6: Taxes and Subsidies Flashcards
Preference vs incentive
Inside of us is a set of preferences for everything
When incentives are provided, preferences have not changed but the package has. Might lead to a different choice being made
How do economists identify preferences? Where do they think they come from?
Through observation – what choices someone actually makes
They do not know where they come from, just assume everyone has them
What is tax/subsidy shifting?
There is an existing ‘status quo’ of taxes, subsidies and markets. A shift makes changes to that.
What is environmental tax shifting?
Any approach which increases taxes on actions that are environmentally harmful
What is environmental subsidy shifting
Increases subsidies on actions that are environmentally beneficial OR decreases subsidies on actions that are environmentally harmful
Two ways the value of the tax or subsidy is decided
- Full cost accounting
- Goal oriented approach
What is full cost accounting
Identifying the exact cost of negative and positive externalities and correct for them then using taxes and subsidies to ‘internalize’ those externalities
Returns decision making to market forces. Individuals can make free choices about production and consumption but WITH the externalities included.
Example of full cost accounting
Social cost of carbon
Tax on carbon includes public health impact, species extinction, property, ag productivity loss, etc
Weaknesses of full cost accounting
getting prices right means you need to determine the value of ‘everything’ (many things are difficult to quantify e.g. cost of climate change on future generations)
What is the goal oriented approach?
Desired outcomes are determined by policy makers (informed by environmental scientists, economists)
Taxes or subsidies are enacted to whatever level is required to achieve the desired outcome
Does not try to ‘get the price right’
Goal oriented approach example
BC’s carbon tax
- wanted to reduce its GHG emissions by 33% by 2020 (value arrived at thru consultation with scientists, industries, etc)
- economists calculated that to achieve 33%, it would take a carbon tax of about $140 per tonne
- ^^ not economically feasible, so $30/tonne tax was established
Example of people responding to prices and price changes
Canadian metered vs non-metered water use (people who pay for water use in form of water bill and those who don’t)
People who pay more or less depending on water use tend to use less
What is ‘at the margins’? e.g.
Economists don’t presume that everyone responds exactly the same to price changes. Instead they consider situations ‘at the margins’ (near decision thresholds)
e.g. renting an apartment closer to work is more expensive, so might not take it. Price of fuels go up, financial incentives have shifted
e.g. 2 turning down thermostat and putting on a sweater to save money on heating (smaller threshold)
Price elasticity of a good? How does this determine the efficacy of a tax
Elastic = when the sale of goods or services are very affected by price
Inelastic = when the sale of goods or services are not very affected by price
Elasticity of a good/service determines how effective a tax can be in changing behaviour
Why might elasticity change over a longer period of time? E.g.
People need longer to make big changes/change behaviours
e.g. per capita consumption of petroleum decreased by higher % each year following BC’s carbon tax
