Categories
Economics

Producers

producers

A producer creates and supplies goods or services.  They typically combine labour and capital – sometimes called factors of production – to create output.  Businesses are the main examples of producers and are usually what economists have mind when talking about producers.  However governments are producers of some kinds of services (such as police services, public schools, universal mail delivery and defence) and sometimes goods, such as when a government owns natural resources.  Households and individuals are producers of non-market goods and services, such as child-rearing, cleaning and food cooking.

Producers pay wages to workers.  This may include salaries, bonuses and benefits such as health insurance.  Producers also pay for capital.  This is called economic rent and includes interest payments.  Anything that is left over for the owner of the business is called economic profit.

Increasingly some consumers are also becoming producers as the scale and cost of marshalling resources to create goods and services falls.  They become ‘prosumers’.

To what extent are the boundaries between producers and consumers becoming increasingly blurred?  Is this happening more in the provision of services, rather than goods; and is it more likely in social media contexts?

Does the traditional role of a producer remain relevant for provision of economic infrastructure and, more importantly, the delivery of services from that infrastructure?

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This Micro Brief is part of an ongoing series provided by Lytton Advisory as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

 

Categories
Economics Infrastructure Transport

Value Uplift and Capture

money_bridgeValue capture and uplift associated with infrastructure projects are often discussed but not well understood. This is because the issue sits at the crossroads of competing public and private interests, as well as institutional imperatives of project proponents.

From an economic perspective, it is a method of generating funds from economic rents – unearned private benefits from public investments – to deliver infrastructure projects. In the Australian context it is increasingly heralded as a potential new source of investment funds. However aspects of this approach have been used in both the US and the UK.

While there are over one hundred studies on value uplift around transport modes, impacts of other infrastructure types remain less well understood.

The Bureau of Transport, Infrastructure and Regional Economics has identified a range of factors assessing land value uplift challenging:

  • separating factors driving uplift to identify the infrastructure impact;
  • sampling errors in the estimation of land prices;
  • determining the catchment for beneficiaries / the project area of influence; and
  • isolating value uplift from network effects.

In essence, value uplift is where value flows from an infrastructure network are capitalised into land values. This is often observed regarding transport networks.

For the reasons outlined above, identifying value uplift is difficult in terms of identifying both who benefits and at what value. It is also why it has not been widely used to fund public infrastructure. However, there are two factors driving consideration of value capture funding:

  • economic rents accrue to landholders benefiting from economic infrastructure – in effect private, unearned returns from public investment in public assets – these are above and beyond use benefits and raises a critical equity issue; and
  • use revenues, particularly from public transport investments, are insufficient to fund infrastructure expenditures and are often complemented with significant subsidies from the public purse – value capture is seen as an alternative to increasing the general level of taxation revenue.

Overseas experience provides some guide to the types of value capture approaches, and each approach has its own pros and cons:

  • tax inventive funding – hypothecated value uplift based on an expected increase in property tax revenue. Commonly, a government issues a bond, effectively guaranteeing a return that matches the expected value uplift increment. The value at risk, however, remains with the government issuer.  This is one of the reasons most government treasuries oppose issuing these bonds – there is no transfer of financial risk associated with the value uplift increment.
  • betterment taxes – land owners thought to be direct beneficiaries of an infrastructure development – but not necessarily users themselves – pay a levy. The levey is typivally on the unimproved capital value of the land. A key challenge with this approach is achieving a correct attribution of the increase in land value from the provision of the infrastructure and related services.
  • transaction taxes – typically levied on property transfers. In this case, some of the property value increase attributed to the provision of publicly funded infrastructure will be collected by these taxes. However, this attribution is again difficult to to assess.
  • joint development – usually where a licence or concession is given to a private agency to develop surrounding land in exchange for delivering economic infrastructure and services. This is a significant model for railway development, and is currently in use for heavy rail in Asian countries.

While a range of estimation problems have been identified above, network architecture remains the most significant factor. Hierarchy, connections and density influence this. While the literature on network architecture largely focuses on transport infrastructure, specifically road and rail assets, further analysis is needed of other linear infrastructure (i.e. water, electricity and gas).

Two broad solutions emerge: either a more to a more general land tax; or further detailed investigation of each specific infrastructure project. The important point is to adopt an approach that minimises market distortions and promotes economic efficiency.

Categories
Economics

Productive Resources

factors_of_productionProductive resources are the requirements for producing goods and services in an economy.  Often economists call these ‘factors of production’.   Usually these are represented as capital, labour and land.  Entrepreneurship is increasingly included as a fourth factor.

Capital usually comprises fixed capital such as structures, buildings, physical plant, machinery and tools.  Circulating capital is often described in terms of components and raw materials.

Labour includes all aspects of human resources and may be unskilled, semi-skilled or skilled.

Land comprises naturally occurring resources where supply is inherently fixed.  These resources may be renewable or non renewable.  Examples are geographic locations, mineral deposits, forests, fisheries, air quality, geostationary orbits and parts of the electromagnetic spectrum.

Entrepreneurship is often described as the capacity and willingness to develop, organise and manage a business venture along with any of its risks in order to make a profit.  It is often closely associated with starting new businesses.

How we define what we use to supply goods and services is critical to our understanding of the economy.  How can we test if the traditional  capital-labour-land approach is still valid?  How strong or significant is entrepreneurship in the mix?

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This Micro Brief is part of an ongoing series provided as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

Categories
Economics

Consumers

consumers

Consumers are individuals who acquire goods or services for direct use or ownership, rather than for resale or use in production or manufacturing. This group is a critical element in an economy.

The needs and wants of consumers drive economic activity and direct the production and distribution of goods and services. Without them producers lack a key motivation to produce.

Consumers are said to be sovereign because they decide what bundles of goods and services they wish to purchase. However they value this consumption also in terms of quality and safety.

Many consumers are now shifting to becoming ‘prosumers’ – consumers that are also producers or influence the products and services being created by being directly involved in their production. This is especially the case for services delivered via the Internet – including information and media on the social web.

So are we seeing a new paradigm with ‘prosumers’ or just a blurring of boundaries as the same economic participants take on multiple roles in the economy?

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This Micro Brief is part of an ongoing series provided by Lytton Advisory as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

Categories
Cost Benefit Analysis Economics Lytton Advisory

Make the Casino Work for You

rouletteNothing is more hair raising than exposure to risk without a sense of the level of that exposure.  This is especially true in capital investment decisions.

Monte Carlo simulations perform risk analysis by building models of possible results by substituting a range of values—a probability distribution—for any factor that has inherent uncertainty and significant impact on the final result.

By using probability distributions, variables can have different probabilities of different outcomes occurring.  Probability distributions are a much more realistic way of describing uncertainty in variables of a risk analysis and improve the quality of sensitivity analysis.

During a Monte Carlo simulation, values are sampled at random from input probability distributions.  This is done hundreds or thousands of times, and results in a probability distribution of possible outcomes.  It provides a much more comprehensive view of what may happen.

Advantages over deterministic, or “single-point estimate” analysis include:

  • Probabilistic Results. Showing how likely each outcome is.
  • Clearer Graphical Results. Visual presentation of probabilities.
  • Improved Sensitivity Analysis. Sharper sensitivity analysis to show what counts.
  • Scenario Analysis: Model repeated variations in combinations of factors to show which scenarios need further investigation.
  • Correlation of Inputs. Represent how, in reality, when some factors goes up, others go up or down accordingly.

Done poorly or with low quality input data, the results can be potentially misleading – producing a level of certainty on the basis of some very uncertain assumptions.

Lytton Advisory holds an @Risk software licence which enable us to provide this type of probabilistic analysis to clients, helping them make better informed decisions. Examples of how we have applied this for clients include:

  • Estimating financial costs of schedule delay on a major metropolitan public transport project.
  • Assessing probability of breaching a cost contingency levels on a +$500 million infrastructure program.
  • Building probabilistic NPV profiles in cost benefit analyses given uncertainty about key economic inputs.

Contact us today to find out how we might be able to help you.

Categories
Cost Benefit Analysis Economics

Opportunity Cost

opportnitycost

Whenever a choice is made, something is given up.  Opportunity cost values an economic resource as the value of its next highest valued alternative use.  It is normally expressed in terms of a relative price.  For example, if a shipwrecked sailor can catch 10 fish or harvest 5 coconuts per day.  The opportunity cost of producing one coconut is two fish.

Opportunity cost is useful when the costs and benefits of choices vary.  By expressing one option in terms of foregone benefits of another, marginal costs and benefits of each option can be compared.  Sometimes these costs and benefits are not reflected in the price we pay for goods or services.

Is the value of the next best thing what you really give up?  Opportunity cost is such a fundamental concept in economics as well as everyday life.

Can we make better decisions without it?

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This Micro Brief is part of an ongoing series provided by Lytton Advisory as a general public information service.  These concepts underpin modern economic analysis.  Find out more about smarter capital investment decisions using economics at www.lyttonadvisory.com.au.

Categories
Economics

Scarcity

scarcityA fundamental concept in economics is Scarcity.  It refers to limitations in achieving desired outcomes due to insufficient resources, goods or abilities.

Scarcity creates situations where choices have to be made.  Working out how to make the best use of available resources or finding alternatives to them is fundamental to economics.

Like individuals, governments and societies experience scarcity because human wants exceed what can be made from all available resources.

Even in the new, knowledge intensive economy, where the cost of providing information is low or almost zero, we still have to decide how to spend our time which is scarce.

In one way or another scarcity is likely to remain a significant issue in economics.  What do you think?

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This Micro Brief is provided by Lytton Advisory as a general public information service.  Find out more about smarter capital investment decisions using economics at http://www.lyttonadvisory.com.au.

Categories
Economics Policy Transport

Inland Freight

canola

Recently I have been thinking about inland freight and logistics to see how this affects Australia’s seaports. Volumes may be constrained by production factors – you can only grow what you can grow when the environment allows you to grow it – but where these volumes go can be determined by these inland costs.

Policy can have consequences as NSW’s freight and logistics strategy shows. Improvements in freight handling and inland cargo aggregation can reduce costs. Some of these improvements reduce the cost of multi modal handling, as well as reduce the cost of line haul by mode – whether that is by rail or road.

For an economist like me it is a relative comparison game. Relatively lower costs will shift the movement of commodities from one mode to another, as well as shift the direction of commodities. Subject, of course, to existing commercial agreements.

However this is not the only story. The other story is around the development of vertically and horizontally integrated businesses that develop their own end-to-end freight and logistics systems. This means they are able to profit maximize by using less profitable parts of their networks to feed the more profitable parts. These firms are also taking equity stakes in their clients.

This is different to geographically and modally constrained freight and logistics operators – they have to maximize efficiency of throughput at a single point or along the linear operation of a particular mode. They certainly do not own parts of their client’s operations. Also, singular operations cannot transfer price because the other parts of the network or system are owned by other parties, and often singular operations cannot aggregate the volumes of goods required to develop leverage over prices.

This article also provides a gratuitous opportunity to show some of the canola fields near my home town in the South West Slopes region of NSW. I took this picture last week on a visit there. Primary production remains an important part of the freight task, albeit a volatile one that is hostage to world demand, weather and yields.

Categories
Economics

Rise of the Machines

robot

The application of capital has seen fewer workers required to produce more physical goods than ever before.  This has released labour to work in the service and knowledge sectors of the economy.  Increasingly, machines are taking over large numbers of knowledge worker roles.

I think I may have dodged a bullet – at least in the short term.  The BBC has noted that around 35% could be subject to automation.  Actuary, economic and statistical  roles have just 15% chance of becoming automated.  Find out the extent your role might be taken over in the future by a robot at the following link:

http://www.bbc.com/news/technology-34066941

Answering a phone is a job at greatest risk of automation, being a publican is the least at risk!

Categories
Economics Lytton Advisory Policy

A Civil Society

kuwaitidiwaniya

While working recently in Kuwait, I was privileged to be invited to a diwaniya (https://en.wikipedia.org/wiki/Dewaniya) along with colleagues from my project team.  This type of forum is fairly unique to Kuwait and it a key element of their civil society.

For around an hour we discussed industry policy with a number of leading lights from Kuwait’s business community.  I learned a lot from them.  The discussion took our project team beyond the numbers and statistics we were considering to just how the reforms might actually be implemented.  The exchanges were robust but expressed in good humour and with great politeness.

I think these kinds of gatherings are extremely important in shaping consensus.  Kuwait has hundreds of diwaniyas and candidates for public office often seek to turn up at as many as possible around election time.  In my view, it removes a lot of the adversarial nature that characterises public discourse in Western countries.  Where hard decisions are needed to effect significant change, a consensus based approach may deliver better outcomes than a crash or crash though approach.

Australia used to do evidence-based, consensus-driven public policy quite well.  It was grounded in clearly explaining the need for change.  I fear now that the people putting themselves forward for public office are increasingly driven more by populism and a startling touch of irrationality.