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Economic Myths: Business rate hike may force UK's shops to raise prices

Tuesday, November 22, 2016 10:20
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The Guardian repeats the usual bleating from the owners of retail premises:

An analysis by Paul Turner-Mitchell, a business rates expert, and the property agent CVS has found that the business rates for 485,435 retail premises in England, which account for more than a quarter of all properties liable for rates, will rise from £7.7bn a year to £8.2bn over the next five years.

Mark Rigby, the chief executive of CVS, said: “The retail sector is facing a significant shift in structural dynamics, with most reporting challenging conditions ahead.

“Add to the mix the already ‘lethal cocktail’ of increased operating costs from the national living wage and apprenticeship levy, and a near half a billion pounds increase in business rates per year for the next five years is simply unsustainable. Something will have to give – whether that’s store closures or even higher prices at the till.”

They fail to make a distinction between marginal costs (i.e. the cost of each extra unit) and fixed costs. The profit-maximising price/output level is dictated by marginal costs, not fixed costs. Here’s the relevant article from Economics Help and here’s the diagram:

The article does not mention fixed costs at all. Clearly, the National Living Wage and the apprenticeship levy increase unit costs, so these might result in lower output/higher prices. In economic terms, those things are very bad indeed (whatever their political/social appeal).

But changes in fixed costs like Business Rates won’t make a difference to prices, unless they are so high as to wipe out profits altogether; in which case
a) shops will threaten to shut; either landlords concede on the rent to balance out the BR increase or they don’t care and shops go out of business
b) in which case landlords are stuck paying the Business Rates themselves with no rental income to cover it
c) local average rents will fall, Business Rates will fall and the shop will become viable again.
d) owner-occupier businesses (our much loved ‘small local shops’) are usually much less profitable (before rent) than tenant businesses, who have to make the rent each month, and can’t be insulated with rent reductions. Well so what? Get with it or get it rented out.

And anybody who has travelled outside his home town knows that freely transportable goods sell for the same price all across the UK – despite the huge disparity in Business Rates. Why would anybody think that this will suddenly change?

It is only goods and services consumed at point of purchase (restaurants, pubs, cinemas etc) whose price includes a location rent element where there is any noticeable different in price between expensive areas and cheap areas; assuming that those businesses are already charging the profit maximising price, why would anybody think this will suddenly change?


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