Economic Policy - Economic Policies

Question 1

Property Rights

Answer 1

With a common resource such as a fishery, over-consumption can result from non-excludability: one policy response would be to award the property rights over the fishery to a particular person/organization, such that they could charge for access and limit consumption.

In connection with harmful externalities, in some cases the producer/consumer can be made to ‘internalize’ the cost of the externality by allocating property rights. For example, if a river was
being polluted then the allocation of property rights to the river would allow the ‘owner’ to either prevent the pollution or levy a compensatory charge. This would be one means of causing the ‘market’ price to incorporate the externality (social costs of pollution)

Question 2

Public Provision

Answer 2

Private firms might not be willing to attempt to supply public goods (due to ‘free riding’) or the quantity supplied in the market might be below the socially-desirable level, if there are large beneficial externalities.

A government might then decide to provide the good/service free of
charge (or at a price well below the private benefit of consumption) in order to increase consumption/usage.

For example, the 1870 Education Act initiated public provision of primary schools in the United Kingdom, with part of the motivation being, arguably, the increased need for literate and numerate
workers

Question 3

Taxes and Subsidies

Answer 3

The previous policy, of public provision, would presumably need to be funded (more on which next semester), but in the case of a service such as education the funding might be from general taxation.

The use of taxes or subsidies to correct market failure directly involves the application of taxes or subsidies to specific goods. For example, one much-discussed policy is a tax on emissions of carbon dioxide and other greenhouse gases. The purpose of such a tax is to
raise the cost/price for producers/consumers, such that they will
choose to produce/consume a lower quantity of the good and thereby
generate a lower quantity of emissions

Question 4

Prohibition

Answer 4

Another means of reducing the amount of harmful externality arising from an activity is to prohibit that activity. Given that this policy would be (potentially) the most effective means of reducing an externality such as the consequences of carbon dioxide emissions (compared with taxes)

Question 5

Tradeable Permits I

Answer 5

An alternative to setting a tax on pollution is to have a system of tradeable permits, in which each producer is required to acquire permits for the quantity of pollution which results from their
activities, with such permits being available either as a ‘grant’ from
government or in a market.

To initialize such a market, the government might give a free allocation to some producers and then make more permits available for purchase. However, an important feature of such systems (the
‘tradeable’ part) is that those with more permits than they need may sell their excess permits to others.

Question 6

Tradeable Permits II

Answer 6

If permits were not tradeable then a producer who had 50 would have an incentive to reduce pollution to an amount equating to 50 permits (in order to avoid having to buy more) but no lower, whereas if the permits are tradeable then there is a further incentive to decrease pollution, as any excess can be sold.
The system can also be designed to provide a further incentive to reduce pollution: if the government reduces the total number of permits each year then some firms will be forced to reduce pollution (or pay punitive fines) and also permit prices might increase, increasing the value of excess permits that can then be sold.