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Evaluating Policy Alternatives

Evaluating Policy Alternatives. Is a policy change desirable? What are the policy alternatives? What are the likely impacts of each alternative? Which alternative is preferred?. Wednesday, February 9. Reasons for policy change. Market failure Government failure Desired social change.

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Evaluating Policy Alternatives

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  1. Evaluating Policy Alternatives Is a policy change desirable? What are the policy alternatives? What are the likely impacts of each alternative? Which alternative is preferred? Wednesday, February 9

  2. Reasons for policy change • Market failure • Government failure • Desired social change

  3. Alternative policy approaches: • Changes in property rights • Taxes or subsidies • Direct regulations (command and control) • Public goods production

  4. Applying Economics to Resource Policy Analysis • Identify key characteristics of the resource (attributes) • Stocks of depletable resources • Capacity/extraction limits for renewable resources • Rival or non-rival • Excludability

  5. Applying Economics to Resource Policy Analysis • Identify key characteristics of the resource • Identify realistic policy constraints

  6. Applying Economics to Resource Policy Analysis • Identify key characteristics of the resource • Identify realistic policy constraints • Identify relevant participants and institutions

  7. Applying Economics to Resource Policy Analysis • Identify key characteristics of the resource • Identify realistic policy constraints • Identify relevant participants and institutions • Identify behavioral responses of participants under different institutional arrangements and policy structures

  8. Applying Economics to Resource Policy Analysis • Identify key characteristics of the resource • Identify realistic policy constraints • Identify relevant participants and institutions • Identify behavioral responses of participants under different institutional arrangements and policy structures • Identify current and future outcomes affected by policy options

  9. Economic Impact Analysis • Proposed change • Property rights • Tax • Subsidy • Regulation • Public good provision • What are the economic impacts and to whom? • Accounting stance issue

  10. Economic Impact Analysis • Impacts on (un)employment rates • Impacts on household incomes • Impacts on general productivity • Impacts on inflation • Impacts on trade balances

  11. Example: Regulations limiting deposition of mine spoils in stream valleys • Changes proposed for how mountaintop mining operations can manage mine spoils • Issue: Costs to mining companies and associated impacts on mining economies, employment, etc.

  12. New regulation – coal mining industry required to internalize costs of managing mine spoils in a safer manner PS*<PS0 PS0 MC after new regs $ MC before new regs PS* p* p0 D q0 q* Tons of coal mined

  13. CS0 CS* MC after new regs $ MC before new regs p* CS* < CS0 p0 D q0 q* Tons of coal mined

  14. Conservative reinforcement: • Evaluating a change in rights specification using prices established under the existing specification biases the analysis in favor of the status quo

  15. PS*<PS0 PS0 New regulation – coal industry forced to reduce external costs MC after new regs $ MC before new regs PS* p* p0 D q0 q* Tons of coal mined

  16. CS before regulation MC after regulation p* CS* q* $ MC p0 MB q0 Acres of public flood control

  17. Conservative reinforcement: • Evaluating a change in rights specification using prices established under the existing specification biases the analysis in favor of the status quo • Market prices would be different if rights were different and coal industry had not passed certain costs on to the public for flood protection

  18. Cost-Effectiveness Analysis • Policy objective is known • Purpose of analysis is to find the least costly method of achieving objective • What we don’t know is the benefits associated with achieving the objective, so we can’t compare costs of program to benefits achieved

  19. Benefit-Cost Analysis • Requires calculation of all benefits and costs associated with implementing a policy – both market and non-market • Requires determination of appropriate discount rate • Requires consideration of equity issues

  20. Benefit-Cost Analysis • Accounting stance – which public is the relevant one? • Clear specification of project or program • Understanding of all physical impacts of program • Estimation of value of all physical impacts (benefits and costs) • Comparison of benefits and costs

  21. Benefit-Cost Analysis • Are benefits larger than costs? • B/C > 1 • What are total net benefits? • TB – TC = NB • These measures refer to a specific project or program of a specific size • Don’t tell us if MB=MC

  22. B/C analysis does not provide for optimal program or project scope Can conduct sensitivity analysis Does changing scope/size of program or project change measure of net benefits? MC $ $ MC MB Q Q Benefit-Cost Analysis MB

  23. Key Analysis Issues • With/without • Choice of discount rate • Distributional issues • Dealing with uncertainty

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