Free Our Data: the blog

A Guardian Technology campaign for free public access to data about the UK and its citizens


Trading Funds report first glance: economists, start here

As the report was written by two economists (Professor David Newbery and Rufus Pollock) and a professor of law (Lionel Bently), all of Cambridge University, it’s not surprising that it contains a lot of economic calculations – the sort that require at least A-level maths to feel comfortable with. (Do we all still feel comfortable? Good.)

We like the start:

The contents of this document may be reproduced free of charge in any format or medium provided that it is reproduced accurately and not used in a misleading context. The material must be acknowledged as Crown Copyright and the title of the document given.

So, just to be clear, the 154-page report is called “Models of Public Sector Information Provision via Trading Funds”. (Please note: page numbers given here refer to those in the PDF, which often differ from the printed form.)

We began at the end, with the appendix “A General Argument for Selling Public Sector Products at Marginal Cost”. This is a pretty important part of the argument: why should the government give away stuff rather than selling it for a profit?

A crux point from the appendix which looks at pricing at marginal cost (p139):

taxing public production (by the difference between price and marginal cost) is inefficient if the production is an input into production, and unlikely to be part of an optimal commodity tax system when sold as a final good.

That is (to simplify again from the economics) if the public data get used to generate something else that is then used in the private sector, charging for them isn’t the most efficient way of growing tax revenue.

They add (p139):

Certainly it is hard to believe that taxing any PSI products would increase consumers willingness to undertake taxed labour activities, or that reducing their price would lead to an increase in leisure at the expense of paid employment.

As shown by the government’s 2003 Green Book, the authors say, (p140)

The UK Government attaches importance to the distributional consequences of its actions, many of which are justified by the beneficial impact they have on distributional outcomes.

A key question then becomes the “marginal cost of public funds” – how much it costs the private economy to spend £1 in the public sector. A 1992 study noted that (p146)

‘The MC(P)F ultimately depends not just on the tax, but also on the nature of the government expenditure under consideration.’ This is a particularly salient point in the case of government revenue subsidising trading funds in order to offer below average cost pricing. As an example, the lower cost of trading fund data may lead to greater innovation.

Which would mean? (p146-7)

On the one hand this could result in higher corporate incomes, which would contribute to subsequent higher

government revenues and hence a lower MCPF.

(This is the Free Our Data argument.)

On the other hand the lower costs of trading fund data may be passed onto lower final goods prices. This case would leave the public with more income to spend on other goods and services, and could weaken incentives to supply labour. This time the lower government revenue would raise the MCPF.

(I have to admit I don’t follow the logic of the second sentence, unless it is that extra income to spend on other goods and services does not lead to extra government income because the same amount of money is being spent – all you’ve done is shift some spending from trading funds goods to other goods, without expanding the economy.)

Leave a Reply