Optimal Policy Instrument Research Articles

The Diffusion Rule of Demand-Oriented Biogas Supply in Distributed Renewable Energy System: An Evolutionary Game-Based Approach

Biogas can be regarded as a dispatchable renewable source when changing into the demand-oriented operation mode (DO), thus could be used for complementing with solar and wind power in distributed energy system (DES) as a substitute for chemical energy storage. However, if the DO is implemented in regional DES, uncertainties are emerged caused by the complex interest interaction between the seller and the buyer groups formed by the biogas plant and the DES’s dispatching center, thus making the development trend of DO unknown. In this context, this study explored the diffusion law of DO in regional DES by establishing a mathematical model based on an evolutionary game between the two major stakeholders, during which the evolutionarily stable strategy (ESS) was deduced for understanding their strategy selections, and then the dynamic diffusion trend was simulated by the system dynamics via a case example. Finally, the sensitivity analysis of parameters is carried out and the optimal policy instruments are proposed according to the main influencing factors. The study revealed that when the DES can realize monetized returns from socio-environmental benefits, the adoption of DO becomes more feasible. Importantly, the revenue generated from electricity sales, by the dispatching center when they do not utilize biogas, emerged as the most critical parameter influencing the ultimate outcomes. The limitations of this research and modeling are discussed to lay a foundation for further improvement.

Mundell meets Poole: Managing capital flows with multiple instruments in emerging economies

We study the optimal management of capital flows in a small open economy model with financial frictions and multiple policy instruments. The paper reports two main findings.. First, both foreign exchange intervention (FXI) and macroprudential policies are tools complementary to the monetary policy rate that can greatly reduce inflation and output volatility in a scenario of capital outflows. Second, the optimal policy mix depends on the underlying shock driving capital flows. FXItakes the leading role in response to foreign interest rate shocks, while macroprudential policy becomes the prominent tool for domestic risk shocks. These results blend the policy prescriptions of Mundell (1968), who stated that “policies should be paired with the objectives on which they have the most influence” and Poole (1970), who showed that the optimal policy instrument ultimately depends on the underlying shock hitting the economy.

A review of optimal energy policy instruments on industrial energy efficiency programs, rebound effects, and government policies

Industrial energy-efficiency programs (IEEPs) are defined as one of the most popular government policies that aim to reduce energy consumption in industrial energy-intensive sectors. In this paper, we review and classify the most important academic studies that have addressed the environmental and economic aspects of IEEPs using a systematic review. The classification of energy policy instruments has been developed based on an analytical approach. We discuss also the outputs, benefits, and barriers of IEEPs, besides a comprehensive argument about the restrictive policies on the rebound effects made after the implementation of these programs. The results disclose that China, USA, and Sweden are the most addressed countries on IEEPs and their applications. In this regard, incentive energy policies e.g., voluntary agreements and subsidies have been applied more than others in the last decade. Furthermore, most of the reviewed studies emphasize energy price reform as an effective practical policy while a few analytical methods can be seen to help policy-makers determine the optimal levels of decision variables. Finally, according to the state-of-the-art analysis, the authors provide some novel recommendations to improve the performance of IEEPs, using some restrictive policies on the negative impacts of rebound effects.

Dairy Farm Management when Nutrient Runoff and Climate Emissions Count

We provide a theoretical framework and detailed bioeconomic simulations to examine privately and socially optimal dairy farm management in the presence of nutrient runoff and greenhouse gas emissions. Dairy farms produce milk by choosing herd size, diet, fertilization and land allocation between crops, as well as (discrete) manure storage and spreading technologies and the number of milking seasons. We show analytically that a critical radius emerges for the choice of land use between silage and cereal cultivation and fertilizer types (mineral and manure). Both privately and socially optimal manure application rates decrease with application distance. We characterize the optimal climate and water policy instruments for dairy farming. A detailed bioeconomic simulation model links farm management decisions with their impacts on climate and water quality. We numerically solve the social and private optima and the features of optimal climate and water policy instruments. We show that using only climate instruments provides considerable water co‐benefits, and in the same vein, the use of water quality instruments provides considerable climate co‐benefits. Climate policies lead to a reduction in herd size, as measures relating to manure management and spreading are relatively inefficient at reducing climate emissions. There is much more leeway for adapting to water policies than to climate policies, because dairy farms have multiple measures to reduce their nutrient loads.

Shaping inequality: Progressive taxation under human capital accumulation

In order to design optimal policy instruments that shape the distribution of income we require realistic income models. A comparison between popular stochastic processes for income shows that most of them fail to match inequality in the US, especially at the top. The Geometric Brownian Motion with reset, however, produces realistic outcomes at both ends of the distribution, while still permitting clear analytic results. Building on this observation, we develop a micro-founded model for endogenous income inequality that fits the current US evidence. It also permits discussing the welfare effects and trade-offs of tax reforms as individuals adjust their labor supply and human capital accumulation. We extend it in an incomplete market setup solved numerically, in which individuals can both form precautionary savings and adjust their labor supply. A calibrated version suggests that the progressivity of US income taxes is below its welfare optimum by around six percentage points.

Panic-Based Overfishing in Transboundary Fisheries

This paper analyses sustainability of bilateral harvesting agreements in transboundary fisheries. Harvesting countries obtain public and private assessments regarding their stock of fish, and the stock experiences ecological changes. In addition to biological uncertainty, countries may face strategic uncertainty. A country that receives negative assessments about the current level of fish stock, may become ‘pessimistic’ about the assessment of the other coastal state, and this can ignite ‘panic-based’ overfishing. The paper examines the likelihood of overfishing and suggests a unique prediction about the possibility of abiding by bilateral fishing agreements. Conditions under which the outcome of the asymmetric-information model reduces to the symmetric-information game are discussed, and optimal policy instruments for intergovernmental management of the stock are offered.

Discriminatory tax and subsidy on environmental behaviors

This paper investigates the consumption tax and subsidy as an environmental policy instrument for environmentally aware consumers by applying the model of price discrimination. We discover that a higher rate of subsidy should be set for less eco-friendly consumers for the purpose of achieving socially optimal environmental qualities under positive externalities and this retrogressive subsidization differs from the current progressive subsidization in the Japanese automobile industry, and could alleviate crowding out effects on prosocial behavior. Moreover, it is revealed that the optimal policy instrument for eco-friendlier consumers shifts from a subsidy to a tax, as the level of negative externalities increases.

Optimal policy instrument selection in monetary policy: endogeneity of money supply

Purpose- Nowadays, the central bank's primary objective is price stability which is defined as low and stable inflation. The central bank has to fulfill some institutional and operational conditions to achieve this goal. One of the operational conditions is the selection of the appropriate policy instrument to implement the monetary policy. The central bank can choose interest rate or monetary base as policy instrument. The main question of this paper is whether the monetary base the optimal instrument. The choice of monetary base as a policy instrument is dependent on the exogeneity of money supply, which means that the money supply is controllable by monetary base. Methodology- This paper investigates endogeneity of money supply of Turkey for a sample period of 1990-2016 using Johansen cointegration test. Findings- As a research method, the Johansen cointegration test and VECM is used to show long-run relationships and causality between variables and Granger causality test is used to examine short-run causality between the variables. Conclusion- It is seen that CBRT has very limited control over money supply, thus monetary base may not be optimal policy instrument to ensure price stability.

Market distortions and optimal environmental policy instruments

In practice, a market does not comprise only one type of firm, resulting in two distortions: negative externalities caused by pollution damage and pricing power enjoyed by dominant firms. This paper examines choice of environmental policy instruments (tax-centered, quota-centered, and mixed policy) in markets where multiple dominant firms are price makers and multiple fringe firms are price takers. Environmental policy is not necessarily applied to all firms or facilities. This study focuses on the situation where only dominant firms are objects of environmental policy because this situation best reflects actual policy instruments. Understanding whether abatement costs exceed the environmental damage is essential to determining the best policy. The major finding of the study is that deadweight loss is reduced if dominant firms adopt eco-friendly technology and the regulator increases the ratio of taxed dominant firms to all dominant firms. Additionally, mixed policy is efficient when market distortion as a result of pricing power decreases.

Optimal Fiscal Policy Instrument under Different Shocks

This paper constructs a New Keynesian model to study optimal tax and government spending rules and compares their welfare. The output gap, inflation and the difference between the output gap and the government spending gap all affect welfare. This paper finds that the optimal fiscal policy instruments under technical shock and cost-push shock are government spending and tax, respectively. If the policymaker is only concerned with the output gap and inflation, the optimal fiscal policy rule and actual social welfare loss will change. However, the optimal fiscal policy instruments under technical shock and cost-push shock are still government spending and tax. This paper also finds that an imperfect financial market affects social welfare but does not change the optimal fiscal policy instrument under different shocks.

The PAYG system and the optimal redistribution instrument in an overlapping generation model

Using a two-period overlapping generation (OLG) model, this article seeks to identify the optimal redistribution policy instrument in terms of aggregate welfare when agents differ according to their labour condition. We use five policy specifications: (i) early redistribution to the young informal generation; (ii) late redistribution to the informal old generation; (iii) a mix between early and late redistribution; (iv) redistribution from the current formal young generation to the current formal old one; and (v) a non-redistribution scenario. With inelastic labour supply, we show that transferring to the young performs better as a redistribution policy. This result is robust across different parameter values.

Optimal policy instruments for externality-producing durable goods under present bias

When consumers exhibit present bias, the standard solution to market failures caused by externalities—Pigouvian pricing—is suboptimal. I investigate policies aimed at externalities for present-biased consumers. Optimal policy includes an instrument to correct the externality and an instrument to correct the present bias. Either instrument can be an incentive-based policy (e.g. a tax on fuel economy) or a command-and-control policy (e.g. a fuel economy mandate). Under consumer heterogeneity, a command-and-control policy may dominate an incentive-based policy. Calibrated to the US automobile market, simulation results suggest that the second-best gasoline tax is 3–30% higher than marginal external damages. The optimal price policy includes a gasoline tax set about equal to marginal external damages and a fuel economy tax that increases the price of an average non-hybrid car by about $550–$2200 relative to the price of an average hybrid car.

The design of ‘soft’ welfare-to-work programs

This paper models welfare-to-work programs as contracts offered by the principal/government to unemployed agents in an environment with moral hazard. A welfare-to-work program comprises of several policy instruments (e.g., job-search, assisted search, mandated work) the principal can use, in combination with welfare benefits, in order to minimize the costs of delivering promised utility to the agent. The generosity of the program and the skill level of the unemployed agent determine the optimal policy instrument to be implemented. Restricting attention to ‘soft programs’ — contracts that make no use of punishments or sanctions — allows a fully analytical characterization of the optimal program and, in addition, it makes the solution robust to hidden saving.

Advancing Doctrine through Devil’s Advocacy: A Response to Alan O. Sykes

Alan Sykes’ editorial comment, Economic “Necessity” in International Law, provides a multi-layered analysis of the defense of “necessity” in international investment disputes. Sykes’ main proposition is that the obligation to compensate investors for government measures prejudicing their investments during economic emergencies mitigates the risk of moral hazard and incentivizes States to “select the least expensive way to protect their interests (the optimal policy instrument).” Otherwise, he contends, “actors will take risks that imperil them to an excessive degree if they can save themselves by imposing costs on others.” Sykes nonetheless argues that payment of the compensation could be deferred in light of the emergency, and not be subject to market interest rates.

International student mobility in Hong Kong: private good, public good, or trade in services?

International student mobility has emerged as a key source of societal and educational transformations in the booming economies of East Asia. International competencies are increasingly valued by employees and employers alike. Given the uneven distribution of international student flows, and the inequitable levels of benefit that they bring to various locales and institutions, some jurisdictions are seeking the optimal policy instruments for leveraging public and private interests in the mobility of human resources and knowledge. This case study of Hong Kong looks at the outbound–inbound student flows and explains how the government facilitates cross-border education balances. The researchers utilized the four modes of the General Agreement on Trades in Services framework, and found it to be a helpful tool in analyzing the government's balancing act, despite the challenges associated with the conceptualization of international student mobility as a commodity or trade in services.

Designing animal welfare policies and monitoring progress

AbstractA single solution to promote higher animal welfare across the whole EU is unlikely due to significant regional differences and because what is most appropriate for each region depends on many factors. Based on analyses of eight member and candidate EU countries, this paper provides a conceptual framework, an ‘animal welfare roadmap’, which can be used to assess the stage of maturity of a country in farm animal welfare policy development and identify appropriate policy instruments and indicators to monitor progress towards higher animal welfare. The ‘roadmap’ consists of five sequential stages: increasing compliance with legislation; raising awareness; product development; mainstreaming; and integration of animal welfare with other issues. For each stage, specific policy instruments are identified alongside the category of stakeholders most likely to be influential in the implementation of each instrument. The policy instruments used to achieve these stages are those used by government departments/agencies, private enterprises, academic bodies or non-governmental organisations who formulate standards for animal welfare. These are supported by indicators best suited to document their effectiveness. Although we have emphasised how different situations and contexts within the EU mean that there is no single optimal policy instrument for the EU as a whole, but rather appropriate policy instruments should be selected according to the stage of development of a country or sector, we do propose a harmonised choice of indicators to allow benchmarking of changes at the EU level with regard to progress towards animal welfare.

Land Value Taxation and Other Measures for Raising Public Investment Revenue: A Comparative Study

One of the most progressive and innovative approaches to public investment financing is known as value capture. Value-capture envisions creation of the policy tools to adequately capture the privately accruing changes in the value of sites and/or consumption that arise from public infrastructure investments. In our earlier study (Gurdgiev, 2009) we have shown that Land Value Tax (LVT) represents an optimal tax instrument when compared to property tax and the existent structure of property taxation based on the stamps, VAT and development charges from the Exchequer perspective, when revenue stability, predictability and counter-cyclicality are of value. In the present paper, we briefly introduce and discuss all internationally available policies used for raising revenue to finance public investment, and draw on some international experience to highlight their main shortcomings and benefits. We provide a comprehensive discussion of the concept of value creation arising from public investment. In contrast to the existent literature, we consider a dynamic model of value creation consistent with the economic framework of multiplier effects of public and private spending and investment. In addition, unlike most of the literature on taxation finance, we distinguish two unique stages of demand for funding: Early stage capital allocation linked to the full capital cost of the project; and Later stage O&M financing support. Following this, we rank the existent policies with respect to their efficiency in addressing the dynamic nature of public investment.In our view, Land Value (site value) Tax represents the optimal policy instrument for raising revenue for public investment when compared to all other alternatives. In a qualitative rankings, the final distance between the optimal policy (LVT/SVT) and the runner-up policies (Property Tax and Joint Development/Air Rights) is significantly greater than the distance between the least favored two alternatives (Development Impact Fees and Special Assessments). This shows that the economy would gain much greater efficiency from moving from a Property Tax or a PPP-style system of financing (consistent with Air Rights and Joint Development) to a Land Value Tax system of revenue collection, than it would from any other reform within the confines of the above choices of policy instruments.

Learning or lock-in: Optimal technology policies to support mitigation

We investigate conditions that amplify market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that ‘small’ market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a ‘lock-in’ into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies including subsidies, quotas, and taxes with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.

Learning or Lock-In: Optimal Technology Policies to Support Mitigation

We investigate conditions that aggravate market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that “small” market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a “lock-in” into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies in addition to carbon pricing with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.

Designing contracts for irrigation water under asymmetric information: Are simple pricing mechanisms enough?

A fertile discussion is developing in the EU regarding the application of the Water Framework Directive (60/2000) (WFD), the legislative act that provides the framework for water regulation in Europe and emphasises the role of economic instruments in water policy. The objective of this paper is to provide an evaluation of different instruments designed to deal with the management of water for agriculture, in the perspective of WFD implementation and agricultural price scenarios. The paper focuses on the regulation of mixed source unmetered water and carries out a comparison of flat rate versus differentiated contracts as the policy instrument. The analysis is based on a combination of linear programming and a Principal-Agent model. The empirical model is applied in an agricultural area of Northern Italy. The results show the feasibility of incentive-oriented policy instruments, even in the less sophisticated form of flat rate area payments. They also show the relevance of agricultural market scenarios and policy scenarios in the design of the optimal policy instruments. The adoption of such instruments, however, could require a revision of the role of different institutions involved in water management.