« Who is Stirling Newberry? | Main | What's Good for the Goose? »
Why is the UK so expensive, redux
Welcome Sunday Times readers from London, here is the original post, sorry for all the spam in the comments. Here is the Times article on that post. Here is a New Economist summary of the piece. Now we need to work on why Denmark is so expensive...
Posted by Tyler Cowen on August 20, 2006 at 03:55 PM in Economics | Permalink
Comments
I'd say there's high demand for Denmark and a very limited supply of it.
Posted by: James Grimmelmann at Aug 20, 2006 5:26:52 PM
My recent experiences in England lead me to guess that prices are high there in large part because commercial real estate is in such limited supply (in part artificially due to council restrictions) relative to the demand. No matter how competitive the output markets might be, high (opportunity) costs will keep the equilibrium prices high.
This observation applies, of course, to average price levels. It did seem to me that maybe watches and cameras were no more expensive there than in Canada.
Posted by: EclectEcon at Aug 20, 2006 6:57:35 PM
Tyler - the Sunday Times is a national newspaper
Posted by: AJE at Aug 20, 2006 7:31:07 PM
Even though it's a pain and takes a little time, I strongly advise deleting spam comments as they come in, because as I've blogged about before, spam attracts spam: http://jacquelinepassey.blogs.com/blog/2005/07/trackback_and_c.html Whereas if you stay on top of it, you get very little. I think it's worth it to keep your comments sections usable by real people who don't want to wade through dozens of spam comments to get to the real ones.
Posted by: Jacqueline at Aug 20, 2006 10:49:03 PM
My question is: Where do I find the scholaarly paper that answers this question.
My anecdotal experience is that London is twice as expensive as Paris (its competition for my tourist dollar).
Twice as expensive for meals in restaurants.
Twice as expensive for hotel lodging.
Twice as expensive for public transport (Tube vs Metro).
This is what baffles me.
Paris has wicked building restrictions.
France has wicked labor laws (Code du Travail).
Metro workers are state employees and get paid a lot.
Both London and Paris have communist mayors.
,dave
Posted by: Dave Barnes at Aug 20, 2006 11:37:43 PM
Re: comment spam, I highly recommend Wordpress and use the Akismet anti-commentspam plugin. You can import your entire MT powered blog with no problem.
Re: Paris vs. London, could it be that there is less demand for hotels, dining out, and public transit in Paris? London seems like more of a happening place, and Paris seems stagnant. Is there any good data on tourism?
Posted by: Nathan Bowers at Aug 21, 2006 12:12:53 AM
I applaud Professor Cowen for his Blog, but suggest both he and the contributors head for my website, Rip-Off Britain: www.rip-off.co.uk
Although I don't claim to have ALL the answers as to why the United Kingdom is so expensive, as compared with many other countries such as the USA, the outrageous tax on fuel (gasoline), other taxes such as high import duties, VAT (sales tax) and property taxes, uncontrolled commercial rents, high property prices and gross profiteering by multi-national businesses (who deem us as ‘Treasure Island’), has much to do with the regime of high prices - which I might add has been this way for the past 50 years!
Has anyone ever wondered why British banks are the most profitable in the World? Recently five of Britain's biggest banks unveiled combined profits of more than £19 billion!
Of course, the UK is not alone. Many other European countries including The Netherlands, Ireland, Denmark, Italy, Austria, Sweden & Norway also suffer from high prices.
Brits DO complain about high prices, but because we live on a small island we can do little about it. Even if one takes off to other European countries to buy 'cheaper' goods, UK Customs restrict certain items one can bring back to the UK without paying high import duties - regardless cross-border shopping is basically unrestricted within the European Union!
The situation can only get worse. With a previous Government estimate of 15,000 migrants from the new EU entrant counties - which NOW is in fact 600,000 - and with the entry of Romania & Bulgaria in 2007, the strain on local services, housing, etc., can only increase prices and unemployment.
Perhaps the only viable solution is to join the 350,000 Brits who are leaving the UK each year!
Keep the debate going.
Regards,
Paul Meyer
Editor, Rip-Off Britain
www.rip-off.co.uk
Posted by: Paul Meyer, Editor - Rip-Off Britain at Aug 21, 2006 7:03:59 AM
I liked James Grimmelmann's comment :) When you say that "Denmark" is expensive, do you mean property, services, products? I'll assume that's the case.
I'm from Denmark and have a few ideas about why things are so expensive here.
First of all, there's the 25% VAT/sales tax. The marginal income tax at around EUR50k/year+ is more than 60%. Special taxes on all kinds of things, candy, alcohol, light bubs, tea, coffe, energy and more. ~160-180% tax on cars (plus the 25% VAT of course).
It's difficult to immigrate because of immigration regulations, and if you do, you'll find yourself in a place with lots of taxes. This limmits labour supply. The free market within the EU, isn't all that that free. Regulations makes it difficult for foreign employees and contractors to work in Denmark. Right now, it's difficult for home owners to find people to repair and improve their homes, because the supply is low.
And because of the taxes and VAT, to pay someone so that they they have DKK 100,- after taxes you have to make something like DKK 800,- before taxes. ~60% marginal income tax for the buyer, 25% VAT, and ~60% marginal income tax for the seller. You do the math.
Lots of regulations on housing. The rent controlled apartments are cheap. In central Copenhagen, there are a lot of those. Houses and condos are not cheap. "Zoning" laws restricts the supply of new buildings.
Posted by: Lau Taarnskov at Aug 21, 2006 7:06:28 AM
About half the people I know who work in Copenhagen actually live in Malmo, Sweden & commute daily into Denmark, because of the comparative housing costs (& good transport links). Anecdotally I'm told this is a quite new & growing trend, but I don't have any stats.
Posted by: nick at Aug 21, 2006 8:02:58 AM
Tyler, thanks for the link to Mark Thoma's piece (he's been guest blogging over here for the past week). Readers may also be interested in an earlier post: Nine reasons why London is so expensive at neweconomist.blogs.com
Posted by: New Ecnomist at Aug 21, 2006 8:28:54 AM
“It’s very expensive compared with Spain. As you spend £1 here you would pay in Spain €1. Everything just costs too much. We’ve been eating hamburgers to save money.”
I wonder if there's a psychological effect here. For example, maybe it's just human nature that a sandwich, say, is worth "5 units of currency", and so that means a $5 sandwich in the US and a 5 Euro sandwich in Paris becomes a 5 Pound sandwich in the UK... and since Pounds are so much bigger than Euros or Dollars, the sandwiches suddenly become expensive.
Posted by: Foolish Jordan at Aug 21, 2006 9:45:15 AM
I don't know why UK is so expensive but I have some knowledge of the Scandinavian countries. I'm not so sure that Denmark and Sweden - I'm Swedish - really are expensive. Some goods and services definitely are more expensive, mostly due to redistributive tax systems, no or low illegal immigration and low competition (the Swedish grocery sector is basically a three-way racket). On the other hand, health care and education is fairly cheap and universal. Real estate is fairly inexpensive as well, with the possible exception of Stockholm and Copenhagen. I have lived in UK and Australia. UK was horribly expensive (most due to exchange rate anomalies). Eating out in Melbourne, and food in general, was cheap. The housing, on the other hand, was expensive. Other shopping was a wash between Australia and Sweden.
Norway, on the other hand... that's a seriously and mysteriously expensive country.
Posted by: Dan K at Aug 21, 2006 11:44:42 AM
I was interested to see the article in the Sunday Times about prices in this
country. Having lived here for nearly thirty years and seeing the constant
rise in prices I can only wonder how the majority of the population manage to
get by. People do complain but only to each other over a cup of tea or a very
expensive pint of beer. There is such a thing as safety in numbers which the history
of this country will bear out but complacency has now set in and the government
is quite keen to capitalize on it at every turn. Greed plays an important
part in the equation as told by the uproar when the minimum wage was finally
introduced here a few years back. Many businesses forecasted bankruptcy
because they would have to pay workers a real wage rather than rake in all
the profits. Of course this hasn't materialised as all they did was raise their
prices to ensure they still made out. I don't see how these people make it when a gallon of
fuel for their car costs around what they make per hour. Just watching
television is a taxing experience because you must have a tv license to
cover the costs of only the BBC channels when there are so many more to choose from.
Mumbling amonst themselves won't get anything done but over a cup of tea or a good pint
you can only discuss the weather for so long.
Posted by: F. Sutton at Aug 21, 2006 12:29:48 PM
I think the answer to this is found in basic economics: "the correct price is that which the market will bear."
In the UK, consumers will pay more, so prices are higher. The reasons are possibly complex, but the fact
remains that consumers here will pay the prices charged.
I've been living here in London for 7 years, and this issue has come up from time to time since I've been here. It never changes. To me it proves that it has less to do with specific market conditions (real estate prices, overcrowding, taxes, etc.) and all to do with the mentality of the British consumer.
It has been mentioned that outsiders are astounded that people don't complain much about bad service and high
prices. They just adopt a stoic attitude of "mustn't grumble." I've learned that it's considered very bad form to complain in public, like one would do in New York, for example. This may be a carryover from the post-war rebuilding time when everyone had to pull together (and not complain).
Also, I believe the class system has a lot to do with this issue. People are more able to accept what is dished out, as compared to those from other countries, especially the lower classes.
In a way, I see the British economic system as a house of cards that everybody, from top to bottom supports.
If the public stopped paying those inflated prices, it would have a ripple effect that would cause a profound change in the economic system. People here don't really like change.
The country is not wealthy enough and producing enough economic value to warrant these higher prices, but if the public keep paying them (and thereby continue to have a lower standard of living than they would elsewhere), the system will continue as is.
Posted by: Tom Jackson at Aug 21, 2006 5:22:58 PM
Tom's right, price discrimination is an important factor. But price differences of this magnitude indicate some highly monopolistic markets in the UK. And my experience is that prices are just about as outrageous all over the UK, including Scotland, and in Ireland as well. I figure the Isles have a kind of monopoly on healthy economic policies. Liberalizing economic reforms happened faster there, in part because of the parlimentary system. The continent remains a relative backwater with overbearing regulation, and the US is an ocean away. The US doesn't have such high prices because of the much larger geographical area and diverse market. Yes, NY is expensive, but if you can't afford it you just move to a cheaper city, like Atlanta. I don't think the UK can maintain such high prices, but that it has for so many years is largely due to political rigidities on the contintent. Already, as mentioned, Brits are leaving at the rate of 350,000 per year, which will tend to reduce prices.
Posted by: will mcbride at Aug 21, 2006 6:12:30 PM
A couple of comments.
London doesn't have a Communist Mayor, Ken Livingstone is a member of the Labour Party. And he's pretty powerless as what people call 'London' is actually 33 local authorites. The post of Mayor and a new London Assembly were created in 2000, "Responsibilities include transport, the police, fire and emergency services, cultural strategy and economic development."
The extremely popular Mayor of Paris, Bertrand Delanoe, is a Socialist whose policies are opposed by the Communists (who do have a political presence in France, but in the UK do not).
I don't know the reasons for the high prices in the UK, but an important one is probably the high price of property, and that probably goes back to the fact that for most of its history property in the UK was owned by a very tiny group of landowners.
Posted by: Doug at Aug 22, 2006 3:04:19 AM
Having recently spent several weeks in the uk after a gap of @ 10 years i was absolutely staggered by the cost of food and accomodation, we tried to stay as much as possible at B&B's but how can someone justify charging 200 pounds sterling for two people for 1 nights stay at a B&B? this was all mainly in the south of england, we actually went to rick steins restaraunt in padstow and saw the prices there for food, we declined the experience, he has a kitchen shop selling a plastic salad bowl with various plants encased in the bowl, this cost 64 pounds, the spoons to go with it cost 24 pounds making 88 pounds in total or (132 euros), i bought exactly the same items in france last year for 25 euros (17 pounds)a nice mark up. He should be called rick einstein as he is making money at the speed of light.
The price to enter the various tourist attractions to me seem to out of control, the final straw was at warwick castle, where if memeory serves me right the entrance fee was 35 pounds each, we simply turned around and headed north, the prices slowly decreased as we headed to the north of england and scotland.
We avoided london completely, i have to say that it is a great place to visit if you are from overseas as in quite short journeys there is a lot to see both historical and countryside wise, but first remortgage your house before you plan to go there.
Posted by: Bill at Aug 22, 2006 6:31:15 AM
Property prices are a key issue, which is why sofas are 2x what they are elsewhere while non-bulky products like cameras are the roughly same price. The sofa takes up more floorspace in a store. Open immigration from Poland and other new EU countries is helping to moderate costs: Poland has a similar GDP per capita to Mexico, yet the influx of Poles into London hasn't resulted in any of the problems the Minutemen of Arizona attribute to Mexicans. The price of London is high because the demand is high: French i-bankers, Polish builders, German draft-dodgers, Australian physiotherapists all want to be here. Capital of the world's fourth richest economy, a country a Polish girl told me was like "a mini-America, but closer to Warsaw." As for London's mayor, Red Ken's leftism is all talk, at least on economic issues. Typical Ken day: photo op with Hugo Chavez, lunch with the Bengali transgender community, and then approve a bunch of new bank skyscrapers.
Posted by: andrew smith at Aug 22, 2006 7:01:38 AM
RIP-OFF BRITAIN? IF YOU ARE BRITISH, YOU ARE LAUGHING!
The true sign of whether Brits are being ripped off is whether growth in their ability to purchase goods and services is slower than in the comparable countries. Prices are certainly part of the story, but only a part. Nevertheless, let's start with prices as they form the crux of this discussion.
Rents and over-crowding have something to do with high prices in the UK: supply for living space faces tight demand, and these high costs percolate through the economy. (A big mac in central London is expensive because McDonalds needs to pay Westminster rent). But to talk about Britain being a “rip-off”, or “uncompetitive” or “unproductive” is simply economically illiterate. By looking only at nominal prices only, one misses a key part of the living standard (and productivity) equation: income.
Take for example rents. Rents push up prices, but they are a transfer, not a real cost. The owners of property do very well at the expense of those who need to rent services. This may explain why foreigners in particular feel justifiably “ripped-off”. But to say the same of UK owners of property would be disingenuous. The fact is, people seem prepared to pay these rents.
To put this another way, British citizens would be being “ripped off” if the differential between incomes and consumer prices (purchasing power) rose more slowly than in non-“rip-off” countries. But this seems not to be the case. Measured on a purchasing power parity (PPP) basis (which accounts for differing prices of good as services internationally) the Brits have been doing relatively well: according to the OECD they seem to be getting richer faster relative to most their European counterparts. They are able to consume increasingly more of the goods and services they are supposedly being ripped-off over than their trans- Channel/Atlantic cousins.
To recap: British real incomes and real purchasing power has been rising faster than in most rich countries because nominal incomes (the sum of wages and capital rental income) in the UK have been rising faster than UK prices, and the excess of income growth over prices has been faster than in most European counties and possibly (if you believe the latest National Accounts revisions) faster even than the US over recent decades.
So no rip-off for the Brits. What about competitiveness? This applies only to tradeable goods and services. If, under market exchange rates (which is above the PPP estimmate), UK goods are that much more expensive, why does anyone buy them? Good question? The UK has a trade and current account deficit, and many European nations do not, but as a proportion of national income, it is a third the size of that in the US. This suggests that for whatever reason, consumers internationally still want to buy UK tradables. This argues against the “poor quality” flabby markets (bovine consumers) story.
Finally, in so far as the nominal exchange rate is above the PPP rate (which simply means UK that goods really are more expensive when compared in a common currency) this also benefits the Brits at the expense of visitors. UK consumers have greater purchasing power and firms an improved terms of trade. Many Londoners, for example, could rent or sell their flats and live well in Thailand without needing to do another day's work in their lives. The really interesting question, then, is why don't they?
The answer to the "rip-off" question, therefore, is Brits are doing very well thanks! Yet prices are high. Not least because foreigners are very keen to buy British products and services, and invest in British assets (including moving to, say, London and pushing up rent and property prices further). They could always vote with their feet, and their wallets, and ditch the UK, as indeed could the Brits. Then prices and incomes would surely fall, but until then, Brits should celebrate their world-beating increase in purchasing power! But I suppose it is in their nature to whinge?
Dimitri Zenghelis
Posted by: dimitri zenghelis at Aug 22, 2006 9:56:54 AM
rapid detox rapid detox
Posted by: rapid detox at Sep 12, 2006 9:46:28 PM
i wish i knew why the cost of sustaining ourselves is so expensive?
more and more i am noticing how expensive basic food like ham and chicken is.
asda in my opinion is the worse when it comes to overpriced food.
they have the nerve to charge over £3 for 6 small round pieces of chicken wrapped in a small piece of bacon stuffed with cheese and leek.
it just puts me right off when i see the prices for so little.
and in 2 months time you will see the price of food go sky high because its christmas and once it is over it's back to high prices for so little again.
Posted by: trevor ellis at Oct 19, 2007 5:29:06 AM
Posted by: at Oct 13, 2008 11:41:50 PM
If you want to know something about laptop betteries,you can see it from hp nc8200 battery,It,s very cool.
Posted by: yanhong at Feb 26, 2009 4:40:07 AM
