The travel and tourism industry Figure 1: Package holiday market share of the six largest providers, booked by UK residents, 2019 Figure 2: Jet2 package holiday prices to Sorrento 2 Adults for 7 Nights from Monday 25 May 2020 Half Board 1 x Premium Double or Twin room Return flights from Edinburgh View flight times 22 kg Bag Allowance 10 kg Hand Baggage ATOL Protected Coach Transfers Holiday price £1,576 Per person price £788 2 Adults for 7 Nights after Thomas Cook shutdown Half Board 1 x Premium Double or Twin room Return flights from Edinburgh View flight times 22 kg Bag Allowance 10 kg Hand Baggage ATOL Protected Coach Transfers Holiday price £1,648 Per person price £824 Extract A Marginal productivity of cabin crew Cabin crew are responsible for loading passengers and providing in-flight meals - Edexcel - A-Level Economics A - Question 6 - 2021 - Paper 1

Reducing airline emissions represents a positive externality, where the social benefits may outweigh the private costs incurred by the airline. In a social optimum scenario, the airline ensures that its operations consider not only its profits but also the welfare of society, particularly concerning environmental sustainability.

To illustrate this, we can use a supply and demand diagram:

1. The Demand Curve (D) reflects the private benefits consumers receive from the airline's services.
2. The Supply Curve (S) shows the marginal private costs of the airline's operations.
3. The Marginal Social Cost (MSC) curve, which is higher than the supply curve due to the negative externality of carbon emissions, reflects the overall societal costs.

By focusing on emission reductions, Thomas Cook can shift the MSC curve downward as they implement greener technologies, aligning private costs with social costs. This promotes a more efficient market outcome, resulting in an overall increase in consumer welfare and a reduction in the environmental impact.

The principal-agent problem occurs when there is a conflict of interest between parties, particularly when a principal (shareholders) delegates responsibility to an agent (company directors). In the case of Thomas Cook, the management's failure to act effectively on the warning signs of financial difficulties suggests that they may not have acted in the best interests of the shareholders or passengers.

Extract C indicates that although efforts were made to rescue the company, there was a disconnect between the decisions made by management and the expectations of stakeholders. This could illustrate a classic principal-agent dilemma, where management pursued strategies that did not prioritize the company’s sustainability or profitability in the long run.

Additionally, the failure to respond to industry challenges, such as growing online competition and Brexit uncertainty, highlights that management may have favored short-term gains over long-term strategies essential for survival. Such behavior exemplifies the principal-agent issue, wherein agents prioritize their own interests, leading to detrimental outcomes for the principals.

The government’s proposal for a £150 million subsidy aimed to prevent the shutdown of Thomas Cook could be seen as both a proactive and reactive measure.

Proactively, the government seeks to stabilize an important player in the travel industry, protecting jobs and minimizing disruption for consumers who rely on the services. A subsidy could allow Thomas Cook additional time to restructure and implement strategies necessary for addressing its operational inefficiencies and external pressures.

However, there are potential drawbacks to this intervention. Subsidizing a failing company may set a precedent that encourages complacency among management. If the agency fails to address fundamental issues causing its downfall, a temporary bail-out may merely delay the inevitable.

Moreover, taxpayer money utilized in the subsidy could have been allocated to more sustainable projects or businesses that demonstrate viability and growth potential. Therefore, while the subsidy could serve as a lifeline for Thomas Cook, careful consideration is necessary to ensure accountability and a firm commitment to reform from management.

In conclusion, while the subsidy could help stabilize Thomas Cook in the short term, its long-term effectiveness relies heavily on how both the government and management respond to the restructuring required.

Jet2’s decision to increase prices in the wake of Thomas Cook's shutdown can be rationalized through several economic principles.

Firstly, the sudden collapse of Thomas Cook may have led to increased demand for holiday packages from other providers like Jet2. With fewer competitors in the marketplace, Jet2 can capitalize on this demand shift by raising prices without significantly risking a loss of customers.

Additionally, as illustrated in the figures, Jet2 raised its holiday prices alongside an increase in perceived value, possibly reflecting improved service levels or enhanced package benefits. This price rise might also factor in increased operational costs associated with ensuring compliance with stringent regulatory environments following the collapse of a major player in the industry.

Furthermore, price elasticity could also play a role in this decision; if demand for Jet2's packages is price inelastic, meaning consumers are willing to absorb the price increase due to a lack of viable alternatives, the strategy would yield increased revenue.

However, it is essential for Jet2 to ensure that prices remain competitive and reflect the value provided to customers. A careful balance is needed to retain customer loyalty and not exploit the situation excessively. Ultimately, while the price increase appears defensible, the company must continually assess market response to ensure long-term success.