Module 6 - Taxes and Subsidies

Question 1

Preferences

Answer 1

Identified through observations- what choices someone actually makes
- choice is contextual meaning that ppl can only choose between the options available to them and that those options have many factors involved
- each choice is seen as a bundle of all the impacts upon the decision maker

Question 2

Incentives

Answer 2

Don’t change your preference, but they change the package
- remember, each choice is seen as a bundle of all the impacts upon the decision maker

Question 3

Do economists care where preferences come from?

Answer 3

Nope! We just know ppl have preferences that they follow and we want to know about how they chance when the package changes

Question 4

What does a tax or subsidy make changes to?

Answer 4

The EXISTING ‘status quo’ of taxes, subsidies, and mkts

Question 5

Environmental tax shfiting

Answer 5

Any approach which increases taxes on actions that are environmentally harmful.

Question 6

Environmental subsidy shifting

Answer 6

Increases subsidies on actions that are environmentally beneficial OR decreases subsidies on actions that are environmentally harmful

Question 7

How is the value of the tax or subsidy decided?

Answer 7

One of these 2 approaches is used

1. Full cost accounting
2. Goal orientated approach

Question 8

Full cost accounting approach to determining the value of a tax or subsidy

Answer 8

• “Getting the Price Right” by identifying EXACT cost of negative and positive externalities and correct for them and then using taxes and subsidies to internalize those externalities
• This is an effort to return decision making to mkt forces and allow individuals to make free choices about production and consumption but WITH the externalities included

Question 9

What is an example of the ‘full cost accounting approach’?

Answer 9

Calculating the Social Cost of Carbon
- put a price on all the externalities associated with C
- big range in estimates bc it is hard to measure and determine the costs

Question 10

What are two weaknesses to the ‘full cost accounting’ approach?

Answer 10

1. Getting the prices right means that you need to determine the value of ‘everything’
   - difficult to really quantify many things
   - difficult to properly account future costs on future generations
2. Many economists argue that doing our best to get an accurate price is far more effective and efficient than just picking a price and using it (or any other method).

Question 11

Why should we try to get the price right when it comes to the FCA approach?

Answer 11

We need to get the price right for ppl to change their behaviours so everyone makes the ‘right’ decisions and we end up in the most optimal situation

Question 12

What is the Goal Orientated Approach to determining the value of a tax or subsidy?

Answer 12

• This approach ABANDONS the goal ‘getting the price right’ to perfectly internalize the externalities and instead relies upon expert opinion and the opinions of elected lawmakers
• Desired outcomes are determined by policy makers
• Taxes or subsidies are enacted to whatever level is required to achieve the desired outcome

Question 13

What is an example of the Goal Oriented Approach?

Answer 13

BC’s Carbon Tax
- BC wanted to reduce it’s GHG emissions by 33% by 2020
- Economists calculated it wasn’t politically feasible to achieve this so a $30/tonne tax was established

Question 14

What does “at the margins” refer to?

Answer 14

Economists don’t presume that everyone responds exactly the same to price changes instead they consider situations ‘at the margins’ (near decision thresholds).

Question 15

“Many decisions have smaller and more thresholds”, what does this mean?

Answer 15

Ex. to buy a car, you have to either buy it or not

VERSUS

Ex. if you are cold in the house you have the option to put on more clothes, use blankets, and gradually increase the heat

Question 16

What is price elasticity of a good?

Answer 16

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

The elasticity of a good/service determines how effective a tax can be in changing behaviour.

Question 17

Why does elasticity change over a longer period of time?

Answer 17

More time to react and change behaviour

Question 18

What is a ‘revenue neutral’ approach to carbon taxes?

Answer 18

Simplified: Gov charges a carbon tax, same to all families. All families also receive the same rebate, a calculated average. Revenue neutrality is not for the household, who may pay more or less, the revenue neutrality is made for the Gov so on average they take in as much as they give out.

Question 19

What is different about a carbon tax vs an auto tax/subsidy for fuel consumption? How will they affect fuel consumption differently?

Answer 19

Carbon tax: every time you get in your vehicle the tax influences your behaviour

Subsidy: only affects you when buying a new vehicle, not your every day life. Not as effective and has a lower impact.

Question 20

What is a ‘Payment for Ecosystem Services’ (subsidy)?

Answer 20

By paying owners of environmental assets not to exploit them (deforest, farm, etc) society gets the benefits those areas provide (water filtration, CO2 sequestering, habitat for animals, etc)
- individual owners of environmental assets often only get benefit from their asset if they exploit it
- however, most of the benefits of keeping the assets are felt at a societal level

Question 21

Conservation Easements

Answer 21

Conservation easements are cases where those who want to protect natural or agricultural land from being developed purchase the right to develop the land from a land owner.

land owner retains ownerships over the land, but no longer has the right to develop the land.

Question 22

What was the Catskill Watershed Program?

Answer 22

• Goal: Influence the behaviour of those who live in Catskill watershed so that NYC has access to high quality water. They pay them to protect the natural fxns and quality of water.
• program is using multiple subsidy based policy instruments to achieve its goal, overall cost is LESS than building a treatment system

Catskills Programs Ex.
- subsidize cost of public sewage and private septic system improvements
- undertake environmental farm plans
- Pay famers not to farm all or part of their land
- subsidize school educational campaigns on enviro management
- subsidize private forestry plans to allow selective logging
- subsidize economic development of the area

Question 23

Who should Pay? The User (consumer)/Polluter by paying an enviro tax OR the beneficiary by paying an enviro subsidy?

Answer 23

Who should pay is determined by who has the right.

Question 24

Why did NYC choose to go the subsidy route to protect the Catskills?

Answer 24

1. Didn’t have the legal right to change the behaviour of the ppl upstream
2. Not politically feasible to force the state to make rules
3. Lower cost to pay the subsidy than to enhance treatment plants

Question 25

What are perverse subsidies?

Answer 25

Subsidies that promote environmental degradation (beyond mkt forces)
- these are ‘created negative externalities’
- a core element of environmental tax shifting is to remove these “perverse subsidies”

Question 26

What are 4 examples of perverse subsidies?

Answer 26

1. tax breaks to oilsands companies
2. discounted water for industry and/or households
3. agricultural subsidies
4. energy subsidies

Question 27

What are Deposit and Bond Schemes? When are they used?

Answer 27

• Involves the application of a deposit or bond at the start of an activity
• used where there is the risk of environmental harm
• if proper actions are taken to avoid environmental harm then deposit or bond are returned

Question 28

2 examples of a deposit and bond scheme

Answer 28

1. bottle deposits
2. mine reclamation bonds

Question 29

What is a current problem with mine reclamation bonds?

Answer 29

The bond being taken is not near enough to repair the area if the company goes out of business.