Essay！！

Criteria for policy choice

Richard Martin

University of Victoria

March 11, 2019

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Review

We have seen that our measures of damages/benefits/WTP are both imprecise and biased.

We have also seen that abatement costs are difficult to estimate, especially when looking at policy that affects the entire economy.

As a result, rather than a policy target (the socially efficient level of emissions) in reality we have a range: where the socially efficient emissions likely falls within this range.

For sake of argument, suppose we had a target level of emissions.

The government has many policy tools available to try to hit the target?

How do we choose between policies?

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Review

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emissions

Figure 1: Representing uncertainty regarding the MAC and MD curves

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Criteria

We have mentioned some criteria already: 1 Efficiency / cost effectiveness. 2 Fairness. 3 Incentive to innovate (shift MAC curve down). 4 Enforceability.

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Criteria Efficiency / cost effectiveness.

Efficiency / cost effectiveness are pie-maximizing criteria, where pie is the amount of surplus generated by society.

An outcome is efficient if it is impossible to make one person better off without harming another. Efficiency occurs when we choose the socially optimal level of (aggregate) emissions, and the reduction in emissions is achieved at minimal cost to society. Cost effectiveness aka conditional efficiency: conditional on a given level of pollution (not necessarily the socially efficient level) the reduction in emissions is achieved at minimal cost to society.

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Criteria Fairness

If we live in a country where redistribution of wealth doesn’t work so well (most places) it matters who derives the benefits and who bears the cost of the various policy choices.

Ideally policy would be either proportional or progressive. Who bears the cost of environmental regulation in the long run when markets are competitive? (think incidence of a tax in the long run). Policy that hurts consumers hurts poor consumers disproportionately hard: the poor consume a greater proportion of their income.

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Criteria Incentive to innovate

So far we have focused on static notions of efficiency and fairness.

But one of the most important drivers of improvement in environmental quality is innovation. We want our policy to create strong incentives for firms to try to shift their MAC curves downwards. Policy that makes firms pay a positive price for every unit of emissions create the greatest incentive for firms to innovate.

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Criteria Enforcement costs

If the government wants firms and people to do something other than what they would naturally choose they need to alter the incentives faced.

The government can either use the carrot or the stick. There are two components of the punishment or reward:

1 The government needs to know what is going on if it hopes to influence behaviour: we need monitoring of emissions.

2 There need to be consequences attached to the observed behaviour.

Figure 2: I prefer carrots

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Criteria Enforcement costs

All policy (other than moral suasion) require the government to monitor emissions.

Consider the stick:

What matters from the perspective of a (risk neutral) polluter is the probability of being caught doing something bad times the consequence: the expected punishment.

Various combinations of monitoring effort and punishment size can yield the same expected punishment.

... But some combinations are easier to enforce.

Easier to enforce when punishment sizes are low and probability of getting caught is high. Why?

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