Much has been written on the sugar tax in this blog. The article below is posted to allow those in the 2017 Year 11 cohort to have a chance to use in their microeconomics IA. Remember all articles must be less than a year old at the time of writing.
Showing posts with label Negative externalities. Show all posts
Showing posts with label Negative externalities. Show all posts
Monday, 5 December 2016
Thursday, 16 June 2016
Another sugar tax
Very sorry I have no time to write posts at the moment. Here is a post on another eample of a sugar tax, called a 'soda tax' as it is the USA.
Monday, 30 May 2016
Sugar tax - flawed thinking?
As IB students approach their first IA I'm posting this story to remind you about the UK 'Sugar tax'.
The article focuses on a group, "The Taxpayers Alliance", who oppose the tax (very Australian - any tax is a bad tax attitude). They point out that the tax is not being applied to all drinks with high sugar content. They also suggest that the tax is regressive.
A sugar tax intends to address a negative externality of consumption and was dealt with in a post on 19th February. However the economics of it is shown in the diagram below. People don't understand how their consumption of the good is not as good for society (and them) as their perceived private benefit.
The first point made by the group is that the tax is not being applied to other sugary drinks. This is a fair point in some respects. Perhaps those who drink fizzy sugary drinks will switch to untaxed drinks due to the change in relative prices. This expose an important flaw in taxation policy, and suggests that applying the tax across a wider range of goods might be advisable.
However the criticism miss the point. Young people (and some older ones) can drink litres of fizzy drinks, but are unlikely to drink litres of hot chocolate. The problem is not the sugar content per 100ml, but the amount consumed. So if people swap a litre of fizzy drink for a hot chocolate then less sugar is consumed.
The second point made is that the tax is regressive. This means that the poorer households pay a higher proportion of their income in tax than richer households. This is usually true of specific indirect taxes. Should we be worried about this? In short, probably not. The sugar tax is designed to change behaviour. If households buy fewer fizzy drinks then they don't pay the tax and that's what the government wanted. If they carry on buying fizzy drinks then they are paying more towards their medical treatment.
Maybe the Taxpayers Alliance should have claimed the elasticity of demand was not conducive to reducing consumption instead?
The article focuses on a group, "The Taxpayers Alliance", who oppose the tax (very Australian - any tax is a bad tax attitude). They point out that the tax is not being applied to all drinks with high sugar content. They also suggest that the tax is regressive.
A sugar tax intends to address a negative externality of consumption and was dealt with in a post on 19th February. However the economics of it is shown in the diagram below. People don't understand how their consumption of the good is not as good for society (and them) as their perceived private benefit.
However the criticism miss the point. Young people (and some older ones) can drink litres of fizzy drinks, but are unlikely to drink litres of hot chocolate. The problem is not the sugar content per 100ml, but the amount consumed. So if people swap a litre of fizzy drink for a hot chocolate then less sugar is consumed.
The second point made is that the tax is regressive. This means that the poorer households pay a higher proportion of their income in tax than richer households. This is usually true of specific indirect taxes. Should we be worried about this? In short, probably not. The sugar tax is designed to change behaviour. If households buy fewer fizzy drinks then they don't pay the tax and that's what the government wanted. If they carry on buying fizzy drinks then they are paying more towards their medical treatment.
Maybe the Taxpayers Alliance should have claimed the elasticity of demand was not conducive to reducing consumption instead?
This article is more relevant to IB students because of its international nature. However VCE students should be aware of the impact of, justification for and limitations of indirect tax.
Tuesday, 26 April 2016
Coping with air pollution
Pollution is a well known market failure. The negative externalities imposed by, say, driving cars are significant and the market has no way of applying a price to these effects. Therefore governments must intervene to mitigate against the worst effects.
There are several possible ways to deal with this. In order of effectiveness, least to best:
Do nothing
Ban the activity
Regulate the activity
Impose a tax or subsidy
Create a tradeable permit scheme
When it comes to pollution caused by traffic there are many difficulties. The 'do nothing' approach has been tried (usually this leads to building more roads which cause more congestion and pollution) and bans on certain vehicles at certain times is also used in some places (such as no lorries allowed 7.30am to 9am).
The article below explains a British scheme to impose charges on high polluting vehicles in certain areas. The aim is to discourage there use in those areas, it is, in effect, a tax. Will it work? Well that depends on the Price Elasticity of Demand for road use by the vehicles operators and whether they simply operate elsewhere simply redistributing the pollution.
The article below discusses some wider issues, but it is clear that when it comes to coping with the negative externality of pollution, or carbon emissions, a comprehensive policy is required. Not only geographically comprehensive but a policy that integrates with transport policy across all modes of transport.
There are several possible ways to deal with this. In order of effectiveness, least to best:
Do nothing
Ban the activity
Regulate the activity
Impose a tax or subsidy
Create a tradeable permit scheme
When it comes to pollution caused by traffic there are many difficulties. The 'do nothing' approach has been tried (usually this leads to building more roads which cause more congestion and pollution) and bans on certain vehicles at certain times is also used in some places (such as no lorries allowed 7.30am to 9am).
The article below explains a British scheme to impose charges on high polluting vehicles in certain areas. The aim is to discourage there use in those areas, it is, in effect, a tax. Will it work? Well that depends on the Price Elasticity of Demand for road use by the vehicles operators and whether they simply operate elsewhere simply redistributing the pollution.
The article below discusses some wider issues, but it is clear that when it comes to coping with the negative externality of pollution, or carbon emissions, a comprehensive policy is required. Not only geographically comprehensive but a policy that integrates with transport policy across all modes of transport.
This article is relevant to both VCE and IB students. The methods of dealing with environmental problems is the key for VCe students whereas IB students should consider the alternative methods and their merits. My list suggests tradeable permits are the most efficient method, but why?
Monday, 11 April 2016
The cost of economic growth may be falling
In economics there are costs and benefits associated with every decision and every change. In recent years when considering the desirability of economic growth the costs have become somewhat more important than they were.
For generations economic growth was seen as good. The benefits of higher real incomes and a higher material standard of living were seen as the primary long-run goal of economic activity. It was not until the 1960's when E.J. Mishan wrote 'The Cost of Economic Growth' that economists began to seriously consider that there was a serious downside to continuous growth.
Today we understand that non-material living standards can be seriously affected by growth (take for example China's atmospheric pollution) often through negative externalities. Also we know that material living standards are are threatened by some elements of growth, such as global warming.
Some economists supported continued economic growth following Mishan's criticism, such as W. Beckerman in his 'In Defence of Economic Growth'. He argued that technical progress would allow society to overcome many of the problems of growth and that the higher real incomes obtained through growth would allow us to devote the necessary resources to deal with the problem.
There had been little to support Beckerman's contention until recently. The article from the New York Times described how growth and CO2 emissions have become 'decoupled' in some advanced economies. This holds out the possibility of economic growth without greater environmental damage. There is a long way to go however, only 21 out of 191 countries have achieved growth without more CO2.
For generations economic growth was seen as good. The benefits of higher real incomes and a higher material standard of living were seen as the primary long-run goal of economic activity. It was not until the 1960's when E.J. Mishan wrote 'The Cost of Economic Growth' that economists began to seriously consider that there was a serious downside to continuous growth.
Today we understand that non-material living standards can be seriously affected by growth (take for example China's atmospheric pollution) often through negative externalities. Also we know that material living standards are are threatened by some elements of growth, such as global warming.
Some economists supported continued economic growth following Mishan's criticism, such as W. Beckerman in his 'In Defence of Economic Growth'. He argued that technical progress would allow society to overcome many of the problems of growth and that the higher real incomes obtained through growth would allow us to devote the necessary resources to deal with the problem.
There had been little to support Beckerman's contention until recently. The article from the New York Times described how growth and CO2 emissions have become 'decoupled' in some advanced economies. This holds out the possibility of economic growth without greater environmental damage. There is a long way to go however, only 21 out of 191 countries have achieved growth without more CO2.
This article is well suited to VCE students as they look at living standards and economic growth in Outcome 2 of Unit 3. It also provides IB students with the opportunity to look at the wider aspects of growth and to evaluate its impact. It provides all of us with the reminder that there are always costs and benefits to consider.
Wednesday, 16 March 2016
Taxing sugar - should Australia follow the UK?
Yesterday the UK announced a tax on sugary drinks. It might increase some own brand cola products by 80%.
The tax is tackling an negative externality. This time the problem is a lack of information leads consumers to value sugary drinks too highly. This then causes obesity and imposes higher costs on the public health system. Therefore sugar is a demerit good in this case.
As the last post was on externalities I'll just draw the diagram and link to and ABC article on the subject. Jamie Oliver, a prime mover in the campaign for the 'sugar tax' has urged Australia to follow suit. They should.
The tax is tackling an negative externality. This time the problem is a lack of information leads consumers to value sugary drinks too highly. This then causes obesity and imposes higher costs on the public health system. Therefore sugar is a demerit good in this case.
As the last post was on externalities I'll just draw the diagram and link to and ABC article on the subject. Jamie Oliver, a prime mover in the campaign for the 'sugar tax' has urged Australia to follow suit. They should.
The problem with sugary drinks is that consumers don't consider the full costs of them. There is a lack of information about the negative effects of the sugar in the drinks. We could represent this as an additional external cost, but instead here it is shown as consumers overestimating the private benefits of sugary drinks. Therefore Demand (Marginal Private Benefit) is to the right of Marginal Social Benefit.
Placing a tax on the drinks pushes the supply curve to the left. There is a new equilibrium price (0P2) and lower quantity (0Q2). In this case the socially optimal output is achieved, because exactly the right tax has been applied and the deadweight loss of the externality is completely eliminated.
Note that not all of the tax is paid by consumers. Part of the tax comes out of firms profits. How this is divided between consumer and producer is determined by the elasticities of demand and supply.
VCE students should note how governments deal with externalities (Unit 3, outcome 1). IB students will need to understand the way markets fail in the technical way the diagram shows it and is an excellent example of tackling demerit goods.
Tuesday, 15 March 2016
Taxing negative externalities - it's a good idea most of the time
Australia has managed to become the subject of much criticism because it insists on dragging its heels on tackling climate change. The rest of the world sees it as an urgent problem that requires concerted action. Australia insists on doing less than everyone else and the world suspects it is because they want to steal a cost advantage!
The British government are now proposing to change their target of an 80% cut in carbon emissions by 2050 to 100%. In other words Britain will not add any carbon to the atmosphere at all due to economic activity. They will do this by taxing carbon emissions and subsidising green energy generation.
There is some doubt about Britain's ability to meet its current target as the BBC article below indicates. However admire the ambition and try not to be too embarrassed by Australia's pathetic effort and climate change deniers.
Dealing with negative externalities with taxes is a well established solution. A.C.Pigou wrote about taxing externalities at the start of last century. Taxes like the Australian carbon tax are known as a Pigouvian tax.
Below re two articles. One on the British governments ambitious target and another on AC Pigou's economics.
The British government are now proposing to change their target of an 80% cut in carbon emissions by 2050 to 100%. In other words Britain will not add any carbon to the atmosphere at all due to economic activity. They will do this by taxing carbon emissions and subsidising green energy generation.
There is some doubt about Britain's ability to meet its current target as the BBC article below indicates. However admire the ambition and try not to be too embarrassed by Australia's pathetic effort and climate change deniers.
Dealing with negative externalities with taxes is a well established solution. A.C.Pigou wrote about taxing externalities at the start of last century. Taxes like the Australian carbon tax are known as a Pigouvian tax.
Below re two articles. One on the British governments ambitious target and another on AC Pigou's economics.
These articles are of great value to VCE Year 12 students and IB students. Knowing how to correct market failure and how taxes work is essential knowledge, as are the pros and cons of using taxes.
Friday, 19 February 2016
Should there be a 'sugar tax'?
There is discussion around the world about putting a tax on sugar. In particular the sugar in fizzy drinks is causing concern with young people consuming so much sugar that it is leading to an obesity problem.
When people become overweight they are more susceptible to illness, such as heart disease. This leads to higher medical costs which are, in most countries, placed on governments and also leads to lower productivity. The economic problem is one of negative externalities in consumption.
The diagram below shows how negative externalities lead to a market failure in the consumption of sugar.
The demand curve (D) is also the Marginal Private Benefit Curve (MPB). The market equates supply and demand at P1, Q1. The problem is that households do not consider all of the costs of consuming all that sugar in the fizzy drinks. The Marginal Social Benefit of consuming sugar is less than the perceived private benefits.
This makes sugar a 'lack of information good' and the market oversupplies the good above the optimum amount (where MSC = MSB which defines allocative efficiency) by the amount Q1 - Q*.
So will the proposal to impose a tax on sugar work? The answer is that if the tax is of the right amount it will. In the diagram a tax of P* - P2 is imposed and the equilibrium quantity falls to the social optimum 0Q*.
There are difficulties. The BBC article suggests that is there is a 20% tax on fizzy drinks will reduce sugar consumption by 16%. That suggests demand is really quite inelastic. If the tax was on all sugar then it would be more effective. Another difficulty is that we actually don't know what the optimal consumption of sugar is, or the elasticity of demand, so the 'right' tax level is guess work.
A tax on sugar will reduce consumption, it will internalize the externality due to the information failure and provide revenue to help fund health services for those who need them. For economists it's a good solution.
When people become overweight they are more susceptible to illness, such as heart disease. This leads to higher medical costs which are, in most countries, placed on governments and also leads to lower productivity. The economic problem is one of negative externalities in consumption.
The diagram below shows how negative externalities lead to a market failure in the consumption of sugar.
This makes sugar a 'lack of information good' and the market oversupplies the good above the optimum amount (where MSC = MSB which defines allocative efficiency) by the amount Q1 - Q*.
So will the proposal to impose a tax on sugar work? The answer is that if the tax is of the right amount it will. In the diagram a tax of P* - P2 is imposed and the equilibrium quantity falls to the social optimum 0Q*.
There are difficulties. The BBC article suggests that is there is a 20% tax on fizzy drinks will reduce sugar consumption by 16%. That suggests demand is really quite inelastic. If the tax was on all sugar then it would be more effective. Another difficulty is that we actually don't know what the optimal consumption of sugar is, or the elasticity of demand, so the 'right' tax level is guess work.
A tax on sugar will reduce consumption, it will internalize the externality due to the information failure and provide revenue to help fund health services for those who need them. For economists it's a good solution.
This article is aimed at a level of difficulty that is most suited to IB Economics (and A level). However VCE students need not worry about the labels MPB and MSC, simply that the demand curve does not include the true benefits of consuming the good.
Sunday, 24 January 2016
Do icecream makers actions mean market failure theory is wrong?
Both Unilever, who are the worlds major icecream brand, and Mars, one of the major chocolate makers are shrinking the size of their products to help consumers make 'healthier choices'.
This seems to contradict the standard economic theory which says in the presence of externalities a free market will fail to allocate resources efficiently.
First let's recap what a free market is. There is no government intervention and so firms produce an amount that maximises profit and consumers maximise the benefit (utility) they can derive from their income. Competition is the only force restraining the behaviour of firms and households.
Economic theory tells us that when there are externalities present the market will not allocate resources in an optimal way. With ice-cream and chocolate we find there are negative externalities of consumption. Consumers over-estimate the benefits of consuming the good because they do not consider all of the costs of consumption, such as the dangers of high sugar and fat consumption (I'm going to assume you know the details of this danger).
The standard market outcome is shown below, in this case for cigarettes.
The market provides no incentive for firms to reduce production (and so consumption) to 0Q*. The market fails when left to itself.
So why has Mars and Unilever decided to take action to effectively reduce their output from 0Q1?
There are a number of explanations. In no particular order:
1. Competition. Doing this first gains the firms market share. Those who feel they should act to improve their health are attracted to the new smaller products. Mars and Unilever increase profit.
Note that competition will make other firms follow if successful.
2. Higher profits. Smaller portions will not be matched with proportional price cuts.
These first two reasons means the free market is alive and well. It has just adjusted to the new market conditions.
3. Better information has changed household preferences. The problem of negative externalities in consumption is a 'lack of information'. Many years of better education has led to a better informed public and pressure for firms to behave ethically. Consumers want to make a better choice.
There are a number of ways to correct market failure, such as tax and legislation. However here we have an example of the market reacting to better information which is closing the gap between Marginal Social Benefit and Marginal Private Benefit (MPB has moved to the right).
For some the conclusion will be a victory of the free market. For others it will be seen as the victory of many years of publicly funded research and education.
This seems to contradict the standard economic theory which says in the presence of externalities a free market will fail to allocate resources efficiently.
First let's recap what a free market is. There is no government intervention and so firms produce an amount that maximises profit and consumers maximise the benefit (utility) they can derive from their income. Competition is the only force restraining the behaviour of firms and households.
Economic theory tells us that when there are externalities present the market will not allocate resources in an optimal way. With ice-cream and chocolate we find there are negative externalities of consumption. Consumers over-estimate the benefits of consuming the good because they do not consider all of the costs of consumption, such as the dangers of high sugar and fat consumption (I'm going to assume you know the details of this danger).
The standard market outcome is shown below, in this case for cigarettes.
So why has Mars and Unilever decided to take action to effectively reduce their output from 0Q1?
There are a number of explanations. In no particular order:
1. Competition. Doing this first gains the firms market share. Those who feel they should act to improve their health are attracted to the new smaller products. Mars and Unilever increase profit.
Note that competition will make other firms follow if successful.
2. Higher profits. Smaller portions will not be matched with proportional price cuts.
These first two reasons means the free market is alive and well. It has just adjusted to the new market conditions.
3. Better information has changed household preferences. The problem of negative externalities in consumption is a 'lack of information'. Many years of better education has led to a better informed public and pressure for firms to behave ethically. Consumers want to make a better choice.
There are a number of ways to correct market failure, such as tax and legislation. However here we have an example of the market reacting to better information which is closing the gap between Marginal Social Benefit and Marginal Private Benefit (MPB has moved to the right).
For some the conclusion will be a victory of the free market. For others it will be seen as the victory of many years of publicly funded research and education.
This post is more suited to IB Economics, but Market Failure is part of VCE Unit 3 where the MSC/MSB analysis is not required, but the principle is.
If used for an IB Internal Assessment the theory can be closely applied and explanations of motive explored.
Tuesday, 19 August 2014
RET, forgotten for a long time, but not gone yet.
The RET is the Renewable Energy Target. It states that Australia should source 20% of its energy generation from renewable sources by 2020.
For Australia the most obvious renewable sources are wind and solar. Wind because huge wind farms can be built in the empty spaces of Australia with minimal environmental impact. Solar because parts of Australia get plenty of sunshine, although actually solar works on cloudy days too.
The point of the RET is to reduce carbon emissions. If renewable sources are used then less coal needs to be burned. Australian coal, especially Victorian coal (brown coal) is really quite 'dirty' with high CO2 emissions.
The government does not like renewable energy. They don't really think action on climate change is important and many suspect they are just pro-mining as they receive strong financial support from that sector.
The government now have a report on what to do with the RET. Written by a climate change sceptic it's likely to add to Australia's disgraceful reputation as a nation of environmental terrorists too poorly educated to grasp the nature of scientific probability.
The Guardian discusses the likely impact of cutting back or abolishing the RET below.
For Australia the most obvious renewable sources are wind and solar. Wind because huge wind farms can be built in the empty spaces of Australia with minimal environmental impact. Solar because parts of Australia get plenty of sunshine, although actually solar works on cloudy days too.
The point of the RET is to reduce carbon emissions. If renewable sources are used then less coal needs to be burned. Australian coal, especially Victorian coal (brown coal) is really quite 'dirty' with high CO2 emissions.
The government does not like renewable energy. They don't really think action on climate change is important and many suspect they are just pro-mining as they receive strong financial support from that sector.
The government now have a report on what to do with the RET. Written by a climate change sceptic it's likely to add to Australia's disgraceful reputation as a nation of environmental terrorists too poorly educated to grasp the nature of scientific probability.
The Guardian discusses the likely impact of cutting back or abolishing the RET below.
Wednesday, 9 July 2014
Reasons to keep the Carbon Tax
As the Senate does or does not vote to keep the Carbon Tax it is useful to remember that the Economics of Climate Change says a Carbon price is a good idea.
It is also worth remembering that the Australian governments issue is that it does not raise enough revenue, thanks to the reckless Costello budgets. Therefore why not tax something bad? It's better than income tax or Medicare co-payments.
It is also worth remembering that the Australian governments issue is that it does not raise enough revenue, thanks to the reckless Costello budgets. Therefore why not tax something bad? It's better than income tax or Medicare co-payments.
Wednesday, 25 June 2014
Regulation to reduce climate change
Yesterday Clive Palmer said he discovered things about the dangers of climate change from Al Gore that he had not known about. Leaving aside the obvious point that no politician who wishes to talk at length about the Carbon Tax should do so without knowing the facts, I also found out something about Australian policy yesterday.
Australia has no vehicle emission standards for cars and light goods vehicles. I knew Australia lagged behind the rest of the world on carbon pricing, emissions targets and CO2 per capita. However not to have rules on how much vehicles emit was a shock.
The good news is that it might happen soon. The Guardian tells the story and has the details of how effective it can be. Such regulation is one of the few examples of where a rule is better than a price to deal with market failure.
Remember when the idiot Abbott falsely claims the Carbon tax is 'the highest in the world' that the rest of the world has multiple climate change measures.
Australia has no vehicle emission standards for cars and light goods vehicles. I knew Australia lagged behind the rest of the world on carbon pricing, emissions targets and CO2 per capita. However not to have rules on how much vehicles emit was a shock.
The good news is that it might happen soon. The Guardian tells the story and has the details of how effective it can be. Such regulation is one of the few examples of where a rule is better than a price to deal with market failure.
Remember when the idiot Abbott falsely claims the Carbon tax is 'the highest in the world' that the rest of the world has multiple climate change measures.
Friday, 25 April 2014
'Final' Direct Action plans published
The government have published their final White Paper on how Direct Action will replace the Carbon Tax.
The idea of direct action is that companies will 'bid' for contracts that will allow them to introduce measures to reduce carbon emissions. The government claim that they will meet the 5% reduction target in carbon emissions by 2020 as a result.
Very few people have any confidence that this new scheme will work. Economists have a very clear view on the effectiveness of various schemes to reduce negative externalities.
The idea of direct action is that companies will 'bid' for contracts that will allow them to introduce measures to reduce carbon emissions. The government claim that they will meet the 5% reduction target in carbon emissions by 2020 as a result.
Very few people have any confidence that this new scheme will work. Economists have a very clear view on the effectiveness of various schemes to reduce negative externalities.
BEST
Permit trading schemes
Tax
Regulation
Nothing
WORST
The Direct Action scheme counts as regulation. Perhaps the kindest thing that can be said about it is that it is better than nothing.
The problem of regulation is that it relies on somebody deciding the amount of reduction and/or the budget for the regulation. Neither will be necessarily the optimal (allocatively efficient) amount and are likely to be restricted by both budgets and political constraints.
The advantage of both tax and trading schemes is that they rely on the market and can be managed so that the economy adjusts to the socially optimal position. Both have the weakness that negative externalities must be well understood to achieve their goal.
However trading schemes have the huge advantage of allowing the cheapest possible reduction in negative externalities. By this standard Direct Action comes a very poor third in reducing carbon emissions.
Sunday, 13 April 2014
"Stop using fossil fuels" - IPCC
The IPCC have published their findings on what must be done to prevent the worst effects of climate change. They say the worst polluting fossil fuels must stop being used as soon as possible and renewable energy used instead.
What this really means is that fuels like brown coal, the dirtiest fuel, should be replaced with new capacity built in renewable energy such as wind and solar. They warn that if carbon emissions are not reduced radically by 2050 then it will be necessary to move into 'negative carbon emissions' after that.
They suggest that if action is taken now the cost will be small. They estimate about 0.1% of GDP per year. Whatever is done energy will cost more than it does today and, frankly, people will just have to suck it up.
Renewable energy is more expensive than energy from fossil fuel. However the external costs of using fossil fuel far outweigh the additional private costs of switching to renewable fuel. The problem is that the external costs fall on future generations and this allows climate criminals, such as the idiot Abbot, to use cheap debating tricks to convince people that there is no need to take urgent action on this matter for short-term political gain.
On the bright side the IPCC point out that there are more immediate external benefits of moving away from fossil fuels. These are all due to lower pollution levels and so better health.
Australia is so far behind the rest of the world on this matter it is difficult to imagine any leadership on this issue. Carbon pricing remains the most efficient way to tackle the problem and nuclear energy the most obvious short-term replacement for fossil fuels. The rest of the world will have to wait until after the next election for any help from Australia.
What this really means is that fuels like brown coal, the dirtiest fuel, should be replaced with new capacity built in renewable energy such as wind and solar. They warn that if carbon emissions are not reduced radically by 2050 then it will be necessary to move into 'negative carbon emissions' after that.
They suggest that if action is taken now the cost will be small. They estimate about 0.1% of GDP per year. Whatever is done energy will cost more than it does today and, frankly, people will just have to suck it up.
Renewable energy is more expensive than energy from fossil fuel. However the external costs of using fossil fuel far outweigh the additional private costs of switching to renewable fuel. The problem is that the external costs fall on future generations and this allows climate criminals, such as the idiot Abbot, to use cheap debating tricks to convince people that there is no need to take urgent action on this matter for short-term political gain.
On the bright side the IPCC point out that there are more immediate external benefits of moving away from fossil fuels. These are all due to lower pollution levels and so better health.
Australia is so far behind the rest of the world on this matter it is difficult to imagine any leadership on this issue. Carbon pricing remains the most efficient way to tackle the problem and nuclear energy the most obvious short-term replacement for fossil fuels. The rest of the world will have to wait until after the next election for any help from Australia.
Tuesday, 25 March 2014
Dealing with negative externalities
Congestion is an excellent example of an externality.
By driving along a road you actually hold up other road users. You consider only the benefits of making the journey to yourself and the cost of the journey to you*. However you impose on other road users the cost of a longer journey for them and impose on the world at large the costs of noise and pollution from your car.
The market will allow far too many cars to use a road. You only need to look at the queues of traffic heading into the City in the morning, or out again in the evening.
The reason why there are too many cars on the road is the failure of drivers to consider the full social cost of their journey. The way to correct this market failure is to 'internalise the externality' by imposing a charge on the drivers. This will raise the cost of the journey to them and fewer will want to use the road (simply the 'Law of Demand').
Economists have long recommended 'road pricing' as a solution to the problem of congestion. It meets with a lot of opposition and was recently rejected by the Abbot government when recommended by the Productivity Commission.
Road pricing means charging road users according to the time of day and level of congestion. It is a variable charge that tries to smooth out the 'peaked demand' of rush hours. By using such a system the market is moved closer to allocative efficiency, the journey times of those prepared to pay is reduced, pollution is lower as less fuel is used and money is raised to subsidise public transport.
Despite the economic sense of road pricing it is unlikely to be introduced anytime soon. There might be a London style congestion charge or a small charge per kilometer on drivers in small areas at peak times. Only Singapore has so far introduced electronic road pricing with variable fees.
By driving along a road you actually hold up other road users. You consider only the benefits of making the journey to yourself and the cost of the journey to you*. However you impose on other road users the cost of a longer journey for them and impose on the world at large the costs of noise and pollution from your car.
The market will allow far too many cars to use a road. You only need to look at the queues of traffic heading into the City in the morning, or out again in the evening.
The reason why there are too many cars on the road is the failure of drivers to consider the full social cost of their journey. The way to correct this market failure is to 'internalise the externality' by imposing a charge on the drivers. This will raise the cost of the journey to them and fewer will want to use the road (simply the 'Law of Demand').
Economists have long recommended 'road pricing' as a solution to the problem of congestion. It meets with a lot of opposition and was recently rejected by the Abbot government when recommended by the Productivity Commission.
Road pricing means charging road users according to the time of day and level of congestion. It is a variable charge that tries to smooth out the 'peaked demand' of rush hours. By using such a system the market is moved closer to allocative efficiency, the journey times of those prepared to pay is reduced, pollution is lower as less fuel is used and money is raised to subsidise public transport.
Despite the economic sense of road pricing it is unlikely to be introduced anytime soon. There might be a London style congestion charge or a small charge per kilometer on drivers in small areas at peak times. Only Singapore has so far introduced electronic road pricing with variable fees.
*Actually drivers only tend to consider their fuel costs and not the cost of maintenance, insurance and wear and tear that they have to pay as well. Therefore they underestimate their true costs and drive even more than they would if the full cost of motoring was considered.
Wednesday, 26 February 2014
Government told its climate change policy isn't good enough
The Climate Change Authority has said Australia's emissions reduction target should be trebled to 15%. This will fall on the deaf ears of the Idiot Abbot's government who not only want to abolish the Authority they also don't believe in climate change at all.
The Authorities point is that the current policy won't even achieve the 5% target and the conditions to do more have been met. Other countries are straining to cut emissions (UK target 80% reduction by 2050).
To reduce carbon emissions it will be necessary to raise the cost of carbon somehow. It is necessary to persuade people to use less goods and services that have high carbon emissions. This will mean people have to pay more and the repeal of the Carbon Tax is a backward move in this sense.
Below is a Guardian Australia article that has some discussion on this.
The Authorities point is that the current policy won't even achieve the 5% target and the conditions to do more have been met. Other countries are straining to cut emissions (UK target 80% reduction by 2050).
To reduce carbon emissions it will be necessary to raise the cost of carbon somehow. It is necessary to persuade people to use less goods and services that have high carbon emissions. This will mean people have to pay more and the repeal of the Carbon Tax is a backward move in this sense.
Below is a Guardian Australia article that has some discussion on this.
Thursday, 6 February 2014
Renewable Energy Targets to be dropped?
It is important not to get carried away or influenced by what be a 'scare stroy'. Politicians love scare stories, but its all politics, not truth.
However there is a concern that the RET's, Renewable Energy Targets, might be dropped. This is consistent with the Abbot government's climate change denying agenda that is also seeing them trying to abolish the Carbon Tax.
The RET is an example of a regulation to deal with market failure. The Carbon Tax is using the price mechanism. While Economists prefer to use prices to influence behaviour, regulation is also important in the case of many market failures - a belt and braces approach.
It is important to concentrate on the issues here:
Why has the market failed in the case of climate change?
What direction must policy move the market in?
What is the best way to achieve the desired goal?
When you approach the issue from this direction you will be applying economic thinking, not political rhetoric.
However there is a concern that the RET's, Renewable Energy Targets, might be dropped. This is consistent with the Abbot government's climate change denying agenda that is also seeing them trying to abolish the Carbon Tax.
The RET is an example of a regulation to deal with market failure. The Carbon Tax is using the price mechanism. While Economists prefer to use prices to influence behaviour, regulation is also important in the case of many market failures - a belt and braces approach.
It is important to concentrate on the issues here:
Why has the market failed in the case of climate change?
What direction must policy move the market in?
What is the best way to achieve the desired goal?
When you approach the issue from this direction you will be applying economic thinking, not political rhetoric.
Thursday, 28 November 2013
High speed rail in Australia - Cost-Benefit analysis
For some time people have talked about a high speed rail link between Melbourne and Brisbane. Or at least Melbourne to Sydney.
A proposal was rejected by the last government on cost grounds. A new proposal is objected to on the same basis, but that's the wrong way to approach it.
Economists suggest that making a decision should be on the basis of a Cost-Benefit Analysis (CBA).
That means taking into account:
1. The direct costs of a decision e.g. The cost of building a railway and the interest on the money used to pay for it.
2. The direct revenues of a decision e.g. The value of fares collected by the railway.
3. The indirect costs of a decision e.g. The disruption caused to people who live near the railway (such as additional noise) or who have to move to allow the new railway to be built.
4. The indirect benefits of a decision e.g. The lower carbon emissions of trains over aircraft, the time saved by the passengers as a result of the new railway.
The first two are the costs and benefits considered by a firm in making a decision. The third and fourth are wider considerations which are equally important from an economists point of view.
Another point to bear in mind is that the railway will be there for a long time and so future costs and benefits, up to fifty years ahead, should be included.
The article below lists objections as 'the return is only 1%', and there 'isn't a spare $50bn lying around'. Both objections miss the point.
Firstly the return is much higher when the indirect costs and benefits are factored in over the whole time period. Secondly the $50bn is borrowed and repaid over time, it does not need to be available now. Indeed the people who will benefit form the proposed rail link will live in the future, it wouldn't be right for current taxpayers to shell out now for the railway.
Cost-benefit thinking is fundamental to economics thinking and decision making. Failure to think in those terms will lead to a lot of mistakes.
A proposal was rejected by the last government on cost grounds. A new proposal is objected to on the same basis, but that's the wrong way to approach it.
Economists suggest that making a decision should be on the basis of a Cost-Benefit Analysis (CBA).
That means taking into account:
1. The direct costs of a decision e.g. The cost of building a railway and the interest on the money used to pay for it.
2. The direct revenues of a decision e.g. The value of fares collected by the railway.
3. The indirect costs of a decision e.g. The disruption caused to people who live near the railway (such as additional noise) or who have to move to allow the new railway to be built.
4. The indirect benefits of a decision e.g. The lower carbon emissions of trains over aircraft, the time saved by the passengers as a result of the new railway.
The first two are the costs and benefits considered by a firm in making a decision. The third and fourth are wider considerations which are equally important from an economists point of view.
Another point to bear in mind is that the railway will be there for a long time and so future costs and benefits, up to fifty years ahead, should be included.
The article below lists objections as 'the return is only 1%', and there 'isn't a spare $50bn lying around'. Both objections miss the point.
Firstly the return is much higher when the indirect costs and benefits are factored in over the whole time period. Secondly the $50bn is borrowed and repaid over time, it does not need to be available now. Indeed the people who will benefit form the proposed rail link will live in the future, it wouldn't be right for current taxpayers to shell out now for the railway.
Cost-benefit thinking is fundamental to economics thinking and decision making. Failure to think in those terms will lead to a lot of mistakes.
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