Government and

the Market

Environmental Policy

• The environment and production– environmental failures of the market– nature of an environmental policy

• Problems with policy intervention– valuing the environment• financial costs to other users• revealed preference• contingency valuation

– other problems• spatial issues• temporal issues• irreversibility issues

Environmental Policy

• Environmental policy options

–market-based policy: taxation and subsidies

• conflicts with revenue objectives

• redistributive effects

• problems with international trade

• effects on employment

• uses of green taxes in various countries

Types of environmental taxes and charges

Green tax revenues as a % of GDP

Green tax revenues as a % of GDP

Environmental Policy

• Environmental policy options (cont.)

– non-market-based policy: command-and-control systems

• approaches to devising CAC systems

– technology-based standards

– ambient-based standards

– social-impact standards

• assessing CAC systems

Environmental Policy

• Environmental policy options (cont.)

– tradable permits

• how tradable permits work

– deciding on permitted levels of pollution

– 'grandfathering'

• their possible use internationally

• advantages

• problems

• Environmental policy in the UK and EU

Transport Policy

• Congestion problems and the impact on society and business

Passenger transport in Great Britain(percentage of passenger kilometres by road)

Passenger transport in Great Britain(percentage of passenger kilometres by road)

Passenger transport in Great Britain(percentage of passenger kilometres by road)

Passenger transport in Great Britain(percentage of passenger kilometres by road)

Passenger transport in Great Britain(percentage of passenger kilometres by road)

Car

s pe

r th

ousa

nd p

opu

latio

n

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

UK

Car

s pe

r th

ousa

nd p

opu

latio

n

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

USA

UK

Car

s pe

r th

ousa

nd p

opu

latio

n

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

USAGermany

UK

Car

s pe

r th

ousa

nd p

opu

latio

n

W Germany

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

USAGermany

BelgiumSweden

UK

Car

s pe

r th

ousa

nd p

opu

latio

n

W Germany

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

USAGermany

BelgiumSweden

UK Spain

Car

s pe

r th

ousa

nd p

opu

latio

n

W Germany

Energy and Transport in Figures (EC, 2003); Federal Highway Administration: http://www.fhwa.dot.gov/ohim/qfvehicles.htm

Increase in car ownership

Transport Policy

• The allocation of road space

– demand for road space

• a derived demand

• determinants of demand

• the price and income elasticities of demand

– supply of road space

• short run

• long run

Transport Policy

• Social optimum level of road usage

– marginal social benefit

– marginal social cost

• congestion costs: time

• congestion costs: monetary

• environmental costs

– socially efficient level of road usage

Actual and optimum road usage

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

MC (private)

Actual and optimum road usage

a

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e

Actual and optimum road usage

MC (private)

a

b

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e

MSC

Actual and optimum road usage

MC (private)

a

a

b d

O

Co

sts

and

be

nef

its (

£)

MSB

Cars per minute

Q1

e

Q2

c

Optimumcharge

MSC

Actual and optimum road usage

MC (private)

Transport Policy

• Social optimum level of road usage– marginal social benefit

– marginal social cost• congestion costs: time

• congestion costs: monetary

• environmental costs

– socially efficient level of road usage

• Identifying a socially optimum level of road building

Transport Policy

• Social optimum level of road usage– marginal social benefit

– marginal social cost• congestion costs: time

• congestion costs: monetary

• environmental costs

– socially efficient level of road usage

• Identifying a socially optimum level of road building– use of cost–benefit analysis

Transport Policy

• Policy 1: direct provision

– the road solution

– public transport

• Policy 2: regulation and legislation

– restricting car access

• bus and cycle lanes

• no entry to side streets

• pedestrian-only areas

– parking restrictions

Transport Policy

• Policy 3: changing market signals

– extending existing taxes

– road pricing

• variable tolls

• supplementary licences

• electronic road pricing

– subsidising alternative means of transport

Privatisation

• History of privatisation

Nationalisation and privatisation in the UK

Nationalisation and privatisation in the UK

Nationalisation and privatisation in the UK

Privatisation

• History of privatisation (cont.)– forms of privatisation

• Arguments for privatisation–market forces• greater competition in the goods market

• greater competition for finance

• accountability to shareholders

– reduced government interference

– reducing the PSNCR

– increased share ownership

Privatisation

• Arguments against privatisation

– natural monopolies

– the public interest

• externalities

• fairness and social justice

– problems with the PSNCR

– problems in the valuation of shares

Regulating the Privatised Industries

• Identifying optimum price and output

• Regulation in practice:– the RPI–X formula

• Advantages of UK regulation– discretionary

– flexible

– incentives

• Disadvantages of UK regulation– disincentives of changes to X

– excessive power of regulator?

– alternatively, regulatory capture

– complexity of regulation

Making Privatised Industries more Competitive

• Increasing competition in the privatised industries

– allowing competition where there is no natural monopoly

• limited extent of true natural monopoly

– allowing access to grids by competitors

– forbidding suppliers from being grid owners

– capping market share of established firms

– competitive franchising to make monopolies contestable