Policy Instruments Flashcards
Why are multiple objectives more tricky than a single policy objectives?
Whether it is made explicit or not, achieving multiple objectives most of the time requires trade-offs when we have limited inputs.
We have to spend the input (e.g. time, money) on one objective and not the other.
So balancing multiple objectives can become a question of whether we are spending the inputs on with a greater marginal benefit.
How does the ideal policy distribute consequences?
policy allocates the costs to those who are responsible for causing the problem and in proportion to their share of causing the problem.
Which project would an economist choose based on distributional costs?
economist prefer a solution that maximises total net social benefit first (cost-effectiveness) and than consider addressing the distributional impacts of the policy by redistributing some of the outcome.
What is the benefit of a policy that encourages innovation?
innovation typically reduces costs over time (i.e. shift the MAC function downward).
Also, current (incumbent) solution providers may ‘cement their position in’ by benefiting from the policy. This may prevent future, more innovative solutions to enter the marketplace.
A policy that encourages innovation may better accommodate new entrants.
What are carrots, sticks and sermons?
Economic incentives (charges, taxes, subsidies, tradable permits, etc.)
Regulations and legal instruments (property rights, liability bonds, bans, etc.)
Information based instruments (labeling, certification, LCA, etc.)
What are the World Bank categories?
Using markets (taxes, charges, fees, subsidy, deposit-refund systems, etc.)
Creating markets (creating property rights, tradable permits, etc.)
Regulations (standards, bans, zoning, licenses, penalties etc.)
Engaging the public (public participation, information disclosure, etc.)
What is a pigouvian tax?
Equals the marginal damage of pollution at Q* (equals the divergence between private and social costs at Q) where Q is the socially optimal level of production
What is the problem with pigouvian taxes?
MSC (or MDF) is difficult to estimate (and may also vary with time and geographical location)
MAC may be known to firms but unlikely to be revealed to governments (asymmetric information problem)
The optimal pollution level may also not be known.
What is a path dependency? What impact does it have on taxes?
Technology/capital investments that are optimal under one set of taxes may not be optimal under a different set of taxes.
Once firm has made a large capital or technology investment, it is committed for a long period of time. it can not change its technology as often as the tax changes. The firms will incur more costs but there may not be more benefits because of the increased tax.
Is the pigouvian tax sufficient? Is the rax revenue required?
Economic theory states that the Pigouvian tax alone is a full and sufficient solution to tackle the problem.
The Pigouvian tax and the subsequent pollution reduction achieve the socially optimal level of pollution.
The pollution that occurs after tax is acceptable because reducing it is too costly.
So from a economic theory point of view, setting the tax at the right level and collecting the tax revenue is the “end of the story”, i.e. the tax revenue is not required to be spent on “fixing the problem”.
What should be done with pigouvian tax revenue?
Tax revenue can be distributed to victims, damage, technology etc
Economists unsurprisingly argue that tax revenue should be put towards the highest value
What is a levy?
In the context of environment, charges or levies are often aimed at raising revenue from the users of the environment in order to cover the cost of monitoring or controlling activities.
Are fee’s incurred due to negative externalities?
No - Fees are levied not to compensate for negative externality but to pay for the resource use.
Used for depletable resources - When the resource is used by someone, it is not used by someone else (rivalry)
What is a land tax and how is value calculated?
Land taxes attempt to account for the market value increases created by business and general economic activity of land nearby.
these activities (the society) create positive externalities for those who own land nearby.
This value is created by society.
Who is Henry George?
Responsible for championing the idea that value created by community belongs to community whereas value created by individual belongs to individual.
Georgism: people legitimately own value they fairly create. However, when value is created by community with the use of natural resources and land that value belongs to the community.
What is economic rent?
surplus’ after all costs and normal returns have been accounted for. OR
The difference between the input costs and the output price (beyond what would be a ‘normal returns’ on the inputs)
What is resource rent?
Similar to economic rent: The difference between the price of a resource and the respective extraction and production costs of getting the resource (beyond the ‘normal return’ on inputs)
Why is rent not profit?
Economic or resource rent is similar to the concept of “supernormal profits” but it is in the context of inputs and not in the context of outputs.
Profit: relates to ‘money made’ in relation to the output price
Rent: relates to the ‘money made’ in relation to the inputs that are used to produce it
What is a resource rent tax?
tax that aims to recover the resource rent that should have been charged to the firm. Most typically seen in mining when miners are given free minig rights and the gov attempts to share in gains
What is scarcity rent?
Scarcity rent/price exists when there is excess demand for the good or resource (demand is greater than supply).
