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

Reasons for policy change Market failure Government failure Desired social change

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

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

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.

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

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

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 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

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

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

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

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

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

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

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.

Tons of coal mined $ D MC before new regs q0q0 p0p0 q* p* MC after new regs New regulation – coal mining industry required to internalize costs of managing mine spoils in a safer manner PS 0 PS* PS*<PS 0

Tons of coal mined $ D MC before new regs q0q0 p0p0 q* p* MC after new regs CS 0 CS* CS* < CS 0

Acres of public flood control $ MB MC after regulation q* p*p* q0q0 p0p0 MC CS before regulation CS* New mine spoil regulations mean less flooding