Economic Evaluation: The phase-out of fossil fuel vehicles

Question: The Danish government imposes registration taxes. Should it be counted as a social cost because it causes a deadweight loss, where it is relevant to use the MCPF? Or should it be categorized as social benefit, as the taxation decreases the negative externality (pollution) and hereby increases social surplus? 

Regarding valuing impacts in the input market, I am not sure how to handle this? Maybe the labor hired to administrate the taxations can be used elsewhere and hereby imposes an opportunity cost? 

The demand for non-fossil cars will increase, as the taxes are less than for fossil cars. The opposite is true for the fossil car market, thus is a social cost. As cars are a market good, the social benefit can be calculated by direct estimation. 

Answer: Taxes alone are not considered as social costs or social benefits. When taxpayers pay tax, it increases the government revenue (which can be used for public welfare).  Taxes are losses to the taxpayers but gains to the government, and at the level of the society as a whole, it is just a transfer. 

At the same time, as you correctly point out, taxation can lead to a distorted market, giving rise to a deadweight loss. This deadweight loss can be taken care of if we multiply all the government revenue and expenditure by MCPF. In other words, paying higher taxes itself is not a social cost, but it does lead to some deadweight loss, and this deadweight loss is accounted for by the MCPF coefficient. Note that the MCPF is the marginal cost of collecting tax revenue in general, which is not directly to the deadweight loss in the car market. In fact, appropriate taxes in the car market do not lead to a deadweight loss but increase efficiency, because it reduces pollution. However, when you reduce taxes in the car market, to keep tax revenue constant, the government has to collect taxes elsewhere, for example, by increase income tax or corporate tax -- because income tax or corporate tax lead to deadweight loss, making MCPF greater than 1. Let me know whether this is clear because it is not easy to understand the meaning of MCPF. 

The reduction in pollution (mostly carbon emission) should be calculated separately as a social benefit. This is probably the largest benefit of the policy, the main reason why the policy is implemented.

You do not need to calculate the input market for the tax collection. Because the government usually hires a fixed amount of employees related to taxation, even if there is some change to the employment, it is negligible compared to the impact (change in the consumer surplus and producer surplus, as well as the benefit from the reduction in carbon emission) caused by the number of fuel vs. electric vehicles.

Economic Evaluation of Drug Subsidy

Question: We had talked to you about providing subsidies for medicines. We have found a drug (called Tresiba®), which comes on the market in 2013 with conditional reimbursement, ie. that only some consumers have access to the subsidy. In 2016, the drug receives a general subsidy, i.e., all consumers have access to the subsidy. 

We have found data on this and we see a very large increase in sales after general subsidies. In addition, we also see that other drugs within the same disease, begin to decline when Tresiba receives general reimbursement. 

We therefore have the following research question, which we would like to investigate: What effect does a change in reimbursement status from conditional reimbursement to general reimbursement of the drug Tresiba® have on the number of consumers of the drug? 

Our effect measure is the number of consumers. We are thinking of calculating the C/E ratio, where we look at what are the extra costs per extra patient? 

What do you think of our research question? And our whole idea?

Answer: In CBA or CEA, the ultimate goal is to make some policy recommendations. In other words, at the end of the analysis, you can recommend whether it is better to have conditional reimbursement or general reimbursement. Therefore, you should be able to decide the threshold C/E ratio above which switching to general reimbursement is not worthwhile (and below which it is worthwhile). This is something you should keep in mind. 

In order to determine the threshold C/E ratio, you should consider what benefits does the increase in consumption of Tresiba® bring. For example, if the cost of 100 kroner increases the consumption by 1, while the increase is only worth 60 kroner as benefits to the consumers and the producers, the reimbursement is not worthwhile. In other words, in your CEA, you still need to have an idea of the approximate monetary value of each unit of effectiveness in order to make a policy recommendation. 

In most cases when we talk about CBA or CEA, we focus on whether a program/intervention is socially worthwhile. Your research question focuses on the increase in consumption and the number of consumers. It seems that your focus is on the benefit to the company selling Tresiba®?

One thing to think about when you choose a project for economic evaluation is whether the project is realistic – in other words, whether the corresponding policy can be approved without strong resistance from the residents. You should be able to provide a good justification for the project/intervention.

Natural experiments

Natural experiment occurs when some exogenous event (e.g., government policy) changes conditions for some group. They are used to uncover “causal relationships,” and often require advanced statistical analysis. 

Angrist (1990) provides an example. This paper aims to estimate how military service affects lifetime earnings. It is often hard to estimate such effect directly because people without good working opportunities are usually more likely to serve in the military, so the lower-income is not “caused” by military service. 

The paper uses a government policy during the Vietnam War – eligibility for military service is “randomly” determined by the draft lottery using the dates of birth. In this case, it could guarantee that when conducting statistical analysis, all the other characteristics of the veterans and the non-veterans are comparable, so we can be sure that the difference in income is “caused” by the military service. The analysis shows that the earnings of veterans were, on average, about 15 percent less than the earnings of non-veterans.

Angrist, J. D. (1990). Lifetime Earnings and the Vietnam Era Draft Lottery : Evidence from Social Security Administrative Records. American Economic Association, 80(3), 313–336.

What causes the planning fallacy?

Generally speaking, there are two reasons why the planning fallacy happens. 

First, overconfidence. Overconfidence has been consistently observed among people. In terms of planning, people often make an optimistic estimate on the time and costs needed to finish a project. This is because it is easier to imagine a project goes well, and hard to anticipate all the possible obstacles and difficulties to be encountered along the way. 

Second, strategic misrepresentation by the government (planner). The government has incentives to deliberately underestimate the cost to get the project approved. It is easier to get forgiveness for overspending than permission for starting. Once the project starts, it is hard to stop, and the taxpayers may simply not monitor the eventual costs of the project. This situation is more serious when there are many departments/ministries in the government competing for the budget.