the current drive for efficiency firms will not choose to purchase sources of energy with such a high price, whatever the long term gain as they aim to compete with other firms for increased market share in the short run to ensure survival and growth. As firms are uncertain about the motives and actions of their competitors within the market, it is highly unlikely firms will take a heavy risk through purchasing energy produced from tidal lagoon systems. Hypothetically the government could mitigate the effects of this analysis by applying certain regulations, for example forcing firms to purchase tidal lagoon energy, however this in itself will be disadvantageous as it provides a disincentive for business growth in the U.K and as per the law of unintended consequences may lead to a drop in U.K exports as firms working in the already marginalized secondary sector look to shift production away from the U.K, creating job losses and worsening the trade deficit, hence harming the U.K’s global competitiveness.
As with most infrastructure development projects, an assessment of the environmental impact of the tidal lagoon systems is key in coming to a conclusion on the utility of the system. The Swansea lagoon system is predicted to generate enough clean energy to satisfy 11% of the electricity consumption in Wales, while it is claimed that around 236000 tonnes of carbon emissions would be saved each year (Messenger, 2016). Reduced carbon emissions in particular are a key advantage of the tidal lagoon system, in particular as the U.K struggles to meet its emissions objectives as set out by the Paris Agreement signed in December 2015 (University College London Energy Institute, 2017). In particular, the U.K can use the technology to become a leader in the ongoing drive for net carbon neutrality, and consistent development and innovation within the construction methods of the lagoon systems will ideally lead to a cheaper and more environmentally friendly energy production system. Moreover, taking an environmentally friendly political stance is bound to increase the political capital of the current government, enabling it to look towards other long terms solutions for sustainable energy security, whilst firms that are reliant on environmental resources will also be more secure in the long run, provided that they operate sustainably. Unfortunately, the tidal lagoon system is projected to have a negative impact on the local habitat during its initial construction, meaning that its construction will harm the flora and fauna in local regions. This can potentially lead to regional economic issues for industries that rely on the plants and animals within the area. Problems highlighted around the Swansea project itself are based around the fact that the technology could lead to lower populations of salmon and sea trout in the area, which will be detrimental to the fishing industry operating around the rivers in Swansea and Neath (Messenger, 2016). Developers have argued that the chances of major impact on the Swansea fishing industry is negligible, yet it is fairly clear that expansion of the tidal lagoon system throughout Britain will have a clear impact on the overall marine ecosystem. This effect is only exacerbated when it is considered that the tidal lagoon systems will need to be fairly large in order to produce meaningful levels of electricity, indeed the breakwater wall itself is built out from the shore in a six-mile-long loop.
The development of tidal lagoon systems as a feasible technology is still in process, with construction of the Swansea Bay project estimated to become operational by 2019 (Cebr, 2014). A recurring theme within the analysis of the system as a sustainable alternative to fossil fuels is that the majority of benefits will be felt in the long term, especially for consumers and the domestic economy, whereas the costs will be experienced in the short term. It remains to be seen as to whether the Conservative Government will consider the long term benefits as a suitable incentive to cover up their short term loss of political capital, especially with the current lack of funding to primary needs including the education and healthcare systems. However, in terms of long term energy security and the move away from a carbon fueled economy, a combination of renewable resources must be utilized efficiently, and tidal lagoon systems certainly have the potential to be cost effective and sustainable providers of energy to power the UK economy. In terms of the impacts of the Swansea project itself, the system will ensure greater prominence for a struggling and marginalized Welsh economy, whilst also leading to a more developed and innovative energy sector within Wales that will be able to utilize the considerable levels of all renewable energy sources within the nation. Critics are correct to assume that their will initially be a larger unit cost of electricity for businesses and households, while the provision of government subsidies will take up a sizeable portion of the federal budget, however the potential in harnessing and leading an innovative industry is well worth the risk.
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An Argument of Fairness: Should those who are purposefully ‘unhealthy’ be allowed to receive free services from the NHS?
In our newest segment, titled 'An Argument of Fairness', we will be examining a range of social policies implemented by governments across that have been targeted for being an inefficient use of funds. Within the segment we will examine whether these policies are justifiable, in both an economic and a social sense. The first entry will be analyzing the National Health Service in the UK and whether it should provide its services free of charge for those who are purposefully unhealthy.
Through healthcare provision to all citizens of the United Kingdom, the NHS practices what is preached in its constitution, which states that ‘nobody is excluded or left behind’, vowing to provide medical assistance to all those in need, and more importantly, at absolutely no cost, (NHS, 2012).
An argument amongst those in disagreement with this ‘everyone – included’ ideology is that of deserve. Certain brits simply believe that recipients of the taxpayer-sponsored service who take advantage of it via an unhealthy lifestyle simply do not deserve this ‘commodity’. The NHS expends more than £11 billion a year treating preventable illnesses caused by smoking, alcohol and general inactivity (Public Health England, 2016). With a total commissioning budget of £105.8 billion (NHS England, 2016), it can be calculated that the expenditure on preventable illness comprises more than 10% of the total budget. Although seen by many as abuse of the UK’s healthcare system, there exists countless reasons as to why the inevitable discrimination against those who lead what one may regard as an ‘unhealthy lifestyle’ must be prevented.
In reference to a study conducted at Columbia University, it is asserted that “About 18% of a citizen’s income tax goes towards healthcare” (Chang, Peysakhovich, Wang, & Zhu). Assuming the income of smokers does not differ from non-smokers, and that the annual income tax revenue is £168,451 million (HM Revenue & Customs, 2017), one can estimate that the NHS receives a total of roughly £5.8 billion pounds worth of income tax from smokers, as approximately 19% of UK citizens smoke regularly (Office for National Statistics, 2014). The healthcare cost per capita per annum in the UK totals at about USD 3235 (OECD, 2015), approximately £2580, meaning that if the UK population is taken to be at 65.1 million (Office for National Statistics, 2017), the approximately 12.4 million smokers cost the NHS £3 billion. This cost is significantly lower than the revenue generated for the NHS through taxing their incomes, illustrating that imposing payment for healthcare would not lead to a gain but on the contrary, a loss, as it would follow that removing their healthcare benefits would also mean that they are no longer taxed that 18%.
In response to the aforementioned statistics, it is frequently contended that the reasoning behind the high per capita cost of healthcare in the UK is primarily due to the extra costs incurred from unhealthy individuals; in other words, smokers and drinkers cost the taxpayers money. Many claim that if it were not for those who make these poor lifestyle choices, the per capita cost of healthcare, as well as income tax rates would be lower as the NHS would require less money to treat their illnesses. This could, in return, stimulate an increase in productivity within the UK due to the lowering of tax rates, resulting in a subsequent increase in consumer discretionary income. Moreover, it may also stir a quasi-laffer effect, ultimately leaving the government greater funds which could be directed towards education subsidization and infrastructure investment. Now, whilst this may seem like a reasonable claim to put forward, the following evaluation of the duties imposed on these demerit goods indicates otherwise:
In addition to the 20% Value Added Tax paid by consumers in the UK, cigarettes also receive an additional tax at 16.5% of the retail price, as well as £4.16 per packet of 20 cigarettes (GOV.UK). In the 2014-15 fiscal year, tobacco duties generated £9.3 billion, and duties on beer/cider, wine and spirits generated a total of £10.5 billion (Levell, O'Connell, & Smith) ,therefore a total of £19.8 billion altogether to the government, a value much greater than the approximate £11 billion spent by the NHS to treat preventable illnesses. Thus, one may conclude that those who lead these lifestyles have in a sense paid the government back their due, accounting for NHS costs, as well as other negative consumption externalities generated, and are not using up more than their ‘fair share’ of the Healthcare Service, when in fact helping to pay for the healthcare of others. One mustn’t forget that these statistics only take into account those who drink and smoke, yet these 2 categories alone have more than paid back the amount that the NHS requires to treat all preventable illness, including those caused by obesity, illegal drug-use and countless others.
Now, if smokers and alcoholics are made to pay for their own healthcare, it would follow that taxation of demerit goods is reduced only to a level which includes VAT and perhaps Sin tax, as they are no longer reliant on the NHS for medical aid. This may prove detrimental to UK citizens who smoke, as the current Price Elasticity of Demand for cigarettes in the United Kingdom stands at -1.19 (HM Revenue & Customs, 2015). Thus, a price reduction of just 10% will increase demand by 11.9%. This price drop may have adverse effects on the health of smokers, as the demerit good would now be more affordable to consume. Additionally, if smokers are now completely responsible for their healthcare, an income tax reduction of 18% for smokers would also follow suit (as this is the approximate share of income tax that goes to the NHS, as mentioned previously), leaving consumers with a larger disposable income, in turn rendering their habit even more inexpensive. It may be reasoned that this will not be the case as smokers will put this extra income towards paying for their healthcare, yet that seems a tough assertion to buy into, due to the addictive nature of cigarettes.
Other negative outcomes may arise with privatizing health care for smokers and alcoholics: as the median full-time gross annual income in the United Kingdom stands at about £27,600 (Office for National Statistics, 2016), or £22080 after the 20% tax on incomes in the £11,501 - £ 45000 bracket (GOV.UK), the cost of healthcare would constitute almost 12% of the average person’s pay (as its per capita cost was earlier cited to stand at £2580). For smokers residing in higher income brackets, paying for medical treatment will not pose many issues; however, those who make up the majority of the population do not possess extreme wealth, and as such would suffer if an aggressive policy taking away their healthcare rights was to be placed. This would be akin to regressive taxation, in which a larger burden is placed on the poorer, as it can be assumed that wealth does not directly determine how much one must spend on healthcare, yet smokers of all incomes would be made to pay the same fixed amount, as opposed to a percentage proportional to their income. This could be defended by claims that smokers would not be made to pay as much as £2580, as the NHS’s Internal Market would ensure that prices are lowered so that individual hospitals remain competitive, however healthcare is a basic human right, and should not be toyed with on the claims that the invisible hand will save those who do not have free access to it, especially when the state possesses the means to provide it.
Certain viewpoints may deem this idea of smokers paying for healthcare to be ‘fair treatment’ as it is their fault that they continue their habit, however, from an economic standpoint, this could cost the nation more than it would save it, as imposing such a policy could prove detrimental to the nation’s workforce: smokers lacking healthcare would turn sick, causing a reduction in the amount of active labour within the UK, therefore hindering potential growth and prosperity (as demonstrated by the graph above, which clearly depicts the negative correlation between unemployment and Real GDP). Increased unemployment may also project further health complications due to depression and poorer diets, potentially commencing a vicious cycle in which they become sicker. Moreover, in order to assess whether or not this really would be ‘fair treatment’, other factors must be considered. For example, smoking cuts 10 years off of one’s lifespan, (Davies, 2014). As the state pension is currently £8094 a year (Hunter, 2016), smokers who live 10 years less will require £80,940 less than others in their old age, and as a result are less dependent on retirement and benefits, reducing the financial burden the government would have to otherwise bear. Considering this amount translates to more than 31 years of healthcare costs, yet smokers only live 10 years shorter, would it really be fair treatment to strip them from their healthcare rights? The statistics would say otherwise. Alcoholics are an even better example, as research dictates that they shave off 23 years off of their lifespans, (Hunter, 2016), and therefore do not make even make it to the retirement age as the average life expectancy in the UK is 79.2 years for males, and 82.9 for females (Siddique, 2016).
Traditional economic theory dictates that we humans are rational and make decisions in order to maximize gain, perhaps through cost-benefit analyses. Yet in practice, as demonstrated by the theory of hyperbolic discounting, smokers do not make decisions about smoking rationally. As opposed to thinking of the health drawbacks caused by the unhealthy habit, cognitive biases such as anchoring may lead smokers to consider an outlier instead, for example, a relative who had lived to an old age despite being a smoker.
Due to limited self-control, smokers struggle to give up their addiction despite all available information provided to them teaching the practices harm. Therefore, this brute-force and authoritarian approach of making smokers pay for their healthcare will not help them manage or quit their habits, as they will not respond rationally. Numerous experts stand against this method, such as Simon Clark, director of a smokers’ rights group, who has stated that “in a mature society people should have the freedom to make an informed choice without being patronised or forced to give up (their habits).”, (BBC NEWS, 2004).
Instead, alternative approaches should be taken: the UK government has now deviated away from its previous tactics of ‘nannying and legislation’, and has instead steered towards designing choice architectures that will encourage people to make better decisions, (Smith, 2010).This has proven itself to be a much better way to reduce and eliminate bad habits that have been taken up by many of the citizens of the United Kingdom, and in the long term would lead to a much better outcome, and will be of much more benefit to the nation than forcing the ‘unhealthy-by-choice’ to pay for their own healthcare.
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