Evaluating Policy Alternatives

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 8

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. Why attributes of things matter: Consider the following communication between Canadian authorities and the commander of a U.S. Navy ship off the coast of Newfoundland in October, 1995: Americans: Please divert your course 15 degrees to the North to avoid a collision. Canadians: Recommend you divert your course 15 degrees to the South to avoid a collision. Americans: This is the Captain of a U.S. Navy ship. I say again, divert your course. Canadians: No. I say again, you divert your course. Americans: This is the aircraft carrier U.S.S. Lincoln, the second-largest ship in the United States’ Atlantic Fleet. We are accompanied by three destroyers, three cruisers, and numerous support vessels. I demand that you change your course 15 degrees North, That’s one-five degrees North, or counter measures will be undertaken to ensure the safety of this ship. Canadians: This is a lighthouse. Your call.

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

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

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

9. 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

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

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

12. 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

13. 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

14. 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

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

16. 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.

17. 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

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

19. CS before regulation MC after regulation p* CS* q* New mine spoil regulations mean less flooding $ MC p0 MB q0 Acres of public flood control