PUAD 606 Foundations of Policy Analysis

Part III: Solution Analysis Policy tools I: Market 1. Freeing, facilitating, and stimulating markets 2. Using subsidies and taxes to alter incentives 3. Debate climate change case (homework)

Study questions and objectives of this session

How can government help markets work better? How do economic incentives work? When are they called for? Learn about two broad solution categories on the market end of the solution spectrum
Freeing, facilitating, and stimulating markets Using subsidies and taxes to alter incentives

Examine/debate the pros and cons of these tools based on the climate change case

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Prospective policy analysis: Analytic steps according to Weimer & Vining

Problem Analysis
Understanding the problem Choosing and explaining relevant goals & constraints

W&Vs Classification of generic policies Freeing, facilitating, and stimulating markets

Incl. providing insurance and cushions

Choosing impact categories Selecting a solution method Specifying policy alternatives Predicting impacts of alternatives Valuing impacts of alternatives Evaluating and recommending

Using subsidies and taxes to alter incentives Establishing rules

Incl. soft law

Information Gathering

Data, documents People

Supplying goods through non-market mechanisms

Incl. privatization and contracting out

Solution Analysis Communication

Adapted from W&V, p. 328

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Freeing markets
1. Freeing, facilitating, and stimulating markets 2. Using subsidies and taxes to alter incentives 3. Debate climate change case (homework) Deregulation
Government Market

Legalization Privatization
Denationalization Demonopolization (User fees rather than agency subvention) (Contracting-out)

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Facilitating markets
Allocating existing goods
Defining property rights (incl. intellectual property rights) Facilitating the private allocation of goods

Stimulating markets
Auction
of collective goods (radio spectrum, licenses, property rights) of collective bads (waste facilities, prisons)

Creation of new marketable goods

Tradable permits (Defining property rights: e.g. intellectual property rights to stimulate inventions)

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Providing insurance and cushions

Insurance
Mandatory insurance Optional/subsidized insurance

Cushions
Stockpiling Transitional assistance (buy/bail-outs, grandfathering) Cash grants more meaningful as subsidy

1. Freeing, facilitating, and stimulating markets 2. Using subsidies and taxes to alter incentives 3. Debate climate change case (homework)

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Taxes
Supply-side
Taxes on producers (e.g. corporate gains, taxes on processes or input goods) Tariffs: taxes on imports (and exports) Commodity/excise taxes

Subsidies
Demand-side
Output taxes (Pigovian tax) User fees Supply side Matching grants, block grants to state and local governments Grants/subsidies to producers Tax expenditures (corporate income tax) Demand side In-kind subsidies Vouchers Tax expenditures Transfers to people (e.g. child allowances)

Supply-side vs. demand-side taxes: Whats better? (e.g. CO2 tax, tax on plastic bags)
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Tax expenditures vs. transfers: Whats better? (e.g. SCHIPS, child care)
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Climate change debate

1. Freeing, facilitating, and stimulating markets 2. Using subsidies and taxes to alter incentives 3. Debate climate change case (homework) Briefly explain your tool Build a case for your tool Defend your tool against competitor

Cap-and-trade CO2 tax

15 min joint discussion 3-5 min define and defend 3 min critique Brief rebuttal

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Climate change debate: Lessons learned

Note how in defending your viewpoint you drew on relevant criteria (impact categories):
Effectiveness in reducing GHG emissions Efficiency in doing so Political feasibility (including visibility, or not) Fairness (producers/consumers affected similarly)

But also note how defending a viewpoint is different from writing a memo:
Focus on those criteria (impact categories) that promise positive outcomes and build a convincing case But being aware of the criteria (impact categories) that the opponents may point to as negatives

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