Tyler Cowen at Marginal Revolution asks a good question: Why is the UK so expensive?

A loyal MR reader, Erik Alberts, writes: I've made several trips to the UK in the past few months in preparation and it amazes me how much more things cost there (in London) then here in California. What I'm trying to understand is why. I realize that some things like gasoline cost more in the UK due to taxes. But for other things, it appears that prices in the UK are 40 to 50% higher. How would you explain this? ...I realize that higher taxes and higher labor costs may be factors (although at my company UK labor is cheaper than it is in California), but I find it difficult to believe that this would explain a 50% difference. Could this be a sign of currency imbalance like the big mac index, a supply and demand issue, or are UK consumers simply used to paying more? I have wondered the same about Switzerland. The standard explanation is that expensive countries are extremely productive with their tradables (North Sea oil and London finance?). That appreciates their exchange rates and renders non-tradables quite dear. This is the flip side of cheap barbers and prostitutes in Thailand. But are the Brits really so productive? If so, why can't they get both hot and cold water coming out of the same tap? And aren't some of the expensive goods tradables rather than non-tradables? One factor for sure is that American retailing is the most efficient and most productive in the world. Perhaps the Brits are especially inept in this regard. A further factor may be that foreigners, even those who are considering moving, sample British prices in biased fashion. We see lots of hotel rooms, cab rides, and restaurants. Fish and chips is still pretty cheap outside of London. As for Marmite I could not say, but that is exactly the point. Your preferred consumption basket will always look expensive in another country; just try getting Ocean Spray grapefruit juice in Western Samoa. Your thoughts?

Erik Alberts mentions two obvious candidates: higher taxes and labour costs.

1. Higher wages: More expensive living costs and a minimum wage well above the United States is reflected in higher wages. (Consolation: you don't have to tip).

2. High sales tax: VAT is 17.5%, well above what you would pay in most US states. It's in the purchase price, so you may not even know it's there.

Tyler mentions three more:

3. Strong sterling: The pound has long been quite buoyant, much to the annoyance of UK manufacturers. But it is particularly perky at the moment, reflecting both a quite robust British economy and an ailing greenback. (But the Euro isn't cheap for American tourists either. If you want your dollars to go further, try Asian countries pegged to the US dollar like China and Hong Kong).

4. Retail competition. I don't think British retailers are "inept", as Tyler claims. But supermarkets account for a smaller market share, because of cultural preference and planning restrictions. And a country with one-third one-fifth the population obviously won't have the same economies of scale as in the US. So yes, retail margins are often higher, and so are prices.

5. Biased consumption bundle/information asymmetry. Tourists do indeed "sample British prices in biased fashion". But their experience of feeling 'ripped off' also reflects information asymmetry. Tourists often catch black cabs or the Underground (rather than buses, which are half the price) because they don't know their way around. They rely on well-known chains because they don't realise the shop around the corner sells coffee or sandwiches for half the price of Starbuck's. They pay far too much for mediocre restaurant meals. Local knowledge saves money and time.

All of these are true. But while high wages, high sales taxes and a strong currency all matter, the biggest single factor is almost certainly property prices.

6. Property prices: Tourists visiting London tend to cluster around Zone 1 in central London, where property prices are higher than Manhattan (thanks to height limits, heritage listing and other restrictions). The result? Very expensive hotels (by US standards), and retailers paying eye-bleeding rentals - which they inevitably pass onto you and I.

Three other factors are also worth mentioning:

7. Transport. In Britain it invariably takes longer or costs more to get to your destination than it should. Britain has fewer roads and trains than the rest of Europe; the result can be road congestion and exorbitant train fares. Many Britons find it easier and cheaper to holiday abroad than in their own country. Moaning about the transport system is a national past time. Incredibly, some now look back on the once-despised British Rail with nostalgia.

8. Weak consumerism. British consumers are used to being mistreated, lied to and cheated (think Basil Fawlty). What surprises many American visitors is how seldom locals make a fuss about bad service or poor quality goods. Consumer law and advocacy is weaker than in the US - fraud is widespread, enforcement can be patchy, and class actions are not allowed. Financial fraud is called 'mis-selling', as if it were just an accident! We have no Ralph Naders.

9. Inequality. London has more of the world's super-rich than anywhere else on the planet, and it shows. Luxury goods and services abound. The place is full of chauffeurs waiting around, 'ladies who lunch', Arabs spending up big, and City boys who think nothing of paying US$200 for a meal and drinks. Many Londoners are not price conscious; they're willing to spend a lot for positional goods. That affects prices. Sadly, it also means paying a lot won't guarantee good quality.

My advice to visitors to London? First, take the time to do some research. For hotels, TripAdvisor is generally reliable - you may not find the best hotel in London, but you will certainly avoid some of the worst. As for food, either ask a local, or try Square Meal or London Eating. And be on the alert for thieves and con artists.

Enjoy your stay!