On the Effects of Policy Costs

Author(s): Peter Bohm

Source: The Swedish Journal of Economics, Vol. 76, No. 1, Economics of Information (Mar.,
1974), pp. 104-116
Published by: Wiley on behalf of The Scandinavian Journal of Economics
Stable URL: https://www.jstor.org/stable/3439361
Accessed: 27-09-2023 07:00 +00:00

JSTOR is a not-for-profit service that helps scholars, researchers, and students discover, use, and build upon a wide
range of content in a trusted digital archive. We use information technology and tools to increase productivity and
facilitate new forms of scholarship. For more information about JSTOR, please contact support@jstor.org.

Your use of the JSTOR archive indicates your acceptance of the Terms & Conditions of Use, available at
https://about.jstor.org/terms

Wiley, The Scandinavian Journal of Economics are collaborating with JSTOR to digitize,
preserve and extend access to The Swedish Journal of Economics

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
ON THE EFFECTS OF POLICY COSTS*

Peter Bohm

University of Stockholm, Stockholm, Sweden

Summary
Costs of implementing policy solutions, e.g. information costs, are often substantial
enough to influence the extent and nature of optimum solutions. In this paper an
attempt is made to present a general framework for analyzing the role of different
kinds of policy costs for optimal policy. Environmental policy is discussed as an
illustrative example.

1. Introduction

It is well-known that market solutions to allocation problems involve trans

action costs and that optimal market solutions cannot be derived unle
these costs are taken into account. Similarly, policy solutions involve cost
of information, calculation and administration-policy costs, for short-whic
may influence the choice of optimal policy solutions. This is widely known
from many fields of applied economic policy such as pollution contro
transportation policy, labor market policy and income redistribution. But
systematic treatment of the impact of policy costs on policy solution is mor
often the exception than the rule. And this is often the reason why politicians
and administrators accuse economists of making policy recommendations
that are "impossible" to carry out in practice. In order to avoid this kind
of disregard for relevant analyses of policy issues and in order to identify thos
cases where such accusations are merely a pretext, it is necessary to pay
attention to the policy cost aspects and to incorporate them into the theor
of economic policy.
In this paper, an attempt is made to identify and analyze certain element
of the role of policy costs for optimal policy. In Section 2, we determine i
what sense policy costs have or lack importance for the derivation of optim
economic policy. In Section 2, we specify different categories of policy cost
which are relevant to distinguish from an analytical point of view, and outline
the general optimization problem. In Section 4, this problem is discussed in
more detail within the framework of an example from the field of environ
mental policy. The main conclusions are summarized in the last section.

* I am indebted to Franz Ettlin, Mancur Olson and Bengt-Christer Ysander for helpfu
comments on an earlier draft of this paper.

Swed. J,. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 105

2. The Role of Policy Costs

Policy solutions to a given problem can have a number of negative side-
effects. First, a particular solution may imply the fulfillment of one policy
goal but make another goal more distant. Second, the practical application
of a solution may deviate from the way it was planned in the sense that the
government agencies involved may be inefficient or exceed their mandates.
Third, a policy solution may incur costs of information and calculation to
determine the exact design and scope of the solution as well as costs of
administrating and controlling the practical application of the solution. In
this paper, we deal with the third aspect only, the role of policy costs.
Policy costs may affect the decision of whether or not to intervene, say,
with respect to a certain market imperfection. The fact that policy costs
do not play this crucial role in a great many cases does not imply, however,
that these costs can be disregarded. In particular, it does not imply that
policy costs are unimportant in the choice of an optimal policy solution from
the appropriate set of policy alternatives. Although there are certainly many
cases where policy costs also lack this influence, it seems reasonable to
assume that it is primarily in this latter context that policy costs play an
important role. Moreover, it is in this context that these costs pose a more
complex analytical problem.
Accepting as a starting-point that there are limits for the necessity of
taking policy costs into consideration, it should be observed that there are
factors which tend to widen these limits. As some of these factors seem to

have grown more important over time, it may well have been proper
disregard policy costs in many previous cases, but it may be less so in
future.

First of all, the development of economic policy has presumably exhau

most of the more remunerative acts of economic policy-at least, an assu
tion of efficiency in economic policy would favor such a proposition. This se
true even when it is taken into account that the relative weights of tar
variables change over time and new policy parameters are being inven
Second, we may expect the simplest tools to have been used first, leavin
with more intricate and more costly policy parameters as well as with the co
development of new policy parameters. In countries like Sweden,
ployment policy may be a case in point.

3. The General Nature of the Optimization Problem in the Presen

of Policy Costs
3.1. Categories of Policy Costs
The use of a policy parameter may involve different kinds of costs, wh
will turn out to have different implications for the analysis of the choic
optimal policy.
Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
106 P. Bohm

First, the introduction of a policy measure may involve substa

These are due to calculations and administration necessary in ord
system to function, regardless of the actual value(s) of the policy
A possible example, where these costs cannot be neglected, is a p
retraining workers. The calculations required in this case include
the future labor market, the demand and supply on its various
forecasting the behavior of retrained workers as well as planni
signing the retraining program and the procedure by which the
are to be transferred into actual employment, etc.
Second, significant costs may be involved in maintaining the use of
parameter over time. Here, the costs may be constant per period
of the value (+0) of the parameter; or they may vary according t
There may also be important economies over time in the sense of "le
doing".
Third, changes in parameter values may incur substantial costs, due to the
calculations and operations required. If the calculations in this context are made
only when changes are deemed necessary and will be carried out, the ensuing
costs should be separated from the two categories already mentioned. If, on
the other hand, calculations are made all along, such that the outcome does
not necessarily imply a change in the parameter value, it is more appropriate
to include these calculation costs in the category of maintenance costs
and/or introduction costs. In general, the administration costs of a parameter
change are probably more important-for example, the costs of implementing
a change in the level of a sales tax-and this calls for separate treatment
of the particular costs of parameter changes. It seems reasonable to assume
that these costs, similar to introduction costs, are independent of the values
of the parameter involved. Furthermore, these costs may resemble the
maintenance costs with respect to the possibility of cost reductions over time.
It is essential to distinguish between these three cost categories from an
analytical point of view. Depending on the particular issue involved further
breakdown may be called for. For example, an important part of the policy
costs is often borne, not by the authorities, but by those who are subjected to
the policy measures, e.g. costs of filling out tax return forms, tax handling,
adjustment to policy changes, etc. Moreover, we may observe one special
subcategory, which has been discussed to some extent in the literature, i.e.
the exclusion costs for goods produced by or subsidized by the government.
These costs might appear important either in the form of introduction costs
(cf. the case of a toll bridge with automatic collecting facilities) or in the form
of maintenance costs (cf. a Pay-TV system) or both.
Since the costs of a policy alternative may be prohibitively high, it may be
practical to treat cases where no policy measure is feasible from a technical
point of view as cases of infinitely high policy costs. On the other hand, it seems
more realistic to assume that there always exist technical solutions the costs of

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 107

which are known or simply judged to be prohibitively high, but never

infinitely high. It is worth-while making this observation, as there seem
to be many cases where policy costs have passed rather rapidly from being
"definitely too high" to being "definitely acceptable", e.g. pricing of park-
ing space.'
In many of the situations just mentioned, the shift from laisser faire to policy
intervention has not been due solely to the direct effect of an increase in
demand for a good in fixed supply. There has also been exogenous or induced
development of new policy measures or of new facilities for policy measures
which are already known (e.g. parking meters). This observation calls for the
introduction of a special category of policy costs, i.e. the costs of looking for
new solutions. The research part of this activity can be seen as a form of
government investment, whereas it is appropriate to include the development
part in the introduction costs mentioned above.
The subsequent analysis will be based on the distinciton between the
following policy cost categories, (1) costs for research into new policy
solutions and (2) costs for known policy solutions, including costs of introduc-
tion (CI), costs for parameter change (CD) and costs of maintenance (Cm).

3.2. The Optimization Problem Excluding Research into New

Policy Solutions
As we have already pointed out, policy measures intended for adjusting a
specific target variable may affect other target variables as well. Hence, the
optimal design of economic policy should take all effects on target variables
into account. It is also well known that policy means may be target variables
as well and that this aspect must be taken into consideration when choosing
the optimal set of policy measures. Thus, as elaborated by Tinbergen [5] and
Hansen [4], the optimal policy problem could be seen as maximizing a target
function

W(xl, ..., xn; al, ..., am)

subject to a set of restrictions ,&(x1, ..., x,; al, ..., am) =0, i= 1, ..., n.
When we now concentrate on the policy cost aspect of the optimum policy
problem, we may abstract from these multidimensional effects of a policy
parameter. Specifically, we shall study the impact of a set of policy para-
meters (a,, ..., am) on a single endogenous variable, x. The variable x may be
a price or a quantity which is found to be nonoptimal at ,, all aj= 0. Moreover,
when all policy costs are neglected, x is found to be optimal at x+ which can be
achieved by using at least one of the parameters, a1 = af 0. Thus, we have

a = f(0, ..., a1, ..., 0) = f(a)

1 Cf. Dorfman [3].

2 See e.g. Hansen [4], Chapter 1.

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
108 P. Bohm

S= f(0, ..., 0, ..., 0) = f(0)

x+ = f(0, ..., af, ...)0) = !(aj),

the latter for at least one j and at most any one j, j= 1, ..., m.I Now, int
policy costs, first in the context of a one-period analysis, these costs fo
parameter are simply

C' = C'(aj, t)

where t denote time and C'(O, t)=O0.

The fact that policy costs (may) have an effect on the choice of optim
implies that there is a trade-off function between x and CJ. To simplif
assume that this function,

F(x, C') = F(f(aj), CO(aj, 1))

is concave and differentiable.2 Then, if aj is not subject to any te

constraint, the necessary and sufficient condition for optimum d
parameter aj in a given period I is that

OF 9CJ' F df
+ -0
aCJ' Oaj x da1

If, on the other hand, any aj is technically constrained to any (closed) interval,
such that F at which the above condition is fulfilled does not exist, we must
check F at the boundary value(s) of a and choose the value of a1 at which F
is at its maximum. Moreover, if F( ) is not differentiable at aj=O, a direct
comparison of F(f(0), 0) and the above solution is called for.
Then, given the optimal value of each parameter, we simply choose that
alternative (or one of them, if there are several) which takes F to its highest
feasible maximum. We may distinguish between three interesting values for
this optimum policy, a?: (1) a? = 0, which means that x=JF in fact is optimal
and that the policy costs have turned out to be so high as to prohibit any
policy intervention. (2) aU =af; in this case, policy costs have not affected the
optimal value of x = x+ = /(at), but they may well have excluded, as no longer
optimal, some parameters a,, for which at exists, i.e. for which x+ = f(at) is
feasible. (3) a #+0 and +at; in this case, the policy costs have led to an
optimal parameter value and hence an optimal value of x, which hitherto has
not been relevant to observe. Moreover, if the set of a' now contained only
parameters for which at did not exist, the optimal policy would necessarily

1 Our assumption of mutually exclusive policy parameters is made for simplicity of

exposition only. Nothing would be changed in principle if we considered solutions, each
of which involved more than one parameter (+0) at a time.
2 As we shall see later on, this assumption is in general too strong. In many cases this

trade-off
price function
of x (cf. may be
the example written directly as k(x) f(a1) - CI(at, 1), where k(x) is the relevant
below).

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 109

involve using a parameter other than any of those for which a' is feasible, hence,
one which is not derived from an analysis where policy costs are disregarded.
For a't*0, i.e. in cases (2) and (3), we have ex post found that the policy
costs could have been neglected when determining whether any correction
should be made or not. For the special case where the set of alternative
optimal policy parameters is such that it contains at least all those para-
meters for which x+ =f(a') is feasible, we have ex post found that policy
costs could have been neglected, if we only wanted to find an optimal policy
parameter. In the even more special case of al, in addition, being equal to
a , we know ex post that the policy costs could have been neglected alto-
gether.
However, the one-period case dealt with so far has enabled us to sweep
most of the difficult problems under the rug. In particular, the distinction
between different kinds of policy costs, mentioned in the preceding section,
was entirely irrelevant in this case. In the more general multiperiod case, the
policy costs become

'= D + + t V + 7 ]
t=1

where C = CJM(ait, t), CI = CJ_(t) and C~t = CJ(t)

where

11 for ait+ 0,1 1 for at + aJ-1 and a,+O

at 60 for aft= 0 0t for ajt= ajt- or at= 0
and

I1 for at + at_-,=O

Yt 0 for any at-, + 0 or at = 0forany 1,2,

Note that we have now defined introduction costs as the sum of C
thus being the additional costs of changing the parameter from z
non-zero value for the first time.

Given -t and x+ for each period and a trade-off function, H(x1, x2, ..., xr,
we have in analogy to the one-period case that the optimal at may diff
from a+ and 0 (thus, xt from x4 and xt), due to the fact that Cm depe
at; hence, we may achieve a reduction in the policy costs by deviating f
aj which outweighs the loss of having xt deviate from xt. In addition a
in contrast to the simple one-period case, there is now a second reason w
ajt may differ from ai and 0. We can, in this more general case, also c
down on policy costs by keeping the parameter value intact for sev
periods, although the a) differ between these periods. In this way
avoided, which may outweigh the loss from having xt deviate from xt.
1 at is superfluous as long as CGJ is a function of ajt, but it is convenient for our discus
to introduce it at this stage.

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
110 P. Bohm

In order to bring out some essential elements of this optimization

we now turn to a specific case where policy costs and, in particu
tion costs are known to play a decisive role.

4. Policy Costs and Corrections for External Effects

As has been shown elsewhere,1 we may under certain conditions

total social surplus of a firm under perfect competition and before
have been taken with respect to its negative external effects (e.g
h,(Qt), as

At= p~t - Gt(Qt) - ht(Qt)

per period t, where output Qt is determined at the point where marginal

costs, MC,= dC (Q )/dQt,=p, the price in each period which, for simplicity,
is assumed to be constant over time.

4.1. The Taxation Solution

Introducing a flat tax at, at which Qt is chosen at profit maximum,

p -at, we have the social surplus as

at(at) = pQt(at) - Ct[Qt(at)] -ht[Qt(at)]

As is well known from the standard treatment of external effects, the

optimum level of this tax, at, is determined by the marginal external effect
in equilibrium (in an otherwise perfect economy). Consequently, we have

rt(at) at a maximum nt for at= at +=dh(Qt)/dQt, the marginal external

effect. (For simplicity external effects are considered to be of a non-cumulative
type, i.e. the pollutants are degradable.) Moreover, we have nt =-i for at =0.
The social gain from using this tax, prior to taking the policy costs into
account, is then nt(at) -rt per period t, or, disregarding discounting,

2at(at)-- At
tl

over a span of 1 periods.

Introducing the policy costs, these costs

I (L,C ,+ ftCD + ytD,)

t -O

where Gm is now assumed to be independ

where CG, GD and CG are independent of
we have the net social gain S as

s = [ [7t(at) - , - t CM
1 See Bohm [2].

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 111

To determine the optimum design of this policy alternative we must find

the vector d = (a,, as, ..., ar-) which maximizes the net social gain. Let us start
from the feasible solution, a =a+ = (at, a, ..., a-). This solution we know
maximizes the first term inside the bracket of eq. (1). Moreover, as it entails
policy costs of 1(CM,+ c) +C,, when at least one of the two exogenously
determined functions, C,(Qt) and ht(Q,), change at every transition from one
period to the next,' we also know that these costs can be reduced. Such a
reduction can be carried out in several alternative ways, and for each of these
we have to find out whether our trade-off function (1) makes the shift from
a+ preferable or not.
We may distinguish among the following set of alternative measures:
(a) If we did not introduce the tax at all, the net social gain would change by
T-

1(c + CD) + C (t+ -

relative to the original solution. If this expression is positive, the alternative
of "no intervention" is preferred to the original solution. It means, however,
only that, and not that this alternative is optimal.
(b) If we postponed the introduction of the tax until after the nth period,
n <1, the net effect would be
n

n(C, + CD)- ' (7rt - t)

i.e. we would make a gross gain equal to the costs of maintenance and of
policy change during n periods.
(c) Similarly, if we introduced the policy parameter at t=l1, but let a,
equal 0 in any n periods of t= 2 to 1, we would save n(CM ,+CD) and lose, in
each of the n periods, ;tr -it.
(d) If we held a =at+_+0 in any n of the I periods, we would save nCD

and
(e) lose, in each
Similarly, weofmay
the consider
n periods, 7+t
case (d)-t(a-1).
in the form of having at=at-_
such that at is neither 0, nor equal to atl.
Thus, it can be seen that we may save on all three categories of policy costs
(in case a), on C, and CD (in cases b and c) or on CD alone (in cases d and e).
We may also note that high values of Cz, CM and CD all have the effect of
making it less likely that any policy intervention should be made. This is,
moreover, the only effect that C, can have. A high CM, on the other hand, may
also imply that it is preferable to have at = 0 in certain periods. Finally, a high
CD tends to reduce the number of changes in the policy parameter, in
addition to the other two effects just mentioned.
As to the actual process of resolving the problem at hand, the more
essential aspects of this process may be illustrated by the following diagrams,
1 If in any period t, all functions were the same as in the preceding one, we would have
at+ ==a+ and one CD would disappear.

8 - 744816 Swed. 1. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
112 P. Bohm

a-aA,

I I I
I I
Fig. 1

.7f-~G

Fig. 2

Figs. 1-6. In Fig. 1, we visualize the effect of at on ~rt-nt (for the case of
h' > 0, i.e. increasing marginal external effects). Dropping the subscript t for
a moment, we have for a=0 that n- += -n+=-ACG in Fig. 1; for
a =a', such that 0 <a'<a+, we have - *+ = - BCF; for a= a+, a- r = 0;
for a = a" = average variable costs, we have n --+ = - ECD or for a > a", where
the firm will have shut down, n is 0 and therefore ~ -a+ = -n+. These effects
of a on a~-n+ are summarized in Fig. 2 (where n+ is assumed to exceed
ECD). Now, assuming that it will turn out to be worthwhile to introduce
the tax in one period or another, the choice of at in any period t is in-
fluenced only by CM and CD. The possible cost savings are shown in Fig. 3.
Adding these savings to the loss described in Fig. 2, we have the net effect as
shown in Fig. 4.
As is clearly seen from Fig. 4, the choice lies among four values (at most)
of at: a,= 0, at = at_, at,= at and, possibly, at >a"', if in the last case all (or most
of) the costs CM and CD are assumed to disappear when Qt =0. In Fig. 4 we have
illustrated, in particular, the case where it pays to keep the policy parameter
at the same level as in the preceding period.
Carrying out calculations along these lines for each period, we will final-
ly end up with a set of functions showing the effects on eq. (1) of deviating
from the original solution a+. Then, the optimum choice of such deviations
(cf. cases a-e above) can be seen as derived from a process of choosing (A)
Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 113

cost
savings

Cm + GD

at-

Fig. 3

net

L oeme

Fig. 4

the set of periods for which at is to be zero and (B) the set of peri
which at equals at-,. These two subproblems can be visualized as
the maximum of the curves in Figs. 5 and 6.
Now, it should be observed that the optimum values for n in
two subproblems, let us call these values n, and Ai, respectively
necessarily describe the final solution to the optimum policy probl
optimum optimorum. The optimum in each subproblem above was
under the assumption that no other deviation from the original solut
been made. Specifically, if we derived the locus of efficient points i

S(a) Original solution, %= 0

case (a), %==I
case (b), O<n<1
case (c), 0<s<i

J/ I

I I

lie

Fig. 5. The effect of letting at be zero in n periods, not necessarily in sequence (c). Curve
(b) can be taken to illustrate the special case of postponing the introduction of the tax n
periods.
Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
114 P. Bohm

S(a) Original solution, n=0

cases (d) and (e),

(a+) i ite

Fig. 6. The effect of having

the special case of at = a_1.1

for nc= iK instead of n

curve to have a maximu
not even this new pair o
as still higher maxima m
Because of this interdep
social gain can be chang
overall optimum. Now, t
tions in practice, we can
easily be managed by a

4.2. The Purification So

Assume that the optimum
In fact, we may expect
tion a+, obtained when p
substantial costs involved
investigate whether oth
performance.
Assuming we have the
central purification sys
costs of this alternative. T
the marginal costs of tr
to the preceding case, th
to the purification plant
to be very sensitive to li
this information would p
1 If frequent policy changes
long-term planning, the rele
tions where n, and ne are co
2 To take an illustration from
for each of the following co
being in the closed interval
a1: 0 0 a+ a+
a2: 0
2 a 0
2 a a+
2

Swed. J. of Economics 1

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
 On the effects of policy costs 115

constant for longer periods than for which at would be constant; thus, the
possible adverse effects on the firm of changes in at and in the purification
charge, respectively, would be smaller in the latter case. On these grounds, it
seems possible to disregard the policy costs altogether in this case.
Thus, we end up in a situation where two relevant policy alternatives can
be expected to have quite different implications with respect to policy
costs. Specifically, the purification alternative may turn out to be the optimal
choice, due to the inclusion of these costs.1
We might also note that if the central purification solution was unknown, the
appropriate calculation of the benefits of investing in research for new policy
alternatives should have included not only the possible effects on reducing the
negative external effects, but also the possibilities of reducing policy costs.
Thus, these costs should be observed not only at the moment when the
best alternative of a given set of policy alternatives is selected.
This observation bears upon another possible solution to the problem
at hand, i.e. a system of subsidies which-along with threats of alternative
government intervention if necessary-provides incentives for firms to
develop decentralized purification methods. As such methods could eliminate
not only the negative external effects but also the policy costs of the taxation
solution, if that were found to be the best solution so far, the subsidies
should be designed with both these aspects taken into account. The policy
cost aspect may be particularly important in the (many) cases of external
effects which turn out to be very difficult to estimate. This difficulty is also
present, of course, when the size of the subsidy is to be determined. But as
long as there is a chance that reasearch into (decentralized) purification
methods will be successful, there are also chances of eliminating the measure-
ment problem in the future. This should tend to favor this policy solution as
well as to raise the optimum level of such incentive programs. A case of
special importance, of course, is where a central purification solution is absent
and the measurement problem is so troublesome, i.e. policy costs are so high,
that not even the taxation solution as outlined above can be applied.

5. Main Conclusions

1. We have seen that policy costs may affect the optimum policy s
on three levels:

(a) The optimum choice of policy parameter,

(b) the optimum value of the parameter chosen,
(c) the choice of whether or not to use economic policy in a particular
context.

2. In principle, we cannot know in advance whether or not policy co

be neglected in the context of a particular problem. Often we may kno

1 As shown in Bohm [2], p. 164, there are several reasons for preferring the tax solu
the purification solution when policy costs are neglected.
Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms
116 P. Bohm

some of the relevant policy alternatives have negligible policy cost

from the point of view of choosing an optimal policy alternative, this fa
make it even more necessary to take these costs into account (cf. our
in Section 4).
3. We have found it to be essential from an analytical point of v
distinguish among three kinds of policy costs:
(a) costs of policy introduction,
(b) costs of policy maintenance,
(c) costs of policy change.
As we have seen, it is mainly the costs of policy change that compli
analysis of optimum policy.
4. As it turned out in our example, we may often expect the r
policy cost functions to have important discontinuities. This m
somewhat disturbing from the point of view of a general formulatio
optimum policy problem. On the other hand, it may in fact turn
simplify solutions in practice, as it should often be evident a priori that
is only a small number of relevant values of this function and, also, wha
values are (cf. our example in Section 4 and Fig. 4 in particular).

References

1. Arrow, K. J.: The organization of 3. Dorfman, R.: General equilibrium with

economic activity: issues pertinent to public goods (ed. Margolis-Guitton).
the choice of market versus nonmarket Public Economics, London, 1969.
allocation. The Analysis and Evalua- 4. Hansen, B.: The economic theory of
tion of Public Expenditure. Washington, fiscal policy. Allen & Unwin, 1958.
1969. 5. Tinbergen, J.: On the theory of economic
2. Bohm, P.: Pollution, purification and policy. Amsterdam, 1952.
the theory of external effects. Swedish
Journal of Economics, June 1970.

Swed. J. of Economics 1974

This content downloaded from 111.68.96.208 on Wed, 27 Sep 2023 07:00:25 +00:00
All use subject to https://about.jstor.org/terms