IB Economics SL 1.1 What is economics? Question Bank

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EU court rules minimum price for cigarettes illegal

(1) The European Court of Justice has ruled that Ireland cannot impose a minimum price on cigarettes. It said that member countries would have to find other ways to combat smoking. This could be achieved by increasing indirect tax on tobacco, but imposing a minimum price would distort fair competition in the market. The ruling is designed to maintain the freedom of manufacturers and importers to benefit from lower costs and greater efficiency.

(2) The judgment said the aim of ensuring that tobacco prices are high can be "adequately" achieved by increasing tax, since any indirect tax rises are, sooner or later, reflected in an increased retail price, without removing the freedom of manufacturers to set prices.

(3) The Irish government had claimed that it needed to fix a high minimum price to discourage smoking. This followed government legislation to ban tobacco advertising and promotion in July 2009. According to a spokesperson from the anti-smoking group ASH (Action on Smoking and Health), this measure helped to prevent retail outlets from making young people feel attracted to buying cigarettes. "Close to 30 % of our population still smoke and 7000 die from tobacco-related disease each year," he said.

(4) It has been argued that increasing the price of cigarettes is one of the most effective ways of curbing harmful smoking and there is a need to make cigarettes less appealing, particularly to young people. The evidence is that banning advertising, introducing minimum pricing and increasing health warnings can all work.

(5) The head of a major retail organization has attacked the idea of minimum pricing for cigarettes. He argued that artificially fixing a minimum price would not be effective. Also, since the demand for tobacco is inelastic, raising the price would not work. Moreover, it was against the free market for a government to set prices for any product available to consumers, limiting their freedom to choose.

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Latvia to join the eurozone monetary union

(1) Latvia will become the 18th country to adopt the euro after being approved for membership by the European Commission. The country has met the criteria for eurozone membership, including low inflation, low long-term interest rates, a stable exchange rate, low public debt and low budget deficits.

(2) Latvia joined the European Union (EU) customs union in 2004. This resulted in a large increase in the availability of credit and strong economic growth in Latvia. However, the 2008 global financial crisis resulted in the collapse of one of its leading banks and massive economic instability. Economic output fell by about 20 % and Latvia had to accept a bailout (loans) from the International Monetary Fund (IMF) and the EU.

(3) Latvia kept the lat (the Latvian currency) pegged to the euro throughout the crisis. At the time, some economists argued that devaluation would have been a better way to improve the economy. However, Latvia followed the path of other countries such as Greece and Ireland, and chose to improve competitiveness through austerity measures. This involved increasing direct taxes and cutting government spending and public sector wages.

(4) By late 2010, the economy was growing again and Latvia had repaid the loans to the IMF and the EU. In 2012, the economy expanded by 5.6 %, the fastest of any country in the EU, although output was still 12 % below its pre-crisis peak. In addition unemployment was falling, but it remained high at 12.4 %.

(5) For Latvia, which shares a border with Russia, the attraction of the euro is about economics and security. Entering the eurozone in January 2014 is part of a process of shifting away from the influence of Russia, and following its northern neighbour Estonia which joined the eurozone in 2011. Lithuania hopes to join the eurozone in 2015.

(6) Public support for joining the eurozone has been low. Evidence from one survey suggests that a small majority of Latvia's population opposes membership, fearing that prices will rise and Latvians will be drawn into the problems facing Europe's struggling economies.

(7) Nonetheless, there are signs that support is growing. The Latvian prime minister said that "switching to the euro will help economic growth and bring increased foreign investment. Unlike countries that can afford to ignore the euro and additional integration, Latvia cannot easily stand on its own. This is good news, not only for Latvia, but also for the eurozone. It shows that there is still confidence in the single currency".
www.theguardian.com, 16 July 2013]

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Price controls in Venezuela

(1) The Venezuelan government ordered that street vendors who operate within the formal economy may only sell basic foods if they respect the government imposed price ceilings and guarantee the necessary conditions of "hygiene and healthfulness". The law also made official the "absolute ban on sales" of basic foods "in the informal market where there is no guarantee of selling at the prices established by the national administration".

(2) Foods included in the government price controls are rice, wheat flour, pasta, beef, chicken, cheese, eggs, sugar, ground coffee and salt amongst many others. Since 2003, President Chavez's government has maintained price controls on roughly 100 food and medical products considered basic necessities.

(3) In Venezuela, food items with price controls sometimes disappear from supermarket and grocery-store shelves. Most items can still be found, but only in the informal market. As a result of this, resources are being misallocated.

(4) White rice, the staple food for many Venezuelans, can now only be sold at a price of 2.15 Bolivar Fuertes (VEF the Venezuelan currency) per kilo. Private companies insist that production of a kilo costs 4.41 VEF and that companies will quickly go bankrupt. Some companies were colouring the rice they produce in order to avoid the government controls as the price ceilings apply only to white rice.

(5) Another result of the restrictions is that local farmers will not supply the selected food products at the government imposed prices thus forcing Venezuela to rely more on imports of these products.

(6) The aim of the Venezuelan government is to reduce the cost of the basic shopping basket of ordinary Venezuelans at a time when inflation is running at 20.5 % annually. Critics claim that Chavez's price controls serve as a substitute for more effective anti-inflation policies and fear that prices will rise dramatically once controls are removed. http://www.forbes.com/2010/01/14/venezuela-inflation-price-controls-opinions-columnists-bruce-bartlett.html, accessed 18 October 2011]

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Urban farms to feed Cuban cities

(1) The Cuban government has launched a project to surround its cities and towns with thousands of organic farms to make the growing of fruit, vegetables and the raising of livestock low cost and environmentally friendly.

(2) The government hopes this new approach to urban farming will make food cheaper and more abundant. It is also hoped that transport and fuel costs will be reduced and that urban dwellers will be encouraged to leave their city jobs and work in the farming sector. The farms are mostly privately-owned with some cooperatives, and more land has been leased to them. These private farmers and cooperatives own about 40 % of Cuba's farmland and produce about 70 % of food grown.

(3) In the past farmers had to purchase their subsidized resources from the government. However, they can now purchase their own seed, equipment and other materials directly from suppliers. They can choose what they want to grow. Farmers are also allowed to sell some of their produce to licensed government sellers or sell directly to consumers at roadside stands. Farmers can also vary the price of the products they sell. These changes allow for greater reliance on the price mechanism and for a more efficient allocation of resources.

(4) However, the Cuban government still plays a major role in production and support of the rest of the agricultural economy. It continues to hold a monopoly over essential foods such as rice, beans, pork and bananas by controlling the production, distribution and land use for these foods. Prices for these commodities are set by the government, which also provides infrastructure, schooling and overall direction to the economy. Nevertheless, poor planning and corruption continue to be obstacles to economic development.

(5) Not all urban farmers can see the long term benefits of this and are concerned about greater competition between producers and the possibility of rising input prices which may result if subsidies end. However, they are encouraged that the reforms allow them to make more decisions about what to produce and how to sell. They believe that more food will be available for sale and consumption. Foreign and local experts welcome the project and expect that as the market mechanism becomes more important, economic growth and economic development will be stimulated.