Environmental Quality

Question 1

What are corrective taxes?

Answer 1

A tax that helps the government achieve specific policy goals

Question 2

What is the idea behind indirect consumption taxes?

Answer 2

Companies that collect these taxes will raise the consumption price with the amount of the tax -> consumers pay the tax indirectly through that

Question 3

A uniform Value Added Tax (VAT) is comparable to…

Answer 3

A flat income tax -> has same effect on labor supply decisions

Only difference is treatment of unemployed and pensioners who pay VAT but no income-tax

Question 4

3 reasons to have both direct and indirect taxes?

Answer 4

1. Spreading collection chances lowers tax evasion
2. Political attractiveness: right in favor of consumption tax, left in favor of income tax
3. Indirect taxes useful in achieving specific policy goals and correct market failures (externalities often tied up with consumption)

Question 5

Corrective taxes require…

Answer 5

A formal policy goal

Question 6

Economic analysis of climate change looks at…

Answer 6

How can the goal of lowering emissions be achieved against the lowest possible welfare loss?

Question 7

Definition of externality

Answer 7

An unpriced effect of an action -> something is used that is not priced (missing market)

Carbon emission market does not take into account climate change in the price

Question 8

How to solve the problem of the carbon emission market not taking climate change into account?

Answer 8

Tax CO2-emissions with a carbon tax

Question 9

How does a negative externality change the costs in a market?

Answer 9

It creases a social cost line in the production of goods - usually a social cost line above the private cost line or a social demand line lower than the private demand line

Question 10

2 different type of externality curves

Answer 10

1. Social cost increases the same per unit supplied
2. Social cost increases per unit supplied, leading to higher and higher social costs per unit supplied

Question 11

While negative externalities lead to over-consumption, positive externalities lead to…

Answer 11

Under-consumption (innovation, schooling, voting)

Question 12

What is the marginal damage in a market?

Answer 12

The extra costs on society caused by the externality

Question 13

How is the social marginal cost calculated?

Answer 13

Summing the private cost and marginal damage

Question 14

What is the solution to negative externalities that Arthur Pigou proposed?

Answer 14

Creating an artificial signal that represents the damage done that is not taken into account -> this could be a tax that ensures that we end up in the socially desired equilibrium if the tax = marginal damage at the amount supplied

Question 15

On a graph, what is the social gain from a tax on a negative externality?

Answer 15

From Q* (original amount supplied) to Q’ (reduced supply) up to the marginal damage curve

Question 16

Another approach to solving external effects: Coase

Answer 16

An externality is a missing market. Nobody owns the climate and thus nobody values it -> solve externality by allocating property rights

Question 17

Another approach to solving externalities: Ostrom

Answer 17

Local communities with informal laws and rules can correct externalities; but becomes harder with too many actors

Question 18

Another approach to solving externalities: Weitzman

Answer 18

Cap-and-trade system with fixed amount of permits based on demand from firms

Question 19

2 instruments that impose a constraint - for negative externalities

Answer 19

1. Paying for the (expected) damage done, e.g., tax, cap-and-trade
2. Standards/norms regarding emissions cap or technology used

Question 20

2 instruments that relax a constraint - for positive externalities

Answer 20

1. Subsidies
2. Information provision

Question 21

What solution to externalities do economists often prefer?

Answer 21

Paying for the (expected) damage done - pricing decentralizes the decisions, so the actors can decide themselves

Question 22

What is efficient regarding a tax or cap-and-trade system for reducing emissions?

Answer 22

Individual actors can decide for themselves if they want to reduce emissions or not (if they can efford not to). Actors who can reduce emissions cheaply will do so more than actors who cannot -> lowest welfare cost

Question 23

A more uniform price in all sectors is…

Answer 23

More efficient

Question 24

What level of price/tax rate is needed - 2 options

Answer 24

1. Compute the value of the marginal damage done
2. Use the marginal abatement cost curve and compute the price needed to reduce emissions to a certain target

Question 25

What is an abatement cost curve?

Answer 25

A graph listing all the options to reduce carbon emissions after how costly it would be

Question 26

How can we calculate a tax rate using an abatement cost curve?

Answer 26

If the cost of 5 different options would be below 100 euros per ton -> a tax of 100 euros per ton would ensure that all those techniques would be carried out

Question 27

What is the EU ETS?

Answer 27

A cap-and-trade system regulating carbon emissions in the European energy-intensive industry

Limited amount of permits are handed out, decreasing every year until 0 in around 2055

Question 28

How does uncertainty effect the EU ETS system?

Answer 28

Keeping the price very low - will governments actually uphold their promise to reduce permits? Are companies expecting cheap abatement options in the future with new technology?

Question 29

Why has the EU ETS recently seen a huge increase in prices?

Answer 29

EU becoming more ambitious in their goals to reduce emissions faster -> expectation of lower availability of permits in the future -> demand for permits now (you can save permits for a couple of years) -> higher prices

Question 30

When are taxes and cap-and-trade systems equivalent?

Answer 30

Under perfect information

Question 31

What is the key difference between taxes and cap-and-trade systems in the case of imperfect information?

Answer 31

A tax ensures a maximum/minimum price to be paid by actors, but leaves the amount to be reduced free -> you can adjust the tax but not the amount of reductions

A cap-and-trade system ensures that you reach specific reduction goals, but there is no maximum/minimum price to be paid

Question 32

What is key to both taxes and cap-and-trade systems?

Answer 32

Monitoring! Emissions must be counted, permits registered, non-compliance enforced

Question 33

3 things to do if the price becomes too low or high in an ETS system?

Answer 33

1. Creating a floor price by letting the government buy permits to increase the price
2. Introducing a CO2-minimum tax
3. A ceiling created by government selling additional permits to decrease the price

Question 34

What does it mean that the tax base erodes with a tax?

Answer 34

Tax affects labor supply -> working less, buying less of a good which is a welfare loss

Question 35

Why can tax erosion sometimes be a good thing?

Answer 35

Corrective taxes are introduced specifically to ensure the consumption is being reduced -> tax base erosion is the goal

Question 36

When introducing a corrective tax, should you only correct for externalities or maximize revenue?

Answer 36

Economists argue for choosing the environmental goal and using other taxes for revenue raising

Question 37

What to do with tax revenues from corrective taxes - 3 options

Answer 37

1. Return to households lump-sum (transfer with no conditions)
2. Subsidize the development of technology to encourage positive externalities
3. Lower the income tax

Question 38

Will lowering the income tax with revenues from environmental taxes improve labor market outcomes?

Answer 38

Probably not - both income tax and corrective taxes affect labor supply decisions -> more jobs not likely to happen