Topic 3: Policy

Question 1

Policy

Answer 1

Gov’s laws, regulations, financial programs and their interpretation, administration and supporting structures

Question 2

Economic justification of regulation

Answer 2

Prevent -ve externalities (-ve impacts on other people who don’t get a direct say in whether the land gets cleared; threatened species, soil erosion filling up dams; salinity)

Question 3

Economic mechanism for regulation

Answer 3

Change incentives faved by violators

Penalise them for violation

E(penalty for violation)= penalty if caught x probability of being caught

E(penalty for violation) must be high enough to outweigh benefits from violating

Question 4

Limitations of regulation

Answer 4

Regulation tends to be default policy for some types of environmental issues

Can be inflexible

Can generate big costs

Economists have developed no. of alternative approaches

Question 5

Economic justification for modifying property rights

Answer 5

Open access problem: anybody who wants to can participate; nobody has exclusive rights

If all agreed to reduce fishing -> all better off (but not incentive to do so)

Each individual has incentive to break agreement

Question 6

Economic mechanism for modifying property rights

Answer 6

Create exclusive property rights (permits)

Penalise people who fish without required permits

E(penalty for violation) = penalty if caught x probability of bring caught

E(penalty for violation) needs go be high enough to outweigh the benefits from over-fishing

Question 7

Direct actions by gov example

Answer 7

Threatened species recovery

Question 8

Economic justification of direct action by gov

Answer 8

Community places high value on preserving threatened species

In some cases, populating islands or fenced reserves or captive breeding are efficient ways of preserving them

Benefits of preserving them are judged to outweigh costs

If left to private individuals, probably won’t happen

Question 9

Economic mechanism for direct action by gov

Answer 9

General tax revenue

Pay salaries and operating costs

Question 10

Information provision

Answer 10

Education, training, raising awareness, coordination, building social capital

Question 11

Economic justification for information provision

Answer 11

Public benefits from voluntary action (+ve externalities)

Promoting +ve externalities

Question 12

Economic mechanism for information provision

Answer 12

Info, awareness raising, etc. to convince people to take voluntary action

Convince people that there are benefits available to them they didn’t know about or under-estimated

Reduce costs or risks through cooperation between people

Relatively cheap policy option, but works best if recommended change in behaviour is beneficial to individual

Question 13

Economic justification for payments/subsidies

Answer 13

Reduce -ve externalities

Benefits go to whole community

Would not happen without some sort of policy intervention

In certain situations, benefits are large enough to outweigh cost of paying farmers

Question 14

Economic mechanism for payments/subsidies

Answer 14

Farmers bear costs from changing their practices

Not willing to change without support

Payments change economics of different farming options

Make environmentally beneficial ones economics attractive to farmers

Info provision alone would not work as new options are unattractive

Question 15

Reverse auction

Answer 15

Lots of people with similar items to sell, bid to sell it to purchaser

Lowest bid wins

Question 16

Economic justification for reverse auctions

Answer 16

Creates +ve externalities (external benefits) to others in community

These would not happen without some sort of policy intervention

Their benefits outweigh the tender payments in some cases

Auction process selects those bids that provide best value for money (greatest environmental benefits for money)

Question 17

Economic mechanism for reverse auction

Answer 17

Farmers bear costs from changing their practices

Not willing to change without support

Payments change the economics of different farming options

They make the environmentally beneficial ones economically attractive to farmers

Question 18

Economic justification for markets

Answer 18

Emissions considered acceptable up to certain level

Most valuable economic activity that generates emissions continues; emission cuts that get made are the least costly ones

Question 19

How is the price of permits set?

Answer 19

Balance between:

The supply and demand of permits

Question 20

Development offsets

Answer 20

Economic developers may wish to take actions that would damage environment

Under regulatory approach, actions would be banned

Under offsets approach, can take actions provided they generate other environmental benefits to compensate

Question 21

Economic justification for developmental offsets

Answer 21

Sometimes regulatory approach rules out actions that greatly benefit the community

Offsets allow them to proceed without damaging environment

Some policies create market where developers buy offsets from landholders

Question 22

Challenges of development offsets

Answer 22

Controversial:

Do the offsets actually work?

Do they outweigh environmental losses?

Would the offset actions have happened anyway?

Question 23

Economic justification of research and development

Answer 23

Research generates info which is itself a public good - may not be able to charge people to access the info -> will be under supplied

In case of environmental research, the info relates to public goods and externalities

May be no suitable technology to solve the problem

Question 24

Economic mechanism for research and development

Answer 24

Direct funding of research by governments

Research and Development Tax Concession for business who invest in R and D

Question 25

Indirect impacts of policy

Answer 25

For many types of policies, intent is to influence behaviour of people or management decisions of businesses

People or businesses affecting environment, not gov

Question 26

Weaknesses in env. policies

Answer 26

Performance of env. policies is very mixed

Poor prioritisation of which projects to invest in

Poor choice of policy mechanisms

Failure to consider likely extent of behaviour change -> excessive optimism about people’s responsiveness

Committing projects without properly considering their feasibility

Failure to learn from mistakes

Inability to resist vested interests