# 10 -- Policy for market failure

Oil and Offshore

Nov 8, 2013 (4 years and 7 months ago)

75 views

Nearly all environmental policies include two key
decisions (both components in practice are

A.
Setting the goal or target

B.
Selecting the means or instrument to achieve the
target

Stavins (1998)

10
--

Policy for market failure

A. Setting the goal:

Step 1: Characterize benefits

Note:

Emissions or
effluent (rate) vs.
ambient
concentration (level)

Slope

Relation to total
damages

Marginal damage function

Interpreting the marginal damage function

Interpret area b, a,
& (a+b)

Shift: interpret the
difference between
MD
1

and MD
2
.
(more to come)

What is the
efficient/optimal
level of emissions?
Is there enough
information?

Field and Field, 2006

A. Setting the goal:

Step 2: Characterize costs

Marginal abatement cost function

Interpreting the MAC function

Interpret area b, a,
& (a+b)

Shift: interpret the
difference between
MD
1

and MD
2
.
(more to come)

What is the
preferred level of
emissions? Do we
have enough
information?

Field and Field, 2006

Uncontrolled emissions

MD curve
does not

pin down
the uncontrolled level of
emissions.

MD

(emissions, tons/yr)

\$

MAC

e

\$

e’

MAC curve
does

say something
e
.
MAC becomes positive when
abatement begins, thus the
uncontrolled emission level

is
e’.

<assume: no free lunch>

e

Identify:

Efficient level of emissions

Point of
minimized total costs
:
TC = TAC+TD

Apply equimarginal principle.

AT the efficient level, identify:

MD of the last unit of
emissions

TAC: Total abatement cost

TD: Total damage

A.
Setting the goal:

combining costs and benefits to identify an efficient target

B. Selecting the means:

Instrument taxonomy

“Myth of market solutions”

Another myth about how economists see the
environment:

“economists
always

recommend a market
solution to a market problem.” (Fullerton and Stavins,
1998)

Economists
do

tend to “search for instruments of public policy
that can fix one market, essentially by
introducing another
(market)
” (e.g. marketable permits, tax) … “allowing each to
operate
efficiently

on its own”

However, the market fix is only efficient if there are no
market
failures

associated with the market
-
based policy itself

Sale of permits in a cap & trade market
monopolized

by a small

or
high transactions costs
? (e.g. costly
to measure emissions?)

There is no policy panacea

“(N)o individual policy instrument…is appropriate
for all environmental problems.”

The best instrument depends on

characteristics of the particular environmental
problem

social, political, and economic context

The policy challenge: selecting the best
instrument for the particular setting.

Stavins (1998)

Criteria for evaluation of

public policies

a.
Cost
-
effectiveness

b. Incentives for technological innovation

c. Enforceability

d.
Fairness/equity/distribution

e.
Agreement with moral precepts

f.
Political feasibility

a. Cost
-
effectiveness

maximizing some objective (e.g. env. qual.) for a
given cost

Informally:
“most bang for the buck”

OR

cost minimization for a given objective (e.g. a
particular level of environmental quality)

Existing environmental regulation:
not always cost
-
effective

Direct cost of federally mandated environmental quality
regulations in
1997
: ~
\$147 billion
(Hahn, 2000)

Source: the “first comprehensive government report on the
benefits and cost of federal regulation produced by the Office of
Management and Budget”
(OMB, 1997 via Hahn, 2000)
.

Comparison: total outlays for domestic discretionary programs in
1997: \$258B.

“(M)any environmental regulations would not pass a
standard benefit
-
cost test” (Hahn, 2000)

E.g.: reallocation of expenditures could save an estimated

Cost effective pollution control:
Minimizing costs

K&O, figure 9.1

Abatement goal:
100

Question: cost
-
minimizing
allocation
between A & B

EP:
equimarginal
principle

b. Technological change
(a component of
cost eff.)

Policies can provide incentives to
reduce the marginal abatement cost.

MAC

e

\$

e
0

A

B

e
1

Innovation/R&D implications of policy

Expected costs of environmental regulation (e.g. pollution
control) are a major barrier to action.

Adoption of innovative technology can increase cost
effectiveness:

(1) increase pollution control for the same cost, or

(2) decrease cost for the same level of pollution control

The optimal level of pollution control increases

Example: regulatory history for nitrogen oxides (NOx)
pollutant emissions

stationary sources (primarily coal
-
fired power plants)

NO
2
: one of the six criteria pollutants regulated by the 1970
Clean Air Act (National Ambient Air Quality Standards set to
protect health and welfare)

NO
x
as a pollutant

Sources: internal combustion engines, fossil fuel power plants, pulp
mills.

Effects: long
-
term NO2 exposure may decrease lung function and
increase the risk of respiratory symptoms (World Health Organization).

The image reveals pollution hotspots above cities and even shipping lanes.
(From
New Scientist
. Image: University of Heidelberg)

1970: Clean Air Act

1977: CAA amendments

1990: CAA amendments

1994: Title I: OTC NOx Budget
Program

(
more)…

Nitrogen oxides
(NO
x
): Policy,
innovation and
emissions

Source:
Yeh et al. (2005)

c.

E
nforceability
(a component of cost eff.)

Ease/cost of monitoring and of
sanctioning violators

Often costly to assess compliance.

Claims don’t always

reflect reality

d. Fairness/equity/distribution

Mankiw
(2008)
:

“Another
-
off

society faces is between
efficiency and equality
.

Efficiency

means that society is getting the maximum
benefits from its scarce resources.

Equality

means that those benefits are distributed
uniformly among society's members...

These two goals often conflict...

…when the government
tries to cut the economic
pie into more equal
slices, the pie gets
smaller.”

Policy burden…

increases

with income

progressive

decreases

with income

regressive

Artist Hans Hemmert:

shoe
-
extenders for uniform height

“The inherent vice of
capitalism is the
unequal sharing of
the blessings.

The inherent blessing
of socialism is the
equal sharing of
misery.”

-
Winston Churchill

(Drawing by Lyn Ott , 1942)

e. Agreement with moral precepts

Whether a policy seems to violate accepted
moral standards

E.g. subsidies may violate many people’s
feelings about who should bear the cost of
environmental improvement

Concepts like the
“polluter pays” principle

have moral foundations

Though not necessarily clear cut (e.g.
Coasian counter
-
framing)

Counterpoint to interventionist perspective

Government
Failure: when a policy intervention
make matters worse rather than better

“There is always an easy solution to every
human problem

neat, plausible, and wrong.”

H. L. Mencken

“The cause of most problems is solutions.”

Eric
Sevareid

Government Failure

Minerals Management Service (M.M.S.)
--

was in charge of offshore
drilling)

let oil companies shortchange the government on oil
-
lease
payments,

literally slept with the people they were regulating.

When the industry protested against proposed new regulations
(including rules that might have prevented the B.P. blowout), M.M.S.
backed down.

A few weeks after B.P.’s
Deepwater

Horizon oil rig blew up…Ken
Salazar, the Secretary of the Interior, ordered the breakup of the
M.M.S.”

Surowiecki
,
James
. (2010). The Regulation Crisis.
The New Yorker,

June 14
.