Professor of Economics Econ mics at Bath John G. Sessions j.g.sessions@bath.ac.uk Professor of Economics

Biography BSc (Southampton), MSc (LSE), PhD (LSE) Joined Bath 2003 Visiting Professor: Cornell (USA), Dartmouth (USA), Paris II (France), Trier (Germany) External Examiner: LSE, Royal Holloway, UEA, Swansea, Loughborough, Aberdeen, Birbeck, Hull, Dundee

Go Home … As quickly as possible … And … … see some economics in action!

Question … £0.70 toll to cross the bridge … No receipt … The toll-collectors don’t own the bridge … Problem? Solution?

Outline Part 1: What is Economics and is it for me? Part 2: Why Study Economics at Bath?

What is Economics? Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when:

What is Economics? Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when: wants are insatiable

What is Economics? Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when: wants are insatiable resources are limited

e.g. Spend today or spend tomorrow?

What is Economics? Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when: resources are limited wants are insatiable

What is Economics? Economics as the ‘science of choice’ studies how agents (i.e. people, firms, governments) make choices when: resources are limited wants are insatiable interests often clash with those of other decision makers

Suppose the UK wants to exercises self-restraint by fishing responsibly in order to maintain fish stocks. While admirable, this is not strategically sustainable because other countries’ fishing fleets won’t be able to resist the temptation to exceed their fishing quotas at the UK’s expense, because this gives them an advantage in short term competition. So despite the UK’s self-restraint, fish stocks will be depleted anyway. Therefore, the choice of voluntary self-restraint is never optimal from an individual country’s point of view.

What is Economics? Key contribution of Economics has been to show that choices made by agents underpin many real world issues:

What is Economics? Key contribution of Economics has been to show that choices made by agents underpin many real world issues: the discrepancy between price and value

ebay price: $189.97 Price in Anya Hindmarch store in New York: $15.00 Sold out within 3 hours ebay price: $189.97 (Source: www.time.com, Wednesday 20 June 2007)

What is Economics? Key contribution of Economics has been to explain many real world issues: the discrepancy between price and value

What is Economics? Key contribution of Economics has been to explain many real world issues: the discrepancy between price and value the best strategy for bidding on ebay

What is Economics? Key contribution of Economics has been to explain many real world issues: the discrepancy between price and value the best strategy for bidding on ebay the big drop in the US crime rate in the 1990s

Economic Methodology

Economic Methodology Real word economic issues are incredibly complex and many factors are at work simultaneously

Economic Methodology Real word economic issues are incredibly complex and many factors are at work simultaneously Unlike in physics or chemistry, difficult for economists to conduct controlled (i.e. laboratory) experiments

Economic Methodology Real word economic issues are incredibly complex and many factors are at work simultaneously Unlike in physics or chemistry, difficult for economists to conduct controlled (i.e. laboratory) experiments Therefore, to study and understand a particular real world phenomenon, economists construct models

Economic Methodology Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world

Economic Methodology Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world Models may be graphical …

p q

Economic Methodology Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world Models may be graphical …

Economic Methodology Economic models are simplified abstract constructs designed to shed light on a particular phenomenon observed in the real world Models may be graphical … … but are usually formulated using mathematical concepts

Economic Methodology Demand: Supply: Equilibrium:

Economic Models in Action Imagine that a government wishes to raise some tax revenue Two schemes are being considered: (i) Sales Tax; (ii) Purchase Tax

Sales Tax £t imposed on the seller of the good Seller responsible for forwarding tax to government Purchase Tax £t imposed on the buyer of the good Buyer responsible for forwarding tax to government

Which scheme would you prefer? Depends on whether buying or selling? To understand, we need to examine how markets work i.e. we need to understand demand and supply

p Supply p* Demand q q*

Demand Formally qd = qd(p) Quantity demanded depends upon price ‘Normal’ Demand Function

q p

Demand We can equivalently think of price depending upon the quantity consumed pd = pd(q) ‘Inverse’ Demand Function

p q

p … quantity demanded at a particular price 5 q 10

p … buyer’s reservation price (i.e. maximum price buyer wiling to pay price per unit) 5 q 10

Demand Usually, we presume that qd depends negatively on (own) price, but this is not always the case (Giffen goods) Note: ‘Movements Along’: Arise as a result of changes in own price. ‘Shifts In’: Arise when anything else changes. Consider the latter …

Demand Tax Consider unit purchase tax Consumer liable for £t per unit purchased Thus, imposition of tax will reduce consumer’s reservation price for the good

(Unit) Purchase Tax p q

(Unit) Purchase Tax p tax q

(Unit) Purchase Tax p t = £2 5 3 q 0 10

Supply The Supply Curve Shows the relationship between price and quantity supplied ceteris paribus That is: qs at particular price per unit (minimum) price per unit suppliers willing to accept for particular quantity.

p q

… quantity supplied at a particular price 5 q 10

p … seller’s reservation price (i.e. minimum price seller wiling to accept per unit) 5 q 10

Supply Tax Consider unit sales tax Seller liable for £t per unit purchased Thus, imposition of tax will increase seller’s reservation price for the good

(Unit) Sales Tax p q

(Unit) Sales Tax p tax q

(Unit) Sales Tax p t = £2 11 9 q 10

How do the two types of tax impact upon buyers and sellers? Assume first a sales tax – i.e. a tax is imposed upon sellers per unit sold How does this affect market equilibrium?

(Unit) Sales Tax p q

(Unit) Sales Tax p t q

(i) Reduces the quantity traded; Thus, a unit sales tax: (i) Reduces the quantity traded; (ii) Raises the equilibrium price

Now, consider a unit purchase tax …

(Unit) Purchase Tax p q

(Unit) Purchase Tax p q

Thus, a unit purchase tax: (i) Reduces the quantity traded 5. Comparison Thus, a unit purchase tax: (i) Reduces the quantity traded (ii) Reduces the equilibrium price

So, which alternative, as a buyer, would you prefer? Must consider gross and net price Unit tax drives a wedge between price paid and received

Unit Sales Tax … Seller is responsible for paying the tax Net price seller receives is equilibrium price less tax

(Unit) Sales Tax p t q

(Unit) Sales Tax p Buyer Pays t Seller Receives q

Unit Purchase Tax Buyers is responsible for tax Net price buyer pays is equilibrium price plus tax

(Unit) Purchase Tax p q

(Unit) Purchase Tax p t q

(Unit) Purchase Tax p Buyer Pays t Seller Receives q

It can be shown that the burden of the tax is independent of upon whom it is imposed Buyer and seller share the burden depending upon slopes of demand and supply curves Slopes affect ability of buyers and seller to ‘pass on’ the burden of the tax to one another

(Unit) Sales Tax p q

(Unit) Sales Tax p t q

(Unit) Sales Tax p Buyer Pays t Seller Receives q

(Unit) Sales Tax p Buyer Pays t A B Seller Receives q

(Unit) Sales Tax p q Buyer’s Burden Buyer Pays t A Seller Receives B Seller’s Burden Seller Receives q

(Unit) Purchase Tax p t q

(Unit) Purchase Tax p Buyer Pays t Seller Receives q

(Unit) Purchase Tax p Buyer Pays C D t Seller Receives q

(Unit) Purchase Tax p Buyer’s Burden C D t Seller’s Burden q

Thus: A + B = t = C + D A = Buyer’s Burden = C B = Seller’s Burden = D The relative tax burden does not depend upon whom the tax is imposed The buyer and seller will share the burden depending upon the slopes of their demand and supply curves

Try to prove this using the following linear (normal) demand and supply equations: Solve for the pre- and post-tax equilibria under both a sales and purchase tax and show that the relative burdens are the same

It can be shown that … … under both a unit sales tax and a unit purchase tax

It can be shown, for example, that a seller is able to pass on more of the burden of a sales tax the steeper (i.e. less elastic) is the buyer’s demand curve …

Figure 15: (Unit) Sales Tax p A = Buyer’s Burden B = Seller’s Burden t A B q

Figure 15: (Unit) Sales Tax p A = Buyer’s Burden B = Seller’s Burden t A1 A B1 B q

In the limit, if the demand curve is vertical (i. e In the limit, if the demand curve is vertical (i.e. perfectly inelastic) then the seller is able to pass on all of the burden of a sales tax to the buyer …

Figure 15: (Unit) SalesTax p A = Buyer’s Burden B = Sellers Burden t A2 A B q

Note, vertical demand curve implies b = 0 such that: Buyer (Seller) bears all (none) of the burden

The relative burden of a unit tax is determined by the relative slopes of the demand and supply curves These slopes determine extent to which buyers and sellers can ‘pass on’ the burden of the tax to one another Who is legally liable for the tax is not important

Why Bath? Best campus University 2014 with: world class research and commitment to excellence in teaching great library and computing facilities state-of-the-art sports centre new arts centre and student residences

Why Bath? Top 10 Economics Department (8th in The Complete University Guide 2017) World class research and teaching Excellent library and computing facilities; state-of-the-art sports centre; new arts centre and student residences Excellent employment prospects: 91% of our graduates have a grad job within 12 months of graduation, rest choose further study or gap year (2nd after Cambridge, see Guardian Econ League Table)

Applications and Acceptances Year No. of Applications No. of Students Accepted (Places) Applications: Acceptances 2008 1518 202 7.51 2009 1513 185 8.17 2010 1273 168 7.58 2011 1287 147 8.76 2012 1235 187 6.60 2013 1376 192 7.17 2014 1305 209 6.24 2015 1839 225 2016 2168 227 9.55 2017 2380 235 10.12

The Bath Philosophy We emphasise academic depth alongside development of transferable skills through our placement scheme Course Culture Enquiry-based learning, learner independence, time management, self motivation Self-directed study (about 15 contact hours per week) Key analytical and interview skills developed in year 1 to prepare you for your placement year

The Department of Economics 40 Academic Staff Number of Students BSc 700 MSc 160 PhD 30 Three BSc Degree Programmes Three MSc Programmes PhD Programme

The Bath Economics Programmes Single Honours Programme BSc Economics Joint Honours Programmes BSc Economics & Politics BSc Economics & Mathematics All programmes with / without placement

Programme Structure: BSc Economics Eight compulsory Units in Year 1 Intro to Economic Theory: Micro- and Macroeconomics Intro to Quantitative Methods: Mathematic (2); Statistics; Economics Data Analysis Institutional Context: Modern World Economy; Economic Policy in the UK Two Optional Units in Year 1 Can be from outside the department; e.g. accounting, corporate finance, politics; modern language, etc.

Programme Structure: BSc Economics Second Year 3 Compulsory (Year Long) Units Intermediate Macroeconomics Introduction to Econometrics 3-4 Optional Units Money & Finance; International Economics, Public Finance; Public Economics; Corporate Finance; Economic Thought and Policy

Programme Structure: BSc Economics Final Year 2 Compulsory Units Advanced Macroeconomics; Advanced Microeconomics 4-8 Optional Units Game Theory; Econometrics; Economics of Environmental Regulation; International Trade; Dev Econ; Public Choice; Welfare Economics & Distributive Justice; Economics of Work; Health Economics; Economics of Banking; Environmental & Natural Resource Economics; International Monetary Economics; Economics of Incentives; Growth Theory; Industrial Organisation; Political Economy; Invest & Trading; Dissertation

Programme Structure: BSc Economics Final Year 2 Compulsory Units Advanced Macroeconomic; Advanced Macroeconomics 4-8 Optional Units Game Theory; Econometrics; Economics of Environmental Regulation; International Trade; Dev Econ; Public Choice; Welfare Economics & Distributive Justice; Economics of Work; Health Economics; Economics of Banking; Environmental & Natural Resource Economics; International Monetary Economics; Economics of Incentives; Growth Theory; Industrial Organisation; Political Economy; Invest & Trading; Dissertation

Programme Structure: BSc Econ & Maths Ten Compulsory Units in Year 1 (no options) From Economics Department Microeconomics Macroeconomics Mathematical Economics From Mathematics Department Analysis (2) Algebra (2) Probability and Statistics (2) Methods and Applications

Programme Structure: BSc Econ & Politics Nine Compulsory Units in Year 1 From Econ Department Intro to Economic Theory (Micro + Macro), Intro to Quantitative Methods (Maths 1, Stats, Data Analysis), Modern World Economy From Politics Department Key Concepts in Politics Political Ideologies International Relations & Global Politics One Optional Unit in Year 1

Programme Structure: BSc Economics Organisation Two lectures and one seminar in each unit Assessment is mix of coursework and final exam (Jan & May) First Year is ‘pass or fail’ – does not contribute to final degree classification; Second-Final Year is 30:70 But ... very important to lay foundation and to signal to prospective work placement employers.

Programme Structure Support Each degree programme has Director of Studies – ‘vertical’ Each year has a Year Tutor - ‘horizontal’ Personal tutor Work placement tutor Student buddy system; Staff-Student Liaison Committee; student representation on Departmental Teaching Committee; seminars; social events

Programme Structure: BSc Economics Final Year Dissertation ‘Double-Weighted’ year long project Can draw from work-placement Empirical; theoretical; case-study; literature review Draws together skill and knowledge, experience and interest

Jonathan Haynes BSc (2010) Work placement - HM Treasury 2008-09 Graduated with first class honours and joined Government Economic Services Fast Stream (climate change, transport, financial regulation) October 2013 joined European Commission in Brussels as a financial economist

Jonathan Haynes BSc (2010) “I highly recommend pursing a placement. Beyond the short term financial rewards, a good placement puts you ahead of your peers when you graduate in an increasingly competitive labour market. You will learn vital soft skills that you can’t learn from the textbooks.” “Your final year of economics will become more rewarding. You will better understand how economics interacts with policy and the economy.” “And one piece of advice, for those who do go down this route. Once you start, actively engage with your line manager to ensure you get the most out of the process. If you can extract expertise and information from the employer to help with your final year dissertation, this is an added bonus.”

Sound interesting? Any Questions? What next…? Come and visit the Economics stand at the information fair in the Sports Training Village. Pick up a brochure and chat to my colleagues and our students. Visit our website, which is a great source of up-to-date information: bath.ac.uk/economics Want to get in touch…? For questions about entrance requirements and the admissions process e-Mail: ask-admissions@bath.ac.uk For questions about our Economics programmes e-Mail: economics-ug-admin@bath.ac.uk

Industrial Placement Programme Department of Economics

Why do a placement at the University of Bath? UoB leading Placement University* 20 years +experience * Dedicated Placement Officers * Extensive Support & Guidance *Exclusive placements* Acquire business skills* Apply theory to practice* Dissertation Inspiration* Self-Development and Self-Confidence* Try before you buy * Employment - 91% within 6 months* Networking*…….

Investment and retail banking Accountancy, auditing Asset management Financial research, forecasting Financial planning and control Sales, marketing, purchasing and logistics Political lobbying or working with MPs or MEPs International development

Dedicated Placement Team

Undergraduate students Christopher Leaney, Bradley Morely, Steven Newcombe and alumnus Christopher Gynn discuss their experience of the economics placement year Undergrad Economics https://vimeo.com/165602267

Any questions ????? Contact Economics economics-ug-admin@bath.ac.uk Contact Kirsten Brown K.A.Brown@bath.ac.uk

But … … the tax does impact on ‘social welfare’

Demand and supply curves – reservation price schedules of buyers and sellers That is, the maximum (minimum) price buyers (sellers) are prepared to pay (accept) If we know prices buyers (sellers) actually pay (receive), then we can derive a measure of aggregate surplus and, thus, social welfare

Consumer Surplus (CS) p 10 8 6 4 p* = 2 pd q 0 1 2 3 4 q* = 5

Consumer Surplus (CS) p TWP = 10 + 8 + 6 + 4 + 2 = 30 p*q* = 2*5 = 10 CS = 20 10 8 6 4 p* = 2 pd q 0 1 2 3 4 q* = 5

Consumer Surplus (CS) p CS p* Expenditure = p*q* pd q q*

Producer Surplus (PS) p Supply Revenue = p*q* q* p* PS p* q q*

Social Welfare (W) p Supply W = CS + PS CS p* PS pd q q*

Social Welfare and Tax p Buyer Pays CS t PS Seller Receives q

Social Welfare and Tax p CS t T = tq PS q

Social Welfare and Tax p CS t T DWL PS q

Relative burden of unit tax is determined by the relative slopes of demand and supply curves Legally liability for tax does not affect relative burden But, both sales and purchase unit taxes lead to the same deadweight loss in social welfare.

The Market for Lemons If it is impossible to observe quality, then goods will be traded at a price reflecting average quality Moreover, price will adjust until buyers’ beliefs about this average quality are confirmed ex post Potential for market failure - sellers of high quality products may withdraw from the market

The Market for Lemons Problem was highlighted by Akerlof (1970) … … second-hand car market … Nobel Laureate (2001)

The Market for Lemons Value to (£) Peach (g) Lemon (b) Buyer 3000 2000 Seller 2500 1000 25% (75%) of the cars are Peaches (Lemons) Sellers have all bargaining power – buyers’ reservation prices hold

The Market for Lemons If quality is known by both buyers & sellers then: If quality unknown by everybody then buyers & sellers consider average quality in calculation of ‘bid’ prices Such that

The Market for Lemons If buyers unable to observe quality then all sellers have an incentive to claim their car is a peach … Thus, buyers offer their expected value But Thus, only lemons traded and the market for peaches fails Or does it … ?