W6 - Induced Innovation Flashcards
(18 cards)
What are the 3 stages of technological change according to Schumpeter? What relation does it have to innovation?
1) Invention
2) Innovation - developing ideas into marketable products
3) Diffusion - new products spread across the market
Innovation describes the whole process - basically doing something new
What is the Porter Hypothesis?
When there is imperfect information, an exogenous constraint can help agents get closer to optimum by triggering experimentation and re-optimisation
paraphrase - strict regulation enhances competition against rivals (debated)
What’s the difference between the weak and strong versions of the Porter hypothesis?
Weak (accepted) - Strict but flexible regulation leads to better environmental performance
Strong (debated) - leads to better environmental AND business performance
What are 5 benefits of regulation?
1) Signals inefficiencies about resource inefficiencies
2) Raise awareness - information gathering regulation
3) Increases investment confidence - regulation signals cleaner tech will be needed
4) Motivates innovation
5) Levels playing field - all firms meet the same standard (in that country) so prevents undercutting
What is the Optimal Search Rule? What is the assumption and limitations? What does Sims theory of rational inattention say?
Firm should keep searching until MC = Expected MB
Assumption - MB: Assumes firms can rank alternatives in terms of success likelihood
Limitations - Opportunity cost of managerial time - decision makers allocate scarce attention to multiple sources of uncertainty (Theory of rational inattention)
Define static vs dynamic efficiency
Static - maximise economic welfare right now
Dynamic - maximise welfare over time (tech investment)
Tech change could affect static efficiency
What affect does regulation inducing innovation have on a firms MAC curve hence the optimal level of pollution?
Shift MAC down, optimal pollutions now lower as cheaper to abate
What are the assumptions of Milliman and Prince?
1) Regulator commits to policy instrument and the level of the instruments
2) Does not anticipate new technologies over the schemes lifetime eg. US EPA committed to a constant permit supply for 15 years
3) All firms move concomitantly in adopting new tech
4) The incentives are viewed from perspective of individual firm
Draw the graph of a Quantity Standard cap
okay
Draw the graph of incentives under a tax
okay
Draw the graph of incentives under a permit scheme
okay
What is the key assumption difference between Milliman and Prince, and Requate and Unold?
Firms can now act sequentially in abatement decisions - can change the rankings of instruments
Rank the 3 instruments that give firms the greatest cost saving opportunity in Milliman and Prince
1) Tradable permit scheme
If all firms - A + B + C
If one small firm - A + B
2) Emissions Tax
- A + B
3) Quantity Standard
- A
Draw the graphs of 1) Incentives under a permit scheme of advanced abatement technologies, 2) Compliance costs of the nth firm under a permit scheme with the old technology 3) 2) but with new technology (all will sequential adoption)
okay
What are the new rankings under Requate and Unold?
Emissions taxes now induce more adoption than new tech than permits as under a permit scheme, firms can free ride on others adoption of new tech
Draw the Time consistent policy of taxes vs permits with increasing MD
okay
If the problems the Time Consistent Policy showed us was the inefficiency of static tax or permits, why cant the government just change it ?
The government can change it and sometimes does, called ratcheting. This comes at a significant cost as firms need confidence to make large investments in tech, so dynamic tax or permits can lead to inertia or even moral hazard.
