Session 3 - Economic policy instruments

Question 1

What are external costs?

monetary or no?

Answer 1

Hidden costs which are paid by society, not necessarily monetary but resources.

Question 2

What are internal costs?

Answer 2

They are included in the market price
e.g. research, materials, energy, labour etc

Question 3

Who are the 3 actors in a business transaction?

Answer 3

Producer (seller)
Consumer (buyer)
Sufferer (victim)

Question 4

What are external costs related to?

What gets impacted?

Answer 4

• enviro degradation caused by pollution, waste, emissions
• Health problems caused by harmful materials and ingredients
• Costs of disposing of a product at the end of its life

Question 5

Explain the actors in an external cost situation using a nuclear example.

seller, consumer and sufferers

Answer 5

seller = power producer
Customer = people using the power
Sufferer = environment, people living near the nuclear waste, future gens

Question 6

What are the responses to the problem of external costs?

Answer 6

Economic policy instruments:
- ecotaxes
- subsidies and rewards
- Tradeable permits

Question 7

What are ecotaxes/charges? and what is their desired effect?

Answer 7

A financial disincentive to encourage people to change their polluting behaviour or pay to repair the damage they cause.

Both options are perfectly legal.

Question 8

How may ecotaxes effect companies?

Answer 8

If they chose to pay the tax rather than change their methods they could lose market share due to their more expensive products.

Question 9

What should be done with the tax revenue?

Answer 9

It should be used to clean up the environmental impact

Question 10

Explain the London congestion charge

Answer 10

2003: pay 427 for motor vehicles on the motorway 7am-10pm
2017: pay an extra $17 for older vehicles

An example of the polluter pays policy

Crit: it disproportionally affects poor and disabled people.

Question 11

What is the difference between a fine and taxes and charges?

what kind of instrument?

Answer 11

Fine = regulatory instrument
Taxes and charges = economic instrument

Question 12

What are the objectives of fines, taxes and fees?

what do they want to acheive?

Answer 12

Fines/taxes and charges = aim to change a behaviour
Fees = just to cover costs of a service

Question 13

What are the mechanisms for fines compared to taxes/charges?

Why are they used?

Answer 13

Fines = punishment
taxes/charges = minimise external costs (change behaviour or repair damage)

Question 14

What is reversibility in relation to fines and taxes/charges and what is assumed for each?

Answer 14

Reversibility = every environmental damage and human health impact can be reversed using money

Fines = not assumed
Taxes/charges = assumed

Question 15

Are fines or taxes/charges a response to illegal behaviour?

Answer 15

Fines = yes
Taxes/charges = no action is illegal but some actions are mores costly than others

Question 16

What are subsidies and rewards and their purpose?

Answer 16

They are financial incentives to encourage a favourable behaviour/action.

Question 17

What are the main ideas behind incentives?

every unit of…

Answer 17

every unit of:
pollution not produced, resource not used and toxic substance not used will earn benefits worth X amount of $

its up to you to decide whether to change your behaviour or not

Question 18

Explain solar rebate example

Answer 18

Non polluter benefits principle

In 2015 gov announced that subsidy covering some of the cost of installing solar panels. This declines by 15th every year to encourage more people to get solar sooner and as technology costs are expected to fall (national)

NSW battery scheme

Proposed federal battery rebate if Labor gov is reelected - crit = people will hold off getting batteries until rebate comes into effect hurting businesses.

Question 19

How do green rewards (incentives) relate to external cost?

They determine the…

Answer 19

The green rewards determine the value of the environment and set a reward which is equal to the external cost that was missing

Question 20

What happens if people decide not to cash in green rewards?

Answer 20

The left over money should be used to undo damage done by polluters.

Question 21

What are tradeable permits?

Answer 21

They are disincentives

Essentially permits to carry out environmentally undesirable activities

Question 22

What are the arguments against tradable permits?

Answer 22

Existing polluters are richer than young startups = becomes a social and equity problem globally and locally.

They can become market barriers - permits holders can decide not to sell, keep competition away.

Question 23

What are the ideas behind tradable permits?

how do they work?

Answer 23

They are limited in no. and costly

up to you to decide to buy permits or invest in cleaner tech - both are legal options

Some responses are more costly than others

You can sell permits to other if you no longer need them - have changed your behaviour

Question 24

Explain tradable permits through Carbon emission trading

Answer 24

Polluter pays principle

We have the Australian Carbon Credit Unit Scheme (ACCU) more of an incentive.

Question 25

Why do environmental economists promote incentives over regulation?

Answer 25

economic instruments incentivise people to pollute below the legal limit Regulations stop people from breaching a limit but won't incentivise people to dramatically reduce their pollution

Question 26

Explain how each of the 3 economic policy instruments could be used to deal with emissions?

Answer 26

Tax or charge on emissions - per unit emitted Tradeable permits for emissions incentives/Green rewards for avoiding emissions applicable to other resources or harmful products.

Question 27

What are the underlying assumptions of economic instruments?

Answer 27

Pollution/unsustainable resource use occurs because external costs are not included in the market price Economic instruments add the external cost - put a price on the environment It will make products more expensive Producers and consumers respond rationally to financial incentives

Question 28

What are the implicit assumptions of economic instruments?

Answer 28

Nature can absorb a certain amount of pollution - therefore those parts of nature can be easily restored/rehabilitated. Financial capital can be converted into natural capital (e.g. money --> trees)

Question 29

Is anything illegal in economic instruments?

Answer 29

Yes - not paying taxes, not complying with tradable permits

Question 30

Do we still need inspectors in economic instruments?

Answer 30

Yes - to make sure people are following rules

Question 31

Compare ecological taxes and tradable permits

Answer 31

Both measure pollution Eco taxes determine the taxes owed and enforce payment. Punishment occurs if no tax is paid. Tradable permits - punishment occurs if action is taken without permit or if action occurs beyond what's allowed by the permit.