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

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

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

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

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

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

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

Tons of coal mined $ D MC before new regs q0q0 p0p0 q* p* MC after new regs New regulation – coal industry forced to reduce external costs PS 0 PS* PS*<PS 0

Acres of public flood control $ MB MC after regulation q* p*p* q0q0 p0p0 MC CS before regulation CS*

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

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 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

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

Benefit-Cost Analysis 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? MB $ Q MC MB $ Q MC

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