PLS 304 – Introduction to Public Policy Analysis Mark T. Imperial, Ph.D. Topics: Identifying Alternatives  Two levels of policy responses to problems − Strategies: planned, calculated behavior consisting of a group of policy instruments. Groups of policy instruments come together (by design or in some cases by accident) into more or less clearly defined strategies. Some strategies present a well conceived and rational policy others emerge piecemeal, as problems evolve or experience accumulates. − Policy instruments: are a means to achieving an end. The way that these instruments come together is the strategy. − Wide array of what are referred to as policy tools, policy instruments, or generic policies in the policy maker’s box − Tendency is to rely on policy tools you are familiar with or use regularly – it is important to understand that there are often many options − Policy analysis rarely compares and evaluates across general policies. Instead it tends to be incremental and compares different versions of the same generic policy − Lots has been learned about the general policies − If you spend a lot of time working with particular general policies, then you need to learn what the literature says about its strengths and weaknesses  Basic categories of policy instruments − Freeing, facilitating, and simulating markets − If we determine that there is no market failure, then establishing or reestablishing a market should be a candidate solution − Three general approaches − Freeing markets by − Deregulation: price and entry regulations may be restricting competition (e.g., airline deregulation) − Legalize: remove criminal sanctions (decriminalization) (e.g., legalize drugs or prostitution) − Privatize: privatization often gets characterized in different ways (See Salmon 1989 below). It usually refers to selling state-owned enterprises to private industry and removing restrictions that prevent industry from competing with government (schools) − Facilitating markets − Allocate property rights to existing goods: Works better when problem is institutional rather than structural (resource is moving). It doesn’t matter in an economic sense who gets the property right as long as it’s secure and enforceable. The distributional consequences are often important from a political and societal standpoint. − Create new marketable goods: most common application is creating tradable permits for pollution - 1 -PLS 304 – Lecture Notes Identifying Alternatives − Simulating markets − Auctions: good can be sold at auction (e.g., auctioning off rights to provide cable television), however, since bidders can behave opportunistically, the auction has to be properly designed to work well. − Using taxes and subsidies to alter incentives − This category is more interventionist than freeing, facilitating, and simulating markets and may be necessary when market failure is endemic or values other than efficiency are important − Subsidies and taxes: their aim is to induce behavior rather than command it so are market-compatible forms of direct government intervention − While economists like incentives, bureaucrats and politicians often are less enthusiastic because behavioral change isn’t required − Big difference between incentives and rules, which require change − Four basic categories − Supply-side taxes − Output taxes: Using taxes to correct negative externalities (e.g., tax on pollution) can also lead to lower cost, stimulate innovation, encourages firms to acquire information, government intrusiveness is minimized, reduces administrative complexity, and can lower transaction costs) − Tariffs: is a tax on imported or exported goods and is usually done to protect a fledgling industry or to correct from unfair trade practices − Supply-side subsidies − Matching grants or subsidies: Is when federal or state governments match local expenditures and thus encourage the provision of some good or service. Business can also be paid directly to reduce some externality (e.g., pay them to reduce pollution). − Tax expenditures (business deductions and tax credits: it is considered an expenditure because it is viewed as being given back money that has already been taken away. Often used to promote research and development. − Demand side taxes − Commodity or excise taxes: used to internalize the negative impacts associated with some goods. Most common applications are application to demerit goods or so-called sin taxes (e.g., alcohol, cigarettes) − User fees: these include license fees, rental charges, fares, tolls, and other synonyms for price. They are best used when you want to internalize externalities or to price public goods appropriately in the context of nonrivalrous, excludable, and congested goods (e.g., bridges, access to fishing grounds) − Demand-side subsidies − In-kind grants and subsidies: subsidize the consumption of specific goods (e.g., public housing provides housing at reduced cost) or direct provision of a commodity (e.g., cheese) to consumers. − Vouchers: In-kind grants that allow consumers to purchase marketed goods at reduced prices (e.g., food stamp program, school vouchers). - 2 -PLS 304 – Lecture Notes Identifying Alternatives − Tax expenditures (personal deductions and credits): are used to stimulate individual demand for things such as housing (e.g., mortgage interest deduction), education (e.g., student interest deduction), medical care, and child care. − Establishing rules − Rules pervade our social and political lives. Government uses rules to coerce rather than induce certain behaviors. Compliance can be enforced by criminal or civil sanctions. − It is not always possible to clearly distinguish between rules and incentives in the practical effect (e.g., a small fine that really serves as an incentive or disincentive to follow the rules) − Two basic categories − Framework rules − Civil laws (especially liability rules) − Criminal laws − Regulations − Price regulation: includes price ceilings, price floors (supports), and price caps. It is often used to prevent monopolies from charging rent-maximizing prices (cable TV rates) − Quantity regulation: regulating the quantity of pollutants produced would be an example. Also included in this category would be technology-based standards. − Direct