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Professor Stephen King

Professor of Economics, Monash Business School, Monash University

Co-Director, Business Policy Forum, Monash Business School, Monash University

Dean, Faculty of Business and Economics, Monash Business School, Monash University (2009-2011)

Commissioner, ACCC (2004-2009)

Finkel Review - August 2017

"The Finkel Review has recommended a mandatory certificate scheme that obliges electricity retailers to purchase a certain proportion of the electricity they sell from sources of electricity whose emission intensity is below a defined level. This is preferable to conventional approaches to the pricing of externalities, such as an emission tax or cap and trade scheme."

Response	Confidence	Comment
Agree	8	To answer this question it is necessary to look at the Finkel Report and see what the Panel was trying to achieve. First, the alternative schemes the Panel considered are just for electricity generation - so we are not talking all sources of carbon emissions in an economy wide scheme. Second, it is important to recognise that the CET scheme and the alternative EIS scheme looked at in the Report - as with all schemes that are based on a quantity path of carbon emissions - can get to the same level of emissions over time, but with different costs. As the Report notes (p.95) "[b]oth an EIS and a CET can also be designed to achieve a set emissions reduction target, though they get there in different ways". If we are looking at economic costs and incentives then the EIS is clearly superior in theory to the CET scheme for the reason noted in the Report. The CET is asymmetric. "In the long-term, the CET scenario saw more electricity produced by brown coal than the EIS scenario because there is no penalty for high emissions generators" (p.92). The EIS 'punishes' higher emitting sources of generation and 'rewards' lower emitting generators. So is close to a Pigouvian tax. The CET does not do this but simply 'rewards' generators who have emissions below a certain threshold. So the EIS will provide better incentives to reduce emissions in the least cost way. If the only criteria for a 'preferable' scheme was reducing carbon emissions from electricity generation at the lowest economic cost, the EIS would win over the CET. But this is not the only criteria. The additional criteria, as the Report makes clear, is workability and (implicitly) the likelihood of having the scheme implemented via a political process. As the Report states on p.96: "The Panel notes that many stakeholders have expressed strong support for an EIS. The Panel also notes that to date the Australian Government has ruled out implementing an EIS". In other words, an EIS may be a well-supported, efficient and effective scheme, but it would be politically dead in the water if it was recommended. Add on to this the ability to build a CET scheme on the current RET scheme, so a CET is relatively easy to implement, and the Report, in Recommendation 3.2, "recommends a Clean Energy Target be adopted". So is the CET scheme preferable to the alternatives? Yes, if the objective is to actually get a working and reasonably efficient emissions reduction scheme working for electricity generation in the NEM. It is not the best scheme that economists could design, but it is the one most likely to be implemented.

Australian Federal Budget 2017 - Outsourcing Economic Forecasting - May 2017

Response	Confidence	Comment
Strongly disagree	9	The only reason to out source the Budget forecasts is if Treasury is unable to do them as well as an external agency. Why could this be the case? There is no reason to believe that an external agency would be more competent at making the forecasts than the Treasury. So the only reason to outsource is if Treasury faces another barrier to producing accurate forecasts. If there is another (say political) barrier, then this should be fixed. The problem is not solved by outsourcing.

Energy shortages - reserving Australian gas - Apr 2017

"In response to energy shortages around Australia, government policies requiring gas producers to reserve some production for domestic consumption are a good way to ensure that Australian consumers have access to sufficient gas supplies while still allowing for gas exports."

Response	Confidence	Comment
Strongly disagree	10	There is a short term problem with gas supply in Australia as we adjust from a domestic market insulated from the world market, to a market where price is set by the export price. The transition is involving significant pain for some businesses. However, a gas reservation policy (like that in place in WA) makes no sense as a solution. First, unless the government was going to make the policy retrospective, it would only apply to future gas developments. These will not occur until the current problem is history. If the federal government did make the policy retrospective then it will be an expost imposition on the gas field developers. The amount of gas reserved for domestic use has to be sufficient to set the domestic price below export parity if the reservation policy is to have any effect in the longer term. So it will lower the price of the gas sold domestically compared to the export parity price. Gas sellers will have to bear the loss - a great example of sovereign risk. Second, even if there was a long term problem, a reservation policy is a poor policy to help ensure the long term viability of businesses that have high demands for carbon intensive fuels like gas. If the government really wants to assist these manufacturers in the long term then it should use a direct, transparent subsidy - not a hidden fuel subsidy. Of course, why the government would actually want to subsidise these high carbon polluting industries is another question.

Response	Confidence	Comment
Disagree	7	The deductions (negative gearing) cannot be considered in isolation. The problem is that the current tax mix (capital gains tax discount of 50% and 'negative gearing') allows wealthier individuals to move highly taxed income to lower taxed capital gains using housing as a vehicle. A better solution might be to remove the capital gains tax discount on housing (or more generally) to stop housing being used as a vehicle to reduce tax at low risk. It is far from clear that this will reduce housing prices in the long term, but it will close a tax loophole used by wealthier Australians.

Response	Confidence	Comment
Strongly agree	10	To understand intro macro students need to understand the basis of trade and where prices come from - basic microeconomics.

Response	Comment
a) more of a microeconomist than a macroeconomist

Response	Confidence	Comment
Disagree	7	I interpret the question as whether the TOTAL economic welfare from gambling is negative. While this is an empirical question, the likelihood that the total economic welfare from gambling at the level we see in Australia (which is altered by taxes) is negative seems rather unlikely. A more interesting question would be whether at the MARGIN gambling creates positive or negative economic welfare (i.e. should there be a marginal change in gambling in Australia). But that is not what is asked.

Response	Confidence	Comment
Agree	6	I only agree because the alternative is so awful. If the Republicans had put up a half decent candidate then they would be a shoe-in by now. Will Clinton be 'good' for Australia? Probably not given her campaign rhetoric. Will she be better than Trump? That is a low bar to hurdle!

Response	Confidence	Comment
Strongly agree	9

Response	Confidence	Comment
Agree	8	The name 'behavioural economics' is new - the rest isn't. It is part of a strong stream in microeconomics that goes back at least 50 years (and arguably a lot longer). It is important - because understanding the limitations of our models of decision making, where they apply and when, and adapting these models or developing alternative approaches, is important. The use of laboratory testing is more recent, but the development of alternative theoretical approaches to address issues in decision making (bounded rationality as per Simon and Leibenstein, decision making under uncertainty as per Allais and Savage, etc) has long been part of a good graduate education in microeconomics. And the claims that 'new' discoveries in behavioural economics somehow undermine theory can only be made by those who have not studied microeconomic theory in any depth.

Question - Part 2: 'It is unethical for governments to use behavioural economics to "nudge" citizens.'

Response	Confidence	Comment
Strongly disagree	9	Of course, this is a moral question, so my view and confidence reflects my moral views. 'Nudging' (or 'soft paternalism' or 'libertarian paternalism') policies would have no effect for 'rational' individuals who face no costs of decision making. But for the rest of us, a nudge (such as changing the default on organ transplants) can significantly change behaviour for those who don't care 'enough'. So we get improved social outcomes while people who really care can still make the same decision regardless of the policy.

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The School

Professor Stephen King

Finkel Review - August 2017

Australian Federal Budget 2017 - Outsourcing Economic Forecasting - May 2017

Energy shortages - reserving Australian gas - Apr 2017

Housing affordability - capital gains on residential investment - Mar 2017

Economics teaching - micro before macro - Feb 2017

Social costs of gambling - Dec 2016

2016 US Election - Nov 2016

Immigration - Oct 2016

Behavioural Economics - Sep 2016

RBA economic growth targets - Aug 2016

The Brexit - impact on UK citizens - Jul 2016

Spend on education or business tax cut - June 2016

Budget 2016-17 - Returning to surplus - May 2016

China services boom for Australia? - Apr 2016

Government investments in major sporting events - Mar 2016

Efficiency of tax incentives - Feb 2016

Bah Humbug Australia - Dec 2015

Penalty Rates Reform - Nov 2015