Political economy of prudent budgetary policy

The principles of tax smoothing and public debt management with stochastic shocks to future national income are extended for prudence. A prudent government deliberately underestimates future national income and the tax base, especially if the variance and persistence of shocks hitting the tax base are large and the tax rate is high. As a precaution the tax rate is thus set higher and public spending lower to build precautionary buffers. This leads to gradual reductions in debt and debt service over time and thus, depending on political preferences, cuts in taxes or increases in public spending. Prudence offsets the intertemporal spending, tax and debt biases resulting from common-pool distortions. Appointing a strong finance minister with as many voting rights as the spending ministers combined ensures that the intratemporal common-pool distortions of an excessively large public sector are eliminated. A strong and prudent minister of finance can thus offset the impatient profligacy of squabbling spending ministers. However, if voters care about outcomes on election eve, finance ministers are tempted to build excessive precautionary buffers early on to dish out tax cuts and boost spending on election eve. Too much prudence may thus be abused for short-run electoral gains.     

Oligopoly Power in British Industry

In this paper a model of industrial behaviour, encompassing factor demand and output supply decisions by industries, is developed and then estimated for ten industries in the United Kingdom over the period 1954–79. The derivation of the provides, within a consistent framework, insight into conjectural variation, Lerner's index of monopoly power, measures of industrial concentration and thereby makes explict the notion of oligopoly power. The estimates provide an empirical basis for evaluating the structure of industry in the United Kingdom and the estimated measures of oligopoly power are finally compared with more conventional measures of industrial concentration.     

Consequences of Environmental Tax Reform for Unemployment and Welfare

We investigate the welfare effects of environmental tax reform, i.e. raising environmental taxes and using the proceeds to reduce distortionary taxes on labour. The framework of analysis is a small open economy with involuntary unemployment due to a rigid consumer wage. Environmental tax reform boosts not only environmental quality but also employment if substitution between labour and resources is easy, the production share of the fixed factor is large, and the initial tax rates on resources and profits are small. If the initial tax system is sub-optimal with a negligible tax on resources, profits rise as well.     

Second-Best Renewable Subsidies to De-carbonize the Economy: Commitment and the Green Paradox

Climate change must deal with two market failures: global warming and learning by doing in renewable energy production. The first-best policy consists of an aggressive renewables subsidy in the near term and a gradually rising and falling carbon tax. Given that global carbon taxes remain elusive, policy makers might have to rely on a second-best subsidy only. With credible commitment the second-best subsidy is higher than the social benefit of learning to cut the transition time and peak warming close to first-best levels at the cost of higher fossil fuel use in the short run (weak Green Paradox). Without commitment the second-best subsidy is set to the social benefit of learning. It generates smaller weak Green Paradox effects, but the transition to the carbon-free takes longer and cumulative carbon emissions are higher. Under first best and second best with pre-commitment peak warming is 2.1–2.3 \(^{\circ }\)C, under second best without commitment 3.5 \(^{\circ }\)C, and without any policy 5.1 \(^{\circ }\)C above pre-industrial levels. Not being able to commit yields a welfare loss of 95% of initial GDP compared to first best. Being able to commit brings this figure down to 7%.     

Does a nutritious diet cost more in food deserts?

Food deserts and their potential effects on diet and nutrition have received much attention from policymakers. While some research has found a correlation between food deserts and consumer outcomes, it is unclear whether food deserts truly affect consumer choices. In this article, we compare food prices in food deserts, defined as low‐income, low‐access census tracts, and nonfood deserts to observe whether and to what extent consumers face higher prices for a complete diet in food deserts. If a nutritionally complete diet costs significantly more in food deserts, resident consumers may be constrained from consuming healthier foods. We use store‐level scanner data from a nationally representative sample and calculate a census‐tract level Exact Price Index (EPI) based on a food basket defined by the Thrifty Food Plan (TFP). The EPI addresses potential biases from both product heterogeneity and variety availability. We find that the overall price impact of living in a food desert is small; low‐access areas have only 3.5% higher EPI than high‐access counterparts. However, consumers who are constrained to shop within their own census tracts face a much higher EPI than high‐access counterparts (9.2%). The higher EPI primarily comes from lower variety availability in food deserts.     

Predator-prey and neo-classical models of cyclical growth

Journal of Economics -     

Frontiers of Climate Change Economics

The potential of taxes to correct environmental externalities has long been recognized among economists. Yet, this welfare-enhancing policy commonly faces strong opposition by citizens. Conversely, externality-correcting subsidies frequently enjoy high public support. We conduct a lab experiment to explore public support for Pigouvian taxes and subsidies. In an experimental market with a negative externality, participants vote on the introduction of Pigouvian taxes and subsidies under full or reduced information concerning how the tax revenues will be spent and the subsidy paid for. Theoretically the two instruments should produce identical outcomes. However, we find substantially greater support for subsidies than for taxes. This can partially be explained by the participants’ expectation that the subsidy will increase their own payoffs more than a tax, but not because it is expected to be more effective in changing behavior. Furthermore, we find that with greater uncertainty, the preference for subsidies is even stronger, a result which is consistent with loss aversion.