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 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