Giudo on booze prices and opportunity costs

Guido\’s got a little campaign going.

Booze is vastly cheaper in Parliament and we should stop there being the subsidy which makes it so.

Well, yes, quite. Last number I saw (a few years back) was that the subsidy was £5 million.

So, if the subsidy disappears, if prices rise so that there is no direct taxpayer subsidy, is that the end of it?

Well, no, actually it isn\’t. For something closely related to opportunity costs then raises it\’s ugly head.

Even if there is no direct, out of the taxpayer\’s pocket, subsidy there will still be an indirect one.

Firstly, Parliament is a Royal Palace. Thus the bars in there do not pay business rates.

From numbers I glanced at a few years ago (no matter why) a pub on the Vauxhall Bridge Road, not that far away, would be paying £40,000 to £50,000 a year in such rates.

Secondly, I am absolutely certain that such bars are not paying a full commercial rent. I don\’t know whether they\’re paying any rent at all of course but even if they are it\’ll not be a full commercial one. For that pub just down the road that would be another £40,000 to £50,000 a year.

So, even if there\’s no direct, out of pocket, subsidy, there would still be the money lost by those bars not paying the same costs into the Treasury that a fully commercial operation would have to. And thus, even without a direct subsidy, booze would still be cheaper.

Now, with booze in Parliament (and it\’s not as if there aren\’t enough people willing to pay to pour booze into the people who work there) it\’s all a bit trivial. But it illustrates a much larger problem.

Think, for example, of those who say that Housing Benefit it very expensive (which it is, at £21 billion a year, £700 on average per taxpayer) and thus that the solution is more social housing. It, perhaps, does cost less in cash outlay to build housing on land the government already owns, or to insist that developers put some amount of social housing into a new development. OK, we\’ll grant that then, that cash outlays are lower.

However, that doesn\’t make the subsidy go away, it only disguises it. As an example, the difference between market rent and social rent for a three bed house in Westminster (used only because I happen to know this number) is around £20,000 a year. If the State builds a house and lets it out at a social rent it is therefore foregoing that £20,000 a year. It\’s foregoing £400 or so a week actually: which is, as any fule kno, about the amount that Housing Benefit is to be limited to.

No taxpayer has had to stump up that cash, this is true. But they have just as certainly had to forego either what could have been bought with that money or the lessening of the depredations upon their wallets that charging the full rent could have produced.

Imagine, just as an example, that we replaced all HB with social housing. We\’ll ignore, just in this model (for that\’s what models do, see, they ignore things in order to make clear the salient points under discussion) that private rents are currently inflated by the existence of HB and simply say that it doesn\’t really matter which way around we do it.

We can either subsidise private rents by £21 billion via HB or we can subsidise social rents by £21 billion by not charging market rents. Either way, it\’s still £700 per taxpayer: yes, in one people have to cough up, in the other they\’re just made poorer without realising it but the economic cost is the same. As are the people who have to carry that economic cost.

It might be true that social housing is in some manner \”better\” than subsidising private housing. I don\’t happen to think so but you might, fair enough. But I have a very strong feeling that much of the support for social housing comes from some weird belief that it is either free or cheaper. Which it simply ain\’t.

10 thoughts on “Giudo on booze prices and opportunity costs”

  1. When we lived in Adelaide we had a babysitter who lived with her infant in social housing. According to her, Adelaide kept the cost down by building on cheap land out in the sticks – no costly city-centre social housing there.

  2. The houses themselves increase in value, and the state can later sell them at a profit, HB is just a wodge of cash given away.

    Or, as the houses are owned by the state, there is no rent. What i mean is that rent increases every year in the private sector, and so HB has to increase with it, whereas with social housing they only pay the maintenence costs and the upfront fee. More up front, less over time.

    I’d say it’s pretty difficult to break down these costs and compare them, but it doesnt seem unreasonable that social housign is cheaper if done properly (ha).

  3. Regarding council houses: Yes. Something that people seem to ignore in discussing the merits of social housing that there is little material difference between giving taxpayers money away to people to find private accommodation or the state forgoing rental income by providing free council accommodation.

    Either way the one that picks up the bill is the taxpayer. With HB it is taking money from me to give to someone else. With free council houses it is taking money from me to make up for the shortfall in council rent income. That lost income should have been meeting the construction and maintenance costs which instead is met by taxpayers.

    Council houses are useful things – they enable a mobile workforce to move to where jobs are – but the pendulum has swung too far to the point of absolving too many people of the need to support themselves. By all means let’s have more council houses but for paying tenants please.

  4. Hmm, good points.

    I guess it starts to stray into psychology though: as a Fact About Us, it seems that people (even if they shouldn’t be) are more adverse to actually shelling out money than foregoing its receipt. Opportunity cost is always a funny thing for A Level economics students to get their heads around, and I suspect it may be because we’re not used to thinking in terms of it.

    Of course, arguably we should. And even more arguably accountants and people in the treasury definitely should. But I do wonder what the psychological consequences of people not really getting to grips with opportunity costs are more widely, and in what unseen ways.

    (sorry, bit rambling but hoepfully you get my point)

  5. Richard Grey:

    “The houses themselves increase in value, and the state can later sell them at a profit”

    The point is how much profit that could have been made by society (i.e. not only the state) had they not built those house to begin with but instead invested the money in something else…

  6. But I do wonder what the psychological consequences of people not really getting to grips with opportunity costs are more widely, and in what unseen ways.

    If they’re spending all their time thinking about opportunity costs, they’re not using the time to something which could be more productive.

    (Sorry, but someone had to say it.)

  7. Not really.

    The choice is analogous to this:
    1. Allow UK farmers to grow more wheat and bring prices down a bit, create jobs etc.
    2. Prevent UK farmers from growing wheat and subsidise imports instead.

    I trust that any sensible free marketeer would prefer option 1. Why is social housing any different?

    Having more social housing keeps rent levels down, so although there might be a fairly painless £21 billion non-cash subsidy to social tenants, non-social tenants ALSO get a non-cash benefit, which is that the rents that they have to pay are also reduced, whether this is by more or less than £21 billion is a different question.

    (Of course this would be A Very Bad Thing from the point of view of the Home-Owner-Ists, but sod them).

  8. The other point you miss is that at present, there is a £7 billion subsidy to ‘private landlords’. That is a real cash expense.

    If they built more social housing instead (cash costs from there on in being minimal) then the taxpayer is freed of the £7 billion cash expense, and while this may increase the notional subsidy to social tenant, there is corresponding notional income of £7 billion.

    i.e. the taxpayer is spending £7 billion of notional income on a notional expense. This must be far better than spending £7 billion of cold, hard cash on a real expense.

    If you are going to do accounts, even notional cost accounts, you have to do both sides of the entry.

  9. Mark Wadsworth – I don’t follow your analogy.

    The options for providing housing for poor people as Tim frames them are:
    A. Government builds social housing and provides it to tenants for free. The government foregoes the rent, so either it must raise taxes or provide less services to citizens than if it had not built the social housing, or build it but charged a market rent.

    B. Government doesn’t build social housing, but pays poor people’s private housing rent. The government is paying out money, so either it must raise taxes or provide less services to citizens than if it had not build the social housing.

    I can’t figure out what you think my option A maps to in your example, does it map to 1 or 2? As far as I can tell, it doesn’t match to 1, as that’s only about letting farmers do stuff, something they’ll presumably only do if it’s profitable to them, while building social housing is about the government actually doing something. But it doesn’t seem to map to your option 2, as no one is being prevented from building private housing.

    I also don’t understand what you mean about it’s far better to spend £7 billion of notional income on a notional expense, than spending £7 billion of cold hard cash on a real expense. That could have been £7 billion to spend on healthcare or education. I can understand that it might feel differently, but government accounting is about more than just how we feel about numbers.

  10. Pingback: There’s No Such Thing as a Free House « Adam Collyer

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