Social Welfare Loss Research Articles

Ideas That Fall Flat: The Effect of Flat Tax on Income Inequality

We examine the effect of flat-rate taxation on income inequality in the post-communist countries. The study contributes to the debate about the political economic consequences of the trade-off between efficiency and equity of taxation policies. The design of an effective redistribution system is highly desirable for any type of political system, and it needs to address concerns over the distribution of tax burden across various income brackets. This leads governments to choose between the range of highly progressive to completely flat-rate taxation regimes. Economic theory has offered approaches to the analysis of the equity gains of flat tax policies by stressing the potential minimization of social welfare loss through economic growth, labour supply and capital accumulation. We find that flat taxation adoption is positively associated with an increase in income inequality. Our findings provide new cross-country evidence that flat tax policies substantially contribute to greater income inequality.

Choice of foreign exchange intervention and inflation targeting commitment

We derive a model in which the decision to intervene in the foreign exchange market becomes an endogenous function of the variance of exogenous shocks and parameters of the model. The central bank evaluates a social welfare loss function under four scenarios including a foreign exchange intervention or non-intervention regimes under both discretionary and commitment type arrangements for administering monetary policy. The model shows that under either a discretionary regime, or a regime characterized as one which commits, the decision to intervene or not to intervene in the forex market depends on an endogenous equation of shallow parameters. Under either intervention or non-intervention, commitment to a policy rule dominates discretion.

CRUDE OIL PRICE VOLATILITY AND ECONOMIC GROWTH: MEDIATING ROLE OF MACROECONOMIC INDICATORS

This study examines the correlation between oil price fluctuation and absolute business development in Pakistan. Our study focusses on three economic sectors, agriculture and livestock, manufacturing and electricity production and transportation from 1980 to 2018 using the autoregressive distributed lag, with linear regression to evaluate the (time series or panel) data (please elaborate the frequency of data as well either it is daily, weekly, monthly, quarterly or yearly data). Our findings reveal negative impact of oil price on the economic development overall, and manufacturing, electricity production and livestock sectors individually; while, there is positive relationship observed with communication and transport sectors. There is need for policymaker’s attention on highly oil-dependent sectors to run their operations. Empirical findings suggest a 30% shortage of oil supply responsible for the highest fluctuated structure of oil pricing, which suddenly increases the projected welfare loss through a 40% reduction in gross domestic product. This study suggests that the country should maintain a minimum 100-day strategic petroleum reserves to hedge any adverse effect of oil price fluctuation on economic and social welfare losses.

A Public Bad Game Method to Study Dynamics in Socio-Ecological Systems (Part II): Results of Testing Musa-Game in Rwanda and Adding Emergence and Spatiality to the Analysis

This article is the second in a series of two and presented findings from field-testing an experimental boardgame (Musa-game) with banana farmers in four villages in Eastern Rwanda. The conceptualization and design of the Musa-game were described in Part I. Musa-game gives insights into how farmers’ individual and collective decision-making and actions regarding management of a public bad interplay with other factors and characteristics of the socio-ecological system (SES). A public bad is a non-rivalrous, non-excludable issue that causes loss of social-welfare of individuals and communities. The method contributes contextual understanding about the emergence of phenomena that arise from the interactions between human and non-human actors. Musa-game was framed to study one public bad challenge in particular: the infectious crop disease Banana Xanthomonas Wilt disease (BXW). Findings increased the knowhow about the emergence and governance of conditions that hinder or enhance the spread of infectious diseases like BXW. Analysis of qualitative and quantitative data suggested that individual farmers’ actions were influenced by perceptions of risk, affecting both individual and collective disease management. Additionally, the used experimental treatments allowed us to evaluate the influence of communication on risk-governance strategies. It appears that a combination of possession of technical knowledge about the disease, opportunities to communicate about the disease, and a collective disease management strategy enables the best individual actions and collective performance.

Assessing the nexus between financial development and energy finance through demand- and supply-oriented physical disruption in crude oil.

Since 1970, numerous governments have established strategic petroleum reserves (SPRs) in relation to oil supply interruptions. In this study, important oil reserves, physical oil supply disruption and social welfare losses due to physical distribution of oil supply have been measured. The physical oil supply disruption has been measured in the form of oil supply vulnerability index and oil volatility index of the South Asian economies. Analysis reveals that the accumulation and drawdown of important national crude oil strategic petroleum reserves where the state wants to optimize individual social welfare while individuals hold over stock optimize their earnings levels. The monetary deciding factors utilize the government’s optimum important stockpile policy and simultaneously the amount and economic factors vital for the nongovernment market to actuate the optimum accumulation and nonaccumulation of important fossil fuels stockpile. Additionally, findings show that India is the lowest crude oil insecure country while Afghanistan and Bangladesh are the highest insecure countries in terms of oil supply. India’s topmost mark shows a bigger possibility to alter the fossil fuels producers while Afghanistan, Bangladesh, Bhutan and Nepal have the minimum mark corroborating the group as the utmost producer risk exposed nations.

Smog Avoidance Investment While Improving Air Quality: Health Demand or Risk Aversion? Evidence from Cities in China.

Atmospheric pollution control policies have achieved remarkable progress in China since 2013, and the smog protective equipment market has experienced a great boom during the same period. From the perspectives of the health production efficiency hypothesis and the time discount rate hypothesis, this study investigates the relationship between household expenditures on air pollution avoidance and health care, and individuals’ self-assessed health based on network survey data from 17 cities in China. Using the treatment effect model to control the potential endogenous selection problems, we explain the paradox of the growing smog avoidance investment coexisting with improving air quality. First, smog avoidance investment and household medical expenditures do not have substitution effects, while the perception of pollution intensity, pollution protection knowledge, and future health preferences significantly promote smog avoidance investment and medical expenditures. Second, air pollution avoidance investment greatly increases the probability that urban residents rate their health as “good” and “very good”. The results indicate that the time preference hypothesis can explain the pollution avoidance investment behavior and health demands of Chinese urban residents well. The hidden social welfare loss caused by air pollution may still be underestimated, even though short-term avoidance costs are included in the evaluation of pollution impacts. It is necessary to optimize environmental regulations and policies to consistently improve the ecological environment.

Low numbers of Covid-19 related infereted individuals in regions having wind resources and energy: A case study

Abstract. This paper investigates the relation between diffusion of COVID-19 and wind resources to provide insights on how sustainable policies for energy production can improve ecosystem, reduce environmental pollution, improve public health and prevent future epidemics. Results reveal that cities in regions with high wind energy production have a lower number of infected individuals of COVID-19, whereas polluted cities with less clean production and low production of energy from sustainable resources (i.e., wind) have higher numbers of infected individuals and deaths. These findings underscore the importance of sustainable energy production to support an ecosystem that protects human health and reduces the associated social welfare loss because of the COVID-19 pandemic and future similar infectious diseases. Keywords. COVID-19, Coronavirus, Wind Energy, Wind power plant, Clean energy, Climate, environmental sustainability, sustainable development, Environmental pollution. JEL. F21, F68, O53, K23 .

The impact of debt restructuring on dynamic investment and financing policies

This paper explores the impacts of debt restructuring on investment and financing decisions and agency problem between shareholders and creditors. Notably, a critical feature in our model is that the renegotiation in debt restructuring is credible. To do so, we develop a unified model of dynamic investment, financing and agency problem for firms with renegotiable private debt, thereby highlight the significance of debt restructuring for corporate decisions. We find that firms with lower renegotiation costs and more uncertainty on cash flows are more likely to issue private debt than public debt. Interestingly, we also discover that debt restructuring can alleviate underinvestment and weaken sharesholders’ asset substitution motives, thereby reducing the agency costs of debt. The above results provide practical implications for policymakers about improving investment and financing efficiency and avoiding the deadweight loss of social welfare.

Should environment be a concern for competition policy when firms face environmental liability?

In the recent period, more and more voices have called for unconventional competition policies as a way to achieve higher environmental investments from firms. This paper shows that this objective may come into conflict with those of environmental liability laws. We introduce a basic oligopoly model where firms produce a joint and indivisible environmental harm as a by-product of their output. We first analyze the effects on the equilibrium of alternative designs in environmental liability law, secondly, we discuss the rationale for “non-conventional” competition policies, i.e. more concerned with public interest such as the preservation of environment (as well as human health and so on). We study firms decisions of care and output under various liability regimes (strict liability vs negligence) associated with alternative damages apportionment rules (per capita vs market share rule), and in some cases with damages multipliers. We find that basing an environmental liability law on the combination of strict liability, the per capita rule, and an “optimal” damages multiplier, is consistent with a conservative competition policy, focused on consumers surplus, since, weakening firms’ market power also increases aggregate expenditures in environment preservation and social welfare. In contrast, a shift to the market share rule, or to a negligence regime, may be consistent with a restriction of competition, since firms’ entry may instead lead to a decrease in aggregate environmental expenditures and losses of social welfare. Nevertheless the fine tuning of the policy requires specific information from a Competition Authority, which we discuss as well.

Competition in the Italian electricity market: The unforeseen social welfare losses of reform

The worldwide wave of reforms investing power industry has created new challenges to both supply demand side management. After deregulation, electric utilities restructured their opera-tions from vertically integrated mechanisms to open market systems in order to establish a new competitive sector. Reform has involved also the Italian power sector, but competition, as lar-gely shown by the empirical literature particularly in the first years of reform, has been far to be reached, and the electricity markets has been characterized by conditions of oligopoly and exercise of market power. This paper aims to analyze welfare loss and deviation from the competitive equilibrium recorded in the day ahead Italian electricity market after the first wave of reforms was almost implemented. The study presents a theoretical and empirical model to construct a competitive equilibrium, estimating market power, both, on the supply and demand sides of the day ahead electricity market. Results show the effect of non-competitive equilibriums for the hourly markets in the period 2013-2014. In an ideal competitive market, prices would be lower than historical prices by about 2-5% and quantities would be higher by about 0.5-1%.

Environmental and economic concerns surrounding restrictions on glyphosate use in corn

Since the commercialization of transgenic glyphosate-tolerant (GT) crops in the mid-1990s, glyphosate has become the dominant herbicide to control weeds in corn, soybean, and other crops in the United States and elsewhere. However, recent public concerns over its potential carcinogenicity in humans have generated calls for glyphosate-restricting policies. Should a policy to restrict glyphosate use, such as a glyphosate tax, be implemented? The decision involves two types of tradeoffs: human health and environmental (HH-E) impacts versus market economic impacts, and the use of glyphosate versus alternative herbicides, where the alternatives potentially have more serious adverse HH-E effects. Accounting for farmers' weed management choices, we provide empirical evaluation of the HH-E welfare and market economic welfare effects of a glyphosate use restriction policy on US corn production. Under a glyphosate tax, farmers would substitute glyphosate for a combination of other herbicides. Should a 10% glyphosate tax be imposed, then the most conservative welfare estimate is a net HH-E welfare gain with a monetized value of US$6 million per annum but also a net market economic loss of US$98 million per annum in the United States, which translates into a net loss in social welfare. This result of overall welfare loss is robust to a wide range of tax rates considered, from 10 to 50%, and to multiple scenarios of glyphosate's HH-E effects, which are the primary sources of uncertainties about glyphosate's effects.

Recycling Carbon Tax under Different Energy Efficiency Improvements: A CGE Analysis of China

Carbon emission reductions and sustainable development have become hot issues in international conferences. As the most direct instrument for carbon emission reductions, the carbon tax has not been favored by policymakers because of its negative effect on the economy. To achieve low-carbon sustainable development, we use a computable general equilibrium (CGE) model to simulate carbon tax recycling under different energy transfer efficiency improvements to achieve triple dividends of carbon emission reductions and social welfare improvement. This paper contributes to the literature on recycling carbon tax for triple dividends in China. The simulation has three main findings: (i) the carbon tax revenue recycling toward reducing the resident income tax rate yields triple dividends without any energy transfer efficiency improvement; (ii) the losses of GDP and social welfare are exaggerated. Meanwhile, the carbon tax brings down carbon emissions and total carbon intensity of GDP with a mild impact on the Chinese economy; (iii) the improvement of energy transfer efficiency demonstrates the advantages of recycling carbon tax and is essential for achieving triple dividends. Thus, we propose the following policy recommendations: (i) the pilot carbon tax mechanism should be launched in high-carbon sectors (such as coal) and then implemented in other industries gradually; (ii) the government should strongly support the technological improvement of energy transfer efficiency in order to achieve sustainable development.

Allocating contiguous blocks of indivisible chores fairly

In the cake cutting problem, a cake needs to be divided among players with possibly different valuations for different pieces of the cake. We consider a variation where the cake represents chores that need to be allocated. We assume the players to be work-averse, i.e., intending to get as little of the cake as possible. We further assume that the chores are indivisible and that they are ordered along a line. We seek a fair allocation of the chores.We study the loss in social welfare due to fairness using the price of fairness concept. Previous work has considered fair division of cakes and chores with non-connected and connected pieces as well as fair division of indivisible contiguous blocks of indivisible items (with positive utility) on a line. We complete the picture by providing price of fairness results for the allocation of contiguous blocks of indivisible chores.

Rent dissipation and administration of mining rent-seeking activities in resource-rich regions

As non-productive activities, rent-seeking behaviors in the exploitation and utilization of mineral resources in resource-rich regions can not only bring about rent dissipation and the waste of social resources, but also lead to the unfair income distribution and lower social welfare. Based on the location quotient and Nelson’s method, this thesis identified coal-rich regions in China, decomposed the rent dissipation in mining rent seeking into social welfare net loss and rent-seeking cost, and analyzed the influencing factors. The conclusion shows that these resource-rich regions have prominent rent dissipation problems in the large-scale development of coal resources. The rent dissipation is mainly represented by the cost of rent seeking in the form of Tullock quadrilateral, which is highly correlated with the economic scale and resource-dependent economic development model. The improved marketization helps to reduce the loss of social welfare caused by rent seeking. On this basis, this thesis proposes corresponding countermeasures and suggestions to reform the taxation system of resource and environment, to establish a long-term mechanism for residents’ sustainable income increase, to deconstruct the system of resource property rights, and to improve the system of supervision, etc.

Air pollution, health care use and medical costs: Evidence from China

Using the micro data of China Family Panel Studies, this study quantifies the effect of air pollution on the health care use and medical costs of people in China. To avoid the potential endogenous biases, the thermal inversion and ventilation coefficient are used as instruments. Findings show that PM2.5 increases the medical care costs, hospitalization spending and self-payment costs of people significantly. Besides, the detrimental effect of air pollution is much larger for young people, and the long-term effect of PM2.5 on personal medical costs is much smaller. The evidence of two possible channels through which air pollution is related to medical use and hospital spending of people are found. On the one hand, the decrease of sleep hours caused by ambient air pollution is not beneficial for maintaining fitness, which could increase personal health care use or medical costs. On the other hand, people spend more hours in sedentary activities to avoid the exposure to air pollution, which is also positively associated with personal medical spending. This study implies that the social welfare loss should be considered when the costs and benefits of air pollution are calculated, and reducing air pollution is effective to improve the overall social welfare in the long run.

Welfare implications of segregation of social and religious groups in India: analyzing from wealth perspectives

PurposeThis paper analyzes the welfare implications of the unequal distribution of wealth amongst the social and religious groups by studying the segregation of these groups across different occupations.Design/methodology/approachThe authors use measures suggested by Alonso-Villar and Río (2017) and del Río and Alonso-Villar (2018) to compute the well-being of social groups (based on caste system prevalent in the Indian subcontinent) and religious groups due to their segregation across different regions (urban and rural) and occupations and social welfare loss of the society due to the segregation. Here social groups comprise of ST: Scheduled Tribe, SC: Scheduled Caste, OBC: Other Backward Caste and Others: other remaining castes; while, religious groups comprise of followers of Hinduism, Islam, Christianity and other religious groups.FindingsThe result shows that SC and ST groups are worse; while, the “others” group is better off due to the segregation of social groups across both regions and occupation. Similarly, in the case of religious groups, the analysis reveals that followers of Christianity are better off due to the segregation across region and occupation. It further shows that followers of Hinduism are negatively impacted while followers of Islam and other religious groups were better off due to the segregation across the regions.Originality/valueVarious researchers have studied the wealth inequality and unequal distribution in India over the years but did not dive further into the welfare implications of segregation of social and religious groups from wealth perspectives in India.

Curbing cost overruns in infrastructure investment

Infrastructure projects around the world have long been notorious for exceeding their budgets. To address persistent cost overruns, the American Planning Association urged planners to adopt reference class forecasting alongside traditional methods but the practice has not caught on in the U.S. Conversely, the U.K. adopted Kahneman’s Nobel Prize-winning theory to challenge biases in human judgment and mandated reference class forecasting for major projects in 2003. Has reference class forecasting, originally developed to rectify honest mistakes, brought the promised success in the public sector wherein political pressure is significant? Through before-and-after and with-and-without comparisons of 107 major projects, this empirical study examines the practical relevance of reference class forecasting for infrastructure investments. A before-and-after comparison reveals that the average cost overrun declined from 38% to 5% following the introduction of reference class forecasting. A with-and-without comparison also demonstrates that the U.K. surpassed its targeted probability of completing projects within budget by 12% using reference class forecasting, whereas the U.S. underperformed by 17%. Thus, reference class forecasting has engendered notable improvements in estimation in the U.K. This empirical study demonstrates the benefits of supplementing or replacing the current forecasting method. The findings can be used to reduce substantial financial risks for the government as well as social and economic welfare losses for society.

Методологічний потенціал теорії політичних ринків та його використання в дослідженнях економічної глобалізації

The article is aimed at covering the methodological possibilities of the theory of political markets for making research of the current macroeconomic policy. The theory of political markets in the contemporary conditions is one of the most effective methodological instruments for researching the mechanisms of macroeconomic policy implementation both within terms of individual countries and in the field of international economic relations. Analyzing, systematizing and generalizing the scientific works of many scholars, the authors combined the analysis of officially declared procedures for making relevant political decisions with real informal mechanisms for the implementation of rent-oriented behavior of any of the political entities – both personified and those who «hide» behind the relevant groups of influence, which are created specially to conceal such personal influence. As a result of the research, two directions of application of the theory of political markets are allocated to study the peculiarities of the regulatory economic activity of the modern State. First, it is an analysis of the interaction of the main internal political actors – participants in the struggle for redistribution of public goods: politicians (whose powers depend on the results of elections); officials (whose powers depend on their appointment to office); voters (who «sell» their votes in exchange for favorable further decisions of politicians) and organized pressure groups (lobbyists). Secondly, it is a study of the regulatory role of the national State in international economic relations. A perspective direction of further scientific research in this plane is the development of a theoretical and methodological instrumentarium for quantitative assessment of the scale of redistribution and the size of losses of social welfare on the basis of the economic-statistical and expert assessments.

What's the Difficulty? Understanding and Incentivizing Bitcoin's Difficulty Adjustment Mechanism

This paper develops a model of the bitcoin market that views the bitcoin as a tradeable commodity whose supply is managed by the Bitcoin protocol. Miners utilize equipment and electricity to solve complex computational problems and the first miner to solve a problem is rewarded with bitcoins. The protocol adjusts the difficulty of the problem to regulate the supply of bitcoins over time. The model demonstrates that an increase (decrease) in the difficulty works in effect like a government's placing an ad valorem tax (subsidy) on the price of a commodity. The rents that would have arisen from limiting supply, however, are wasted as electricity costs that benefit neither a government nor the miners. Ironically, while the bitcoin is esteemed for its nongovernmental design, its system of supply management is far less efficient than if a government were to regulate the quantity of bitcoins by imposing a tax on its price. I show that an actual tax on the price of the bitcoin can incentivize the protocol to minimize the electricity costs it induces and I characterize the cost-minimizing tax. Using data from March 2014 to January 2019, I estimate that the difficulty adjustment mechanism resulted in net social welfare losses of 351.6 million USD and an average initial tax of 119.5% would have minimized the electricity costs during this time period.

Sustainable and Optimal “Uniqueness” Contract in Public-Private Partnership Projects of Transportation Infrastructure

To control the “uniqueness” risk in Public-Private Partnership (PPP) projects of transportation infrastructure, we design a simplified “uniqueness” contract model by incorporating the impact of the initial investment which is based on the Bertrand model. The nonlinear programming method is adopted to derive the optimal “uniqueness” contracts for incumbent private capital, the public, and the social welfare, respectively. The simulation results show that the achievement of the optimal “uniqueness” contract is essentially the result of a compromise between the private capital, the public, and social welfare. The extent to which such a contract reduces the probability of “uniqueness” risk mainly depends on the equilibrium relation between the interests of private capital and the public. The initial investment is not related to the government default when the contract does not take into account the interests of the private capital. Furthermore, the “uniqueness” contracts between private capital and the government are mainly for anticompetitive purpose in the PPP market of transportation infrastructure. Unless the contract terms focus on the improvement of social welfare, entering a “uniqueness” contract will cause social welfare losses.