D. Methods of assessing the effectiveness of policies/measures
Estimating the behavioural responses of firms and households, including income/price elasticity
'Economics' may be defined as
In a world of unlimited resources, the choice an individual or society makes has no implications whatsoever. However, in view of the finiteness of resources, every possible choice has an associated cost. Economics uses theories to explain how the behaviour of households is affected by changes in economic factors (e.g. an increase in the price of a good).
Environmental economics is a new sub-discipline of economics that applies economic principles to analyse and provide solutions to environmental problems.
Law of Supply and Demand
A basic law of economics is the Law of Demand which says that given income, preferences and prices of alternative goods, an individual will be willing to buy less as its price increases.
On the Supply side, it is assumed that the producer's aim is to maximise profit subject to the above constraint. (More)
The Concept of Elasticity
The shape of the demand curve reflects how sensitive quantity demanded is to price changes. This is referred to as the price elasticity of demand. It is defined as the ratio of the change in quantity demanded in response to the change in its own price. In other words, the commodity is ‘price inelastic’ when the demand for it is not affected by the change in its price and ‘elastic’ if the demand for it changes with even a slight change in its price. (More)
Market Equilibrium in the Competitive Market
The interaction of supply and demand forces in the market determines the equilibrium or market clearing price, and the equilibrium quantity demanded (see Figure 1). In the Figure 1, the market equilibrium for the commodity is at a price of $3.80 and quantity of 7. Any shift in either the supply (e.g. due to increased production cost) or demand (e.g. due to substitute commodity, maybe) will shift either of the lines and result in other equilibrium values. (More)
Figure 1: Demand, supply and market equilibrium
Source: Asafu-Adjaye, J. Environmental Economics: An Introduction for the Non-Economist. World Scientific Publishing, New Jersey, London, Singapore, 2000, p.54.
Determining the efficiency of policy measures (cost-benefit analysis)
To assess the efficiency of environment-related measures, it is necessary to determine whether the economic costs of implementing the policy are outweighed by the benefits. For the policy to be beneficial to the society, the net benefits must be positive. One method for carrying out this sort of analysis is a social cost-benefit analysis (CBA).
A social CBA is normally carried out from a social perspective, in contrast to a financial analysis which is carried out from a particular firm's or individual's perspective. A social CBA involves the following steps:
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