Applying behavioural economics to public policy in Canada

Behavioural economics incorporates ideas from psychology, sociology and neuroscience to better predict how individuals make long‐term decisions. Often the ideas adopted include present or inattention bias, both potentially leading to suboptimal outcomes. But these models also point to opportunities for effective, low‐cost government policies that can have meaningful positive effects on people's long‐term well‐being. The last decade has been marked by a growing interest from governments the world over in using behavioural economics to inform policy decisions. This is true of Canada as well. In this paper we discuss the increasingly important role behavioural economics plays in Canadian public policy. We first contextualize government policies that have incorporated insights from behavioural economics by outlining a collection of models of intertemporal choice. We then present examples of public policy initiatives that are based upon findings in the field, placing particular emphasis on Canadian initiatives. We also document future opportunities, challenges and limitations.     

Forward-looking versus recursive-dynamic modeling in climate policy analysis: A comparison

This paper develops a multi-regional general equilibrium model for climate policy analysis based on the latest version of the MIT Emissions Prediction and Policy Analysis (EPPA) model. We develop two versions so that we can solve the model either as a fully inter-temporal optimization problem (forward-looking, perfect foresight) or recursively. The standard EPPA model on which these models are based is solved recursively, and it is necessary to simplify some aspects of it to make inter-temporal solution possible. The forward-looking capability allows one to better address economic and policy issues such as borrowing and banking of GHG allowances, efficiency implications of environmental tax recycling, endogenous depletion of fossil resources, international capital flows, and optimal emissions abatement paths among others. To evaluate the solution approaches, we benchmark each version to the same macroeconomic path, and then compare the behavior of the two versions under a climate policy that restricts greenhouse gas emissions. We find that the energy sector and CO₂ price behavior are similar in both versions (in the recursive version of the model we force the inter-temporal theoretical efficiency result that abatement through time should be allocated such that the CO₂ price rises at the interest rate.) The main difference that arises is that the macroeconomic costs are substantially lower in the forward-looking version of the model, since it allows consumption shifting as an additional avenue of adjustment to the policy. On the other hand, the simplifications required for solving the model as an optimization problem, such as dropping the full vintaging of the capital stock and fewer explicit technological options, likely have effects on the results. Moreover, inter-temporal optimization with perfect foresight poorly represents the real economy where agents face high levels of uncertainty that likely lead to higher costs than if they knew the future with certainty. We conclude that while the forward-looking model has value for some problems, the recursive model produces similar behavior in the energy sector and provides greater flexibility in the details of the system that can be represented.     

Models in evolutionary economics and environmental policy: Towards an evolutionary environmental economics

In this paper we review evolutionary economic modelling in relation to environmental policy. We discuss three areas in which evolutionary economic models have a particularly high added value for environmental policy-making: the double externality problem, technological transitions and consumer demand. We explore the possibilities to apply evolutionary economic models in environmental policy assessment, including the opportunities for making policy-making endogenous to environmental innovation. We end with a critical discussion of the challenges that remain.     

Revisiting the economics of climate change: the role of geoengineering

Technically simple measures to directly reduce mean global temperatures could be available in the near future. We introduce “geoengineering” into a simple analytical model of climate change. We model the technical and economic characteristics of geoengineering in line with the recent literature from physical and environmental management sciences. We investigate: (i) under which circumstances geoengineering can substitute, partly or completely, for traditional abatement strategies, (ii) under which conditions and at what level geoengineering is optimally employed, and (iii) whether geoengineering can mitigate free-riding problems.     

Educational policy and the economics of the family

This paper analyzes the implications of alternative ways to model decision-making by families for educational policy. We show that many of the policy implications associated with credit constraints cannot be distinguished from the implications of models of the family that differ from the conventional Barro-Becker model. We then argue that it is the combination of credit constraints and non-conventional preferences that provides a robust basis for government intervention to promote educational investment.     

Expanding the solution set: Organizational economics and agri-environmental policy

The market failure paradigm dominates agri-environmental research and policy. Organizational economics provides an alternative framework for analyzing agri-environmental problems and points to alternative solutions. In this paper, the traditional approach of creating markets for environmental goods and services is critiqued and set aside to provide space for an organizational analysis. From an organizational perspective, the relationship between the state and agricultural agents is viewed as grounded in an over-arching exchange relationship including elements of cooperation and trust. Such a collaborative exchange relationship may prove useful in supporting exchange between agricultural agents and the state leading to the provision of ecological goods and services. Highlighting the potential of organizational economics, the analysis suggests that agri-environmental research and policy go further in accounting for, and investigating, the unique organizational modes of exchange governing the production of food, fiber, and ecological goods and services.     

An analysis of China's climate policy using the China-in-Global Energy Model

The primary approach to address climate change in China has been the use of CO₂ intensity targets coupled with targets for low carbon energy deployment. We evaluate the impact of extending similar targets through 2050 on China's energy use profile and CO₂ emissions trajectory using the China-in-Global Energy Model (C-GEM). The C-GEM is a global computable equilibrium model that includes energy and economic data provided by China's statistical agencies, calibration of savings, labor productivity, and capital productivity dynamics specific to China's stage of development, and regional aggregation that resolves China's major trading partners. We analyze the combined impact of extending CO₂ intensity targets, implemented via a cap-and-trade program, and low carbon energy policies (directives for nuclear power expansion and feed-in tariffs for wind, solar, and biomass energy) through 2050. Although with the policy, simulated CO₂ emissions are around 43% lower in 2050 relative to a reference (No Policy) counterfactual, China's CO₂ emissions still increase by over 60% between 2010 and 2050. Curbing the rise in China's CO₂ emissions will require fully implementing a CO₂ price, which will need to rise to levels higher than $25/ton in order to achieve China's stated goal of peaking CO₂ emissions by 2030.     

Unspoken ethical issues in the climate affair: Insights from a theoretical analysis of negotiation mandates

Taking climate change as an example, this paper provides new insights on the optimal provision of a long-term public good within and across generations. We write the Bowen–Lindhal–Samuelson (BLS) conditions for the optimal provision of the public good in a world divided into N countries, with two periods, present and future, and we simultaneously determine the optimal response in the first and second periods for a given rate of pure time preference. However, the Negishi weights at second period cannot be determined unambiguously, even under a “no redistribution constraint” within each generation, because they depend on non-observable future incomes; and thus on the answers to two often-overlooked ethical questions: (i) Do rich countries agree on deals which recognize that developing countries may catch up with developed countries in the long run, or do they use their negotiating powers to preserve the current balance of power? And (ii) does each country consider only the welfare of its own future citizens (dynastic solidarity) or does it extend its concern to all future human beings (universal solidarity)? Answers to (i) and (ii)—critical in the debate about how to correct the market failures causing global warming—define four sets of Negishi weights and intertemporal welfare functions, which we interpret as four mandates that countries could give to the Chair of an international negotiation on climate change to find an optimal solution. We find that in all mandates, public good provision expenditures are decreasing functions of income at first period. But each mandate leads to a different allocation of expenditures at second period and to different optimal levels of public good provision at both first and second periods. Finally, we show that only one of these four mandates defines a space for viable compromises.     

The economics of New Labour: policy and performance

This paper reviews the foundations of New Labour's economicpolicies and the performance of the economy since 1997. It arguesthat New Labour's policies have evolved from Thatcherism andthat it has largely embraced the tenets of neo-liberalism. NewLabour has rejected most aspects of Keynesianism and its policieshave eschewed the use of active demand management policies.But it has been the high levels of demand—in particularconsumption expenditure—that have driven economic growthin the UK and which have ensured that (as yet) New Labour hasnot faced the problems of dealing with a major economic downturn.     

Unemployment and the economics of gradualist policy reform

This paper investigates the efficiency of adjustment to economic reform programs when the cost of adjustment arises from high unemployment that can be generated as contracting sectors shrink faster than expanding sectors grow. Under plausible assumptions on the adjustment process, the speed of adjustment to “shock therapy” reforms is shown to be excessively rapid, and the rate of unemployment to be excessively high during the transition to the new equilibrium. The authorities can improve the efficiency of the adjustment by removing the distortion gradually, rather than abruptly. Gradualism has beneficial income distributional, as well as efficiency properties, because it improves welfare of the unemployed, who are necessarily the least advantaged social group in this model.     

The economics of hyperstagflation: Stabilization policy in post 1973 Chile

This paper examines the stabilization policy of post 1973 Chile and attempts to explain the coexistence for four years of rates of inflation averaging well over 200 percent/year with a demand deficient depression comparable in its severity to the Depression of the '30s. The analysis is conducted in the framework of ‘disequilibrium’ models. It concludes that the origins, severity and duration of such ‘hyperstagflation’ lie in the stabilization policy's neglect of inflationary expectations, especially in the product market, thus forcing the labor market to absorb the brunt of a disequilibrium whose origins lay in the product market.     

The rise of economics in competition policy: A Canadian perspective

Competition policy in Canada and elsewhere has changed remarkably over the last 50 years—in large measure due to advances in economics. In this article, we trace the impact of developments in industrial organization on the three central areas of competition policy: cartels, single firm conduct and mergers. We focus on Canadian competition policy but draw comparisons with developments in the United States and Europe.     

Factor mobility and fiscal policy in the EU: policy issues and analytical approaches

Increased integration of labour and capital markets creates significant challenges for the welfare states of modern Europe. Taxation of capital and labour that finances extensive programmes of cash and in-kind redistribution creates incentives for capital owners and workers to locate in regions where they obtain favourable fiscal treatment. Competition among countries for mobile resources constrains their ability to alter the distribution of income and may lead to reductions in the size and scope of redistributive policies. Mobility of labour and capital is imperfect, however. Recent trends indicate that labour and capital are neither perfectly mobile nor perfectly immobile, but rather adjust gradually to market conditions and economic policies. This paper presents an explicitly dynamic analysis showing that governments can achieve some redistribution when it is costly for factors of production to relocate. As the costs of factor mobility fall, however, the effectiveness of redistributive policies is more limited, and governments have weaker incentives to pursue them. Liberalized immigration policies, EU enlargement, and other steps that promote integration of the factors markets of Western Europe with those of surrounding regions thus present a challenge to policy-makers if they also wish to maintain fiscal systems with extensive redistribution.     

On some criticisms of critical realism in economics

Methodological comments on critical realism in economics haveproliferated over the past decade—typically focusing onTony Lawson's Economics and Reality and Reorienting Economics,which constitute the core of this project. In the present paperwe select a series of important, mostly very recent argumentsagainst critical realism in economics and assess their meritsand demerits.     

Neoclassical versus evolutionary economics in developing countries: convergence of policy implications

This paper aims to determine whether the dichotomy between the science, technology, and innovation policy based on neoclassical and evolutionary schools of economics is applicable to developing countries. Regarding the fundamental differences in foundations of these two economic paradigms, policymakers have been forced to select and to follow one of the two seemingly competing views. However, in developing countries, due to various market and government coordination failures, complying with one of the schools has not been successful in practice. From the past, there has been some controversy between neoclassical and evolutionary schools on the subject of science, technology and innovation policy. Using a survey questionnaire and statistical analyses of the results, this paper shows that, due to the institutional setting and structural conditions in developing countries, despite the fundamentally different foundations of the competing schools of thought, the policy implications of the schools have converged. Drawing on Theme Analysis Method, the rationales are first conceptualized and then the fuzzy method is applied to reveal the respondents’ tendency to the extracted rationales and implications of the two competing schools. In conclusion, the statistical results validate the proposed hypothesis.