Market Failure & Policy (2)

Question 1

What should be considered when making a decision about appropriate policy instruments?

(7 points)

Answer 1

Cost effectiveness

Dynamic efficiency

Political feasibility

Dependability

Monitoring

Ancillary benefits

Flexibility

Question 2

Explain what dynamic efficiency means as a consideration for policy instrument decisions

Answer 2

Concerns the instruments ability to incentivise firms to innovate and improve over time

Question 3

What is meant by “ancillary benefits”?

Answer 3

Does the use of a policy instrument brings about a “double dividend”

Question 4

Briefly explain the “double dividend” concept

Answer 4

Where emissions tax revenues are used to reduce level of distortionary (efficiency-reducing) taxes, so that there is i) An environmental benefit; ii) A gain in economic efficiency