Purpose
This essay asks you to move from diagnosing a policy problem to comparing possible solutions. In public-sector economics, identifying a market failure is only the beginning. Once the problem is identified, the next question is what kind of policy tool should be used.
Different tools change behavior in different ways. A tax does not work the same way as a regulation. A subsidy does not work the same way as direct public provision. A tradable permit system does not work the same way as a command-and-control rule. Public production, privatization, and public-private partnerships all create different incentives and different risks.
For this essay, your task is to choose one policy problem and compare at least two possible policy tools. Your goal is not simply to choose the policy you like best. Your goal is to explain how each tool works, what incentives it creates, what tradeoffs it introduces, and which tool is better suited to the economic problem.
Prompt
Choose one policy problem involving an externality, public good, natural monopoly, publicly provided good, or another public-sector issue discussed in class. Write a thesis-driven essay comparing at least two policy tools that could be used to address the problem.
Your essay should answer the following central question:
Which policy tool is better suited to the economic problem, and what tradeoffs does that choice create?
You may choose a topic such as carbon emissions, traffic congestion, water pollution, renewable energy subsidies, public transit, electricity provision, broadband infrastructure, plastic pollution, prison privatization, public utilities, health care provision, pollution permits, public school funding, or another relevant policy area.
Required Elements
Your essay must do all of the following:
- Identify the policy problem clearly.
Choose a specific problem. Avoid broad topics such as “climate change,” “transportation,” or “health care” unless you narrow them. For example, “carbon emissions from electricity production,” “congestion pricing in urban traffic,” or “privatization of prison services” would work better.
- Explain the economic problem.
Briefly explain the economic issue behind the policy problem. Is the issue an externality, public good, natural monopoly, incomplete market, information problem, or something else?
This section should not repeat Essay 2 in full. You only need enough diagnosis to set up the comparison of policy tools.
- Identify at least two policy tools.
Your essay must compare at least two possible policy tools. Possible tools include:
- Pigouvian taxes
- Subsidies
- Direct regulation
- Performance standards
- Input standards
- Tradable permits
- Cap-and-trade
- Public production
- Privatization
- Public-private partnerships
- User fees
- Information disclosure
- Legal liability
- Government contracting
Choose tools that could realistically address the same problem.
- Explain how each tool changes incentives.
This is the most important part of the essay. Do not just describe what each policy does. Explain how each tool changes the behavior of firms, consumers, producers, voters, agencies, or other actors.
For example:
- A pollution tax changes the private cost of polluting.
- A subsidy lowers the cost of a desired activity.
- A tradable permit system creates a market for pollution rights.
- A regulation sets a legal limit or requirement.
- Public production changes who provides the good or service.
- Privatization changes managerial incentives but may create new accountability problems.
- Compare the tradeoffs.
Your essay should compare the strengths and weaknesses of each tool. Consider questions such as:
- Which tool is more efficient?
- Which tool is easier to administer?
- Which tool gives firms or consumers better incentives?
- Which tool creates more certainty?
- Which tool gives more flexibility?
- Which tool creates larger enforcement problems?
- Which tool has more serious distributional consequences?
- Which tool is more vulnerable to political manipulation or capture?
- Make an argument.
Your essay should have a clear thesis. It should argue that one tool is better suited to the problem, or that each tool is better under different conditions. Do not simply say that both tools have pros and cons. Explain which tradeoff matters most and why.
Questions to Consider
You do not need to answer every question below, but they may help you develop the essay:
- What behavior is the policy trying to change?
- Who is creating the problem?
- Who is harmed by the problem?
- Does the policy target the problem directly?
- Does the policy rely on prices, rules, public provision, or information?
- How would firms respond?
- How would consumers respond?
- What are the enforcement costs?
- What are the information requirements?
- Who pays?
- Who benefits?
- What unintended consequence could appear?
- What would make one tool better than another?
Structure
Your essay should include:
- A title
- An introduction with a clear thesis
- A short explanation of the policy problem
- A comparison of at least two policy tools
- An explanation of the incentives created by each tool
- A discussion of tradeoffs
- A conclusion that explains which tool is better suited to the problem and why
A strong essay will not simply say “taxes are better” or “regulation is better.” A strong essay will explain what each tool does to incentives, why that matters, and what cost or tradeoff comes with the preferred policy.
Course Concepts You May Use
Useful concepts from Week 3 include:
- Externalities
- Positive externalities
- Negative externalities
- Marginal private cost
- Marginal social cost
- Pigouvian taxes
- Corrective taxes
- Subsidies
- Pollution abatement
- Tradable permits
- Cap-and-trade
- Direct regulation
- Performance standards
- Input standards
- Information disclosure
- Natural monopoly
- Public production
- Privatization
- Public-private partnerships
- Government failure
- Incentives
- Efficiency
- Distributional consequences
You do not need to use all of these terms. It is better to use a smaller number of concepts carefully than to list many concepts without explaining them.
Evidence and Sources
You should use course material from Week 3. Outside research is allowed, but it is not required. If you use outside sources, cite them clearly.
The main purpose of this assignment is not to gather as much information as possible. The main purpose is to show that you can compare policy tools using economic reasoning.
Grading Criteria
This essay will be graded on the following criteria:
Policy problem
The essay identifies a specific policy problem and explains the economic issue behind it.
Policy tool comparison
The essay compares at least two realistic policy tools.
Incentive analysis
The essay explains how each tool changes behavior. It does not merely describe the policy in general terms.
Tradeoff analysis
The essay evaluates the strengths, weaknesses, costs, and risks of each tool.
Argument
The essay makes a clear claim about which policy tool is better suited to the problem, or under what conditions each tool would be preferable.
Use of course concepts
The essay uses relevant Week 3 concepts accurately and meaningfully.
Writing quality
The essay is clear, readable, and edited. The writing should be direct and analytical.