Week 9: Cost-Benefit Analysis & Policy Evaluation Flashcards
(17 cards)
What is the purpose of policy evaluation in public sector economics?
To assess the effectiveness, efficiency, and equity of public policies using tools like cost-benefit analysis (CBA) and regulatory impact assessments (RIA).
What are the key components of cost-benefit analysis (CBA)?
Comparing monetary costs and benefits, valuing non-market goods, using shadow prices, and applying discount factors.
Why is the discount factor used in CBA?
It accounts for the time value of money, showing that a dollar today is worth more than a dollar in the future.
How is the discount rate determined?
Typically based on government borrowing interest rates minus inflation (e.g., 10% if Treasury yields 12% and inflation is 2%).
What does a positive Present Discounted Value (PDV) indicate?
The project is economically viable (e.g., PDV = -3000 + 909 + 826 = 735 > 0).
How do discount rates impact climate change policy?
Higher rates (e.g., 4.3% in Nordhaus model) favor less aggressive action; lower rates (e.g., 1.4% in Stern Review) justify stronger measures.
What is regulation, and why is it used?
Government-imposed rules to modify behavior, reduce externalities (e.g., pollution), ensure equity, or provide public goods (e.g., vaccines).
Give examples of regulations.
Clean Air Act (U.S. emissions standards), UK Tobacco Advertising Ban, EU GMO labeling laws.
What is a Regulatory Impact Assessment (RIA)?
: A policy tool (e.g., OECD/EU) to evaluate regulations using CBA or multi-criteria analysis (e.g., SME impacts, consumer rights).
What are the types of taxes?
Income, lump-sum (e.g., poll tax), property, sales, excise (specific goods), capital gains, tariffs (imports).
Distinguish distortionary vs. non-distortionary taxes.
Non-distortionary taxes (e.g., poll tax) don’t alter behavior; distortionary taxes (e.g., income tax) may reduce efficiency by changing incentives.
What is tax incidence?
The burden of a tax, which may differ from who pays it (e.g., VAT is paid by firms but often passed to consumers).
How does VAT work in the UK?
Three rates: 20% (standard), 5% (reduced, e.g., car seats), 0% (essentials like food). Exemptions include stamps and financial transactions.
Why was the classification of Jaffa Cakes legally significant?
Cakes (zero-rated VAT) vs. biscuits (standard-rated) affected tax liability; McVitie’s won a 1991 case proving they were cakes.
How did the UK’s 5p plastic bag charge demonstrate CBA?
Net benefit of £782m (2020), with a 50% drop in marine litter, showing positive policy impact.
What are the advantages of CBA?
Transparency, participatory valuation, identifying winners/losers, and quantifying imperfect data better than opaque decisions.
What tools evaluate taxation vs. regulation?
Taxation: CBA; Regulation: RIA. Long-term policies may also use foresight methods.
