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ib economics hl notes

Intenal Assessment Supply Demand

UPDATED ON - 12 APR 2020
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This Economics HL IA talks about economic inflation and deflation around supply and demand. There are three news articles in this IA and it's broken down by "Economics Commentary" below it which helps the reader comprehend the economic impact of each article.


Table of Contents

  1. Article 1

  2. Commentary on Article 1

  3. Article 2

  4. Commentary on Article 2

  5. Article 3

  6. Commentary on Article 3



Baseball's Stadium Shakedown
By Ralph Nader
Sunday, July 13, 2003; Page B07


Though it has hit a few bumps in the road recently, Major League Baseball still expects to shake down the District of Columbia. Many in the city want a team -- but we don't have to give in to baseball's demands to get it.

Major League Baseball, made up of 29 individual owners or ownership groups, owns the Montreal Expos collectively. The league plans to move the Expos to a more lucrative market, sell the team to new owners for a considerable profit and stick taxpayers with the tab for a new stadium.

The Washington metro area, by far the largest in the nation without a team, is preferred by baseball as a place to relocate the Expos. But Major League Baseball is demanding tribute before it will do what is in its own interest. No locale can become the Expos' new home, baseball's titans have decreed unless the public pays for most of the cost of a new stadium.

The result: Washington, it's Northern Virginia suburbs and Portland, Ore., are engaged in a race to the bottom that would limit resources for other pressing public services to subsidize a stadium for wealthy owners.

Look no farther for the success of baseball's squeeze than the District: Mayor Anthony Williams offering $200 million, then $275 million, then $300 million, then $339 million in
corporate welfare to big-league baseball.

Fortunately, Jack Evans, chairman of the D.C. Council's finance committee, where the stadium bill now sits, has jumped in front of the mayor's runaway gravy train. Evans has
gained widespread support throughout the city by calling baseball's bluff and promising that no stadium bill will go through his committee until baseball commits to the District.
"Anything short of that, we've got nothing here," Evans said.

Evans's action is certainly a step in the right direction, but he isn't challenging the core concept of a stadium subsidy. Even if baseball commits to come to the city, the stadium bill will still be grossly inappropriate.

Williams claims that because a stadium would be financed by bonds and repaid through taxes outside the general fund, it wouldn't take money from schools, libraries, parks, police, health care, housing, drinking water, public transit, children's programs, and other city-funded services.

But there is no free money; Williams should leave the Enron accounting to Arthur Andersen. Floating bonds might defer the day of reckoning, but if the city chooses to spend hundreds of millions of dollars on a stadium, that money will eventually come at the expense of the city's taxpayers, allocated either to reduced city services or increased taxes. The only other alternative is that the investment will generate growth that raises overall tax revenue. But a wealth of experience makes clear that won't occur.

As Smith College economist Andrew Zimbalist wrote this year, "There are very few fields of economic research that produce a unanimous agreement. Yet every independent economic analysis of the impact of stadiums has found no predictable positive effect on output or employment. Some studies have even concluded that there is a possible negative impact."

One such study, by Robert Baade of Lake Forest College, examined 30 cities over 30 years and found that 27 experienced no significant impact from new stadiums, while three experienced a negative economic impact.

One segment of society does benefit from stadium subsidies. Team owners enjoy windfall profits when they turn around and sell. The favored ownership group for the District is
the Washington Baseball Club, a team of investors reportedly worth $3 billion and headed by Fred Malek. A veteran of these conversions, Malek formerly owned the Texas Rangers,
with George W. Bush among others. In 1991 Malek's group demanded that Arlington, Tex., taxpayers provide $135 million for a new stadium. The group threatened to move
the team if the ransom wasn't paid. After the stadium was built and the Rangers' value had tripled as a result of the taxpayer subsidies, Malek's group sold the team.

There is an alternative to the baseball shakedown. The District, Northern Virginia and Portland should all tell baseball that they are ready to bid based on fan enthusiasm, transportation lines, and other such factors, but not on the size of the public subsidy for a stadium. They should tell baseball that there will be no subsidy, especially in this time of extreme financial hardship for city and state governments.

Meanwhile, Major League Baseball should sell the Expos to new local owners for the amount it paid for the team -- $120 million, not the $250 million or more it will demand. The savings could be used by the private owners to build a new stadium or renovate an existing one, such as RFK, covering part of what baseball is now trying to squeeze from taxpayers.

The writer is a consumer advocate and author. He is the founder of League of Fans, a sports industry watchdog project.


Economics Commentary #1


“Baseball’s stadium shakedown”- the Washington Post.

The article raises some interesting questions about the role of sports in society. Is it right of governments, particularly those at the state and municipal level, to subsidize the building of a sports stadium? What are the benefits of a city in building a new stadium? Who should pay? Do the benefits outweigh the costs?

Usually, subsidies (payments made by the government to producers of goods and services) are given to provide for merit goods, to protect businesses from foreign competition or help consumers by lowering prices. Neither seems to be the case here, so why should the government subsidize? The implications of subsidies are many, the most important being that resources will be re-allocated. It would create jobs in the area, complementary businesses such as merchandising shops would spring up, possibly increase public transport use and promote tourism.

Nader is critical to having taxpayers pay for the new stadium. The government taxes people directly (taxes on income and wealth) and indirectly (taxes on spending and
output) and use the tax revenue to invest in various sectors. When decisions are made at a municipal level the question about who should pay becomes more problematic and goes back to who benefits from the stadium. The main argument for selling a stadium construction contract to the tax-paying public is that it gives a boost to the local economy. The money will be generated, and the taxes on the new revenue will, in theory, compensate for the taxes used to subsidize the stadium. However, there is a fallacy in this line of thinking, which comes from how money is generated, and the principle of opportunity cost. If a family goes to a ball game they are indirectly taxed, and the government would, therefore, earn money. But it would also have earned money from indirect taxes had the family gone to the movies or bowling instead. So does it really boost the economy? Suppose it will attract tourists to the area, but the same principle applies here. $50 spent on baseball is most likely $50 not spent somewhere else.

One could argue that the taxes lain on the owners and players would boost the local economy. However, it can be possible that players settle out of town, particularly when retiring, spend their money elsewhere and import luxury goods. The government has no guarantee in the long run that the money drawn from direct taxes alone would offset the costs of building the stadium.

Of course, non-economic benefits should be considered. A new stadium could promote health, enthusiasm for the sport and increase unity as the city gains a concrete, multi-racial, apolitical entity to rally around. Still, it is rather dubious that a stadium makes a good governmental investment.



Huge Rise in Tube Fares to Plug a Deficit
By Danielle Demetriou

20 August 2003


Tube fares in central London are to rise by up to 25 percent and bus journeys in the districts will cost 43 percent more in the biggest increases for 20 years.

London Underground journeys will be hit the hardest, with single-fare Tube tickets in Zone 1 rising from £1.60 to £2, while a weekly Zone 1 travelcard will increase from £16.15 to £18.15.

Bus journeys in outer London will also rise, from 70p to £1, although children under the age of 11 will be able to travel free on all buses under the reforms, unveiled yesterday by Ken Livingstone, the London Mayor.

The fare changes, to be implemented from 4 January 2004, are intended to raise an additional £42m from the Tube and £39m from the buses, Mr. Livingstone says. The extra funds will help to plug a growing deficit in Transport for London's budget, which was predicted to have reached £560m by 2007.

Mr. Livingstone described the reforms as "the most extensive package of changes to London transport fares since the Fares Fair policy 20 years ago" but blamed the Government's failure to invest more in the Underground on the fact that the system did not provide value for money.

He said: "If I had complete freedom over my finances I would be looking at the sort of fares reductions of about a third on the Underground. But unless the Government gives me that money I cannot do it. It is the most expensive system in the Western world and I suspect the service is well below most of our rivals."

The announcement coincided with the introduction of the Oyster card, a new version of the existing travelcard, which marks a move towards a cashless transport system. Passengers can pass the smartcard, which can be charged up like a mobile phone card, over a yellow detector while passing through Tube barriers or boarding buses. Tube travelers who use the Oyster card will be able to continue paying 2003 prices next year when the price rises are implemented.

Lynne Featherstone, chairman of the London Assembly's transport committee, said: "The huge hike in cash fares on the Tube is way beyond encouraging pre-payment on a service which is still failing the public."


Economics Commentary #2

“Huge rise in Tube fares to plug deficit” -The Independent.

The fact that they are trying to increase revenues by increasing the fares says something about the price elasticity of demand for public transportation. The centralized London Transport has decided increasing bus fares believing that a 25% increase in price would lead to a less than 25% decrease in quantity demanded. This suggests that public transportation in London is relatively price inelastic.


The fact that they are raising the price of tube journeys more than bus journeys could suggest that bus journeys are more elastic in demand than tube journeys. This could be because the Tube is not dependent on city traffic and hence faster and more reliable. Inner-city journey fares were also to be increased less than district ones. These suggest inner-city journeys are more elastic. This seems reasonable as one could walk/bike in the  city center of London but those living out in the districts are dependent on the tube to
get into town, particularly as there is very limiting car parking in the city center.

Two determinants of the elasticity of demand are the number and closeness of substitute goods/services and the proportion of income spent on the goods/service. In this case, there are not many substitutes (fares of both the Tube and bus rides are rising), leaving walking, biking, and driving. Biking and walking may not be a good substitute (too long distances) and changing to driving a car might not be a real alternative. A car costs a great deal of money (both to run and purchase), one needs to have a license and there is restricted parking in London. Hence a change from public transport to car driving cannot happen overnight (there is a time lag).

Also, the proportion of income spent on public transport is not very high. This supports the hypothesis that public transport journeys are relatively inelastic in demand.

By making tickets free for those under 11 years mean that more (big) families will probably travel by public transport.

The Oystercard system, being cheaper than buying normal tickets, will probably result in fewer queues and more efficiency as tickets are then pre-paid by cell phone. This will again provide a better offer to the public, making more people likely to travel by public transport in the long run.


Financial Daily from THE HINDU group of publications
Sunday, Sep 21, 2003
Agri-Biz & Commodities - Insurance
Income Insurance Scheme for Farmers From Next Rabi Season

Our Bureau
New Delhi, Sept. 20

THE Union Government plans to introduce a comprehensive `income insurance' scheme for farmers during the coming rabi season.

The proposed scheme is aimed at compensating farmers for income losses suffered by them not only on account of lower than expected crop yields but also because of their products being sold below the official minimum support prices (MSPs).

"We will start this scheme on a pilot basis from the coming rabi season. Our idea is to have the scheme in place for at least one crop in one district of each State. This would ensure coverage of about 30 districts in the coming season," the Agriculture Minister, Mr. Rajnath Singh, told Business Line.

The Minister claimed that the scheme was `novel' since it protected farmers not only from yield losses but even adverse price fluctuations. Further, unlike the existing MSP scheme, which was implemented only for a few crops such as paddy and wheat and that, too, benefiting farmers of few States (mainly Punjab, Haryana, and Andhra Pradesh), "the proposed scheme will eventually extend to the whole of India and cover all crops", Mr. Singh said.

The Minister said once the scheme is in place, there will be no need for the Food Corporation of India (FCI) and other Government agencies to physically procure grains or oilseeds from farmers at the official MSPs.

Instead, farmers can sell their produce to private traders with the insurer bridging the gap between the lower market price and the MSP. The scheme would protect `average income per hectare' for the farmer, which will be computed as the product of the average crop yield in a particular block (based on crop cutting experiments) and the MSP.

"If any farmer's income goes below this average either due to yield losses or fall in prices, the insurance company will meet the difference," Mr. Singh said. While the premium rates to be paid by the farmers would be actuarial, the Government will, however, be willing to provide a subsidy to make the scheme attractive.


Ministry officials said the best part about the scheme was that it was fully WTO- compatible since it did not involve any `trade-distorting' payments to the farmers and the market was left entirely to private players, with prices being set not by FCI but by the normal supply-demand factors.

"FCI will continue to procure grains, but this would be limited to just meeting the requirements of the public distribution system and maintaining a critical minimum buffer stock. This would confer huge savings in carrying costs and additional costs of transportation and distribution of surplus grain," the officials pointed out.


The only problem though lay in the modalities of its implementation on the ground. Mr. Rajnath Singh admitted that covering 11-crore odd farming families through the scheme would not be easy and there could be scope for corruption and instances of farmers not being paid the indemnified amounts.

"It is for this reason that we want to start the scheme on a pilot scale. The pilot projects will provide us the requisite experience to replicate the scheme on a large-scale national level," he added.


Economics Commentary #3

Income insurance scheme for farmers from the next rabi season. The Hindu Business Line.

Buffer stock schemes are intended to provide stable prices to benefit producers and consumers and are generally used with commodities, where the price is very volatile. India is dependent on the export of commodities and is therefore vulnerable to such volatility.

Farmers have unstable incomes, mostly due to uncertainties in weather causing supplies of certain goods to be in excess or shortage, leading to price fluctuations. Since food is a necessity, farmers face inelastic domestic demand, so when there is a poor harvest, total revenue falls drastically. They also face elastic international demand, bumper harvests in competing countries can lead to a drop in demand, a sharp reduction in price (and hence in total revenue). Also, small changes in output can lead to large changes in price because both supply and demand are inelastic in the short run.

In the short run, governments may want to shield farmers from these fluctuations. It is important in the long run to ensure that farm income grows at the same rate as for urban dwellers to ensure balanced sectorial growth (quite troublesome as income elasticity for food is close to zero, meaning it has very little potential for growth in demand).

India has previously dealt with this problem by setting a minimum price on some crops.



The new scheme is quite interesting. The government will encourage the farmer to buy “income insurance” (by subsidizing) from companies who will pay them if crops fail or market prices fall below a price set by the government. The supposed benefit from this is that, unlike direct subsidizing, it will not distort market signals.

This is not entirely true, any form of subsidizing distort market signals and farmers will be encouraged to produce more as there is less risk. There are still problems. There is a probability of cheating by individuals who might seek to sell larger amounts by reducing the price and get the insurance company to pay the difference. There are also other factors that India has little control over, such as the increasing supply of many commodities throughout the world due to improved technologies, causing downward pressure on prices.





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