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Informing tough trade-offs

Informing tough trade-offs. Jeff Bennett Professor Crawford School of Economics and Government. Overview. Markets act to convert conflicts into opportunities for mutual benefit BUT markets are not universal AND equity issues remain as sources of conflict

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Informing tough trade-offs

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  1. Informing tough trade-offs Jeff Bennett Professor Crawford School of Economics and Government

  2. Overview • Markets act to convert conflicts into opportunities for mutual benefit • BUT markets are not universal AND equity issues remain as sources of conflict • Information is key to ensuring resolution of conflict in collective decision making • CBA provides the framework BUT environmental values and the treatment of employment remain challenging • MDB provides a classic case

  3. Rules and conflict • ‘You can’t always get what you want’ • Rules of coordination to avoid costly ‘tantrums’ in families and economies • Exchange of property rights: • External institutions (contract law, property law etc) • Internal institutions (honesty, trust etc) • ‘Tantrums’ converted to mutually advantageous gains from trade

  4. Gaps • Initial allocation of rights can be disputed: • ‘It’s not fair’ • Transaction costs are high enough to preclude the formation of markets: • No motivation for supply • Buyers won’t act without security of title

  5. Fillers • Collective alternative to decentralised market • Imposition of external institutions beyond the definition and defence of property rights • Equity: • Proportional taxation • Social security • Missing markets – eg the environment: • Direct or subsidised provision

  6. Conflict possibilities • Access to resources via the collective decision making process (politics) • Rent-seeking ‘squeaky wheels’ ie tantrums • Transparency in decision making is advisable • INFORMATION + well-educated populace + free press + responsive democratic processes

  7. Conceptual framework • Cost-Benefit Analysis: framework for assembling information for decision makers • Merits of a change assessed relative to the ‘counter-factual’ • Utilitarian, anthropocentric approach based in welfare economics principles

  8. Social impacts • All CBA elements are ‘social’ • ‘Socio-economic’ is a tautology • Social impacts taken to be further consequences of changes in producer and consumer surplus changes • regional service provision • Mental health impacts • Need to avoid double counting

  9. Employment • In CBA: • Employment of labour and other resources is an (opportunity) cost • If a change involves fewer resources being used … allows resources to be freed for other uses and so results in a benefit • In social impact assessment • Reduced employment is a cost to society • People who are put out of work are left without income and suffer loss of self-esteem, depression etc

  10. A critique • Reduced employment is a benefit only if resources are fully employed and adjustment is costless • If unemployment • No offsetting benefit of alternative use so reduce the benefit by the probability of unemployment • If adjustment costs: • Reduce benefit by the costs of adjustment • Social cost of unemployment? • Non-market value

  11. Environmental impacts • Missing markets induce rent seeking • Information requirements: • Predictions of bio-physical impacts of change relative to counterfactual • Values held by people for those impacts • Safe Minimum Standard approach relies on achieving set levels of the biophysical impacts • Potential for a clash of ‘musts’ • Revert to trade-off under ‘intolerable cost’ clause

  12. Weighing up trade-offs • CBA requires estimates of all values • Non-market valuation techniques: • Revealed preference methods • Stated preference techniques • Consistent with welfare economics • Other methods are problematic: • Costs of achieving environmental goals – estimating benefits with costs? • Replacement cost; averting costs

  13. Conclusions • Markets offer conflict resolution process but are not ubiquitous and are based on a specific wealth distribution • Collective decision making requires information to avoid rent seeking • CBA provides framework but application BUT application requires ‘caveat emptor’ • Alternative: market testing of demand?

  14. For more information: http://www.crawford.anu.edu.au/staff/jbennett.php • Environmental Economics Research Hub: http://www.crawford.anu.edu.au/research_units/eerh/index.php

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