Henry Ergas

New policies create a new politics: issues of institutional design in climate change policy

Institutional design focuses on the task of providing accountability and effective monitoring of decision-making by bodies vested with the coercive powers of the state in a context where information is inherently limited, costly to acquire and asymmetrically distributed. This paper focuses on issues of institutional design in the context of climate change policy. It examines proposals advanced in the June 2008 Draft and Final Reports of the Garnaut Climate Change Review (‘Garnaut Reports’), and in the Government’s July 2008 Green Paper and December 2008 White Paper on the Carbon Pollution Reduction Scheme (‘Green and White Papers’) with respect to how revenues raised by the sale of emissions permits would be used; and second, the proposed governance arrangements for the emissions trading scheme.

Policy forum: designing a carbon price policy: using market-based mechanisms for emission abatement: are the assumptions plausible?

Support for using market‐based mechanisms (carbon taxes or emission‐trading systems) to deal with climate change is based on a number of premises. This article discusses those premises, focusing on the claim that the promise of ever‐rising implied carbon prices under such market‐based mechanisms will support induced innovation in low‐ or no‐carbon technologies. It notes that this claim assumes that promise to be credible and sufficient to induce the innovations required. It argues that the assumed credibility of such very long commitments is questionable, and hence, even in the best of worlds, the implied benefits are unlikely to arise. For a small country like Australia, the problems are then compounded by the absence of a credible, global agreement on emission reduction. Given that, the marginal benefits of investing in carbon abatement are likely to be very low or negative.

Mandatory aged care insurance: a case for Australia

ABSTRACT This paper assesses the feasibility and welfare-improving potential of an insurance market for aged care expenses in Australia. As in many other countries, demographic dynamics coupled with an upward trend in costs of personal care result in consumer co-contributions imposing a risk of expenses that could constitute a significant proportion of lifetime savings, in spite of the presence of a government-run aged care scheme. We explore issues around the development of an insurance market in this particular setting, considering adverse selection, moral hazard, timing of purchase, transaction costs and correlation of risks, as well as such contextual factors as longevity and aged care cost determinants. The analysis indicates aged care insurance is both feasible and welfare-enhancing, thus providing a gainful alternative to the aged care reform proposed by the Productivity Commission in 2011. However, while the insurance market would benefit the ageing Australian population, it is unlikely to emerge spontaneously because of the problem of myopic individual perceptions of long-term goals. Consequently, we recommend regulatory action to trigger the market development.

Providing and financing aged care in Australia

This article focuses on the provision and financing of aged care in Australia. Demand for aged care will increase substantially as a result of population aging, with the number of Australians aged 85 and over projected to increase from 400,000 in 2010 to over 1.8 million in 2051. Meeting this demand will greatly strain the current system, and makes it important to exploit opportunities for increased efficiency. A move to greater beneficiary co-payments is also likely, though its extent may depend on whether aged care insurance and other forms of pre-payment can develop.

Time Consistency in Regulatory Price Setting: An Australian Case Study

Time consistency refers to situations where a policy that is optimal ex ante proves not to be optimal ex post, creating the risk of opportunistic policy reversals. While the threat of such reversals has received widespread attention in the theoretical literature, testing whether policy is indeed time consistent is challenging. This paper implements such a test by comparing the depreciation profile established by the Australian telecommunications regulator at the outset of a regulatory period with the actual path of allowed recovery, and finds that the regulator acted in a time-inconsistent manner.

National disability insurance scheme funding: the case for hypothecation

In 2011, the Productivity Commission released a report on the design of a National Disability Insurance Scheme. Subsequent to that report, the Commonwealth has moved to establish such a scheme with partial funding from an increase in the Medicare levy. However, the Medicare levy is a relatively inefficient funding source and does not address the key incentive issues facing the scheme. This article examines the use of a fully hypothecated tax instead and concludes that it would probably be a superior alternative.

The Analytics of the Australian Private Health Insurance Rebate and the Medicare Levy Surcharge

This paper presents an analytical framework for examining changes in the Private Health Insurance rebate (PHIR) and the Medicare Levy Surcharge (MLS), and uses it to establish three key propositions. First, increases in the MLS rate tend to reduce the elasticity of demand for private health insurance. Second, simultaneously increasing MLS rates and thresholds has a theoretically ambiguous effect on PHI take-up rates. Third, means testing the PHIR can never increase PHI take-up, and will reduce it in some circumstances. The paper concludes with a discussion of the possible consequences of recently proposed policy changes to private health insurance in Australia.

Price Squeezes and Vertical Discrimination on Next Generation Access Networks

Next generation access networks (NGANs) are in many cases likely to be supplied by vertically integrated firms, that is, firms that both wholesale access and sell services downstream to end-users. A long standing concern of regulators is that such firms may engage in anti-competitive price squeezes. This paper examines this concern and reviews the difficulties associated with conventional imputation tests in an NGAN context. The paper is organised as follows. Section 2 of the paper provides an analytical framework for understanding vertical integration, vertical discrimination, including price squeezes, and the incentives to engage in such behaviour. Section 3 explains why the incentives for a NGAN provider to vertically discriminate are sharply reduced as compared with a traditional vertically integrated telecommunications carrier. Section 4 considers regulatory approaches to the price squeeze. Section 5 focuses on how regulators are also concerned with inefficiently high prices and derives implications for the efficient setting of NGAN access charges.

Error and Design: Economics in (and Some Economics of) the Australian Competition Tribunal

The Australian Competition Tribunal plays a central role in the Australian regulatory system. Three of the Tribunal’s recent decisions are examined and found to have significant errors. It is argued on the basis of the economics of the institutional design that these errors are inevitable in a system where regulatory decisions are based on vague standards. It is concluded that the quality of regulation would be improved by a shift to a regulatory system that relied less on such vague standards and more on prescriptive, explicit rules.

Reflections on Expert Economic Evidence

The courts face difficulties in properly testing economic evidence, not the least because of the difficulty of estimating the plausibility of hypothetical counterfactuals.