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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.

Example

An Application of the Economic Framework - The Socially Optimal Level of Forestry

Clear felling of timber has several undesirable effects on society. Examples include loss of forest cover and associated problems such as increased soil erosion, loss of soil nutrients, loss of biodiversity and so on. However, in most countries the stumpage price (i.e., the price charged per log) does not account for the costs of the environmental damage. In this section, we analyse a policy of including environmental (or external) costs in the stumpage price. (More)

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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