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Governmental Policies

May 7, 2012, 6:30 pm
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Governments often intervene in the marketplace to achieve societal objectives. For example, to promote energy conservation and greenhouse gas mitigation, governments have tried a variety of policies involving taxes, price floors, permits, and regulations. These policies, because they directly and indirectly influence supply and demand, have broad consequences.

For example, several U.S. presidential candidates in 2008 proposed a “tax holiday” to lift U.S. excise taxes on gasoline during the summer in order to provide some relief for the electorate from the burden of high gasoline prices. Governments sometimes also impose a price floor to prop up the price of a particular good or a price ceiling to insure that its price does not exceed a certain level. For example, the U.S. government sets minimum prices for certain agricultural commodities, a policy that almost ensures a surplus supply and forces the government to store the agricultural surplus or to limit agricultural production.

The economics of global climate change however, do not fit comfortably into the classical mold of a market economy because of several factors:

• Divergent national interests distort global markets for goods or services. 

Developed countries such as the United States, Japan, and members of the European Union have been responsible for most of the greenhouse emissions to date. These countries are reluctant to proceed unilaterally with projects to reduce emissions and in recent times China and India have become major emitters of greenhouse gases but are reluctant to implement policies that might constrain their economic growth.

• Monopolies or cartels control the supply of some goods or services. 

Utilities that supply electricity; natural gas; sewage disposal etc are natural monopolies because one provider who benefits from economies of scale can serve a local market more efficiently than multiple providers can. Economies of scale are significant for utilities because they have high capital costs but have direct costs that increase relatively slowly with size. Moreover, utilities provide services that are largely homogeneous: A watt of electricity from one company should be indistinguishable from a watt of electricity from another company. Economies of scale together with homogeneity of services act as barriers to any company attempting to enter a market in a new locality. Inconsistent economic policies toward the electric power industry have slowed the adoption of technologies that diminish greenhouse gas emissions from power plants.

• Crucial information about some goods or services is sparse, uncertain, or not publicly available. 

In a free market, providers and consumers make rational decisions based on information about the cost, quantity, and quality of the available goods and services. Information about global climate change, however, suffers from being sparse, uncertain, or not publicly available. For instance, estimates of polar bear populations are sparse, estimates of greenhouse gas emissions from various sources are uncertain, and estimates of petroleum reserves in various locations are not publicly available. Without reliable information, economic decisions are prone to error.  About 25 satellites that currently orbit Earth provide crucial data about the planet’s climate trends (National Research Council 2005). More than half of these are near or past their expected service lifetimes and will no longer be operational by 2010. Failure to launch replacement satellites will severely limit the information available about the state of the world.

• Some relevant goods or services are free and invite indiscriminate use.

With respect to global climate change, Earth’s atmosphere has two properties that interfere with market forces. It is to some extent nonrival; one person using the atmosphere does not perceptibly diminish the quality or quantity of atmosphere available to others. It is nonexcludable; one person or entity cannot keep another person or entity from using the atmosphere.  This is known as “the tragedy of the commons”  i.e.market forces are poorly suited for conserving common property resources, and governments must intervene. Most economists propose a mix of taxes and permits to regulate greenhouse gases [1]

• Important processes span several generations of human beings.

Average global temperatures have warmed discernibly only after two centuries of large-scale emissions of greenhouse gases. Even if these emissions abate today, temperatures will continue to rise through the next century.  Such long delays between cause and effect, action and reaction, increase the difficulty of developing efficient economic policies.

[1] Viscusi, W. K. and J. E. Aldy (2003) The value of a statistical life: A critical review of market estimates throughout the world. Journal of Risk and Uncertainty 27:5-76.

This is an excerpt from the book Global Climate Change: Convergence of Disciplines by Dr. Arnold J. Bloom and taken from UCVerse of the University of California.

©2010 Sinauer Associates and UC Regents

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Citation

Bloom, A. (2012). Governmental Policies. Retrieved from http://www.eoearth.org/view/article/161442

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