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Policy Area Papers on Law and justice

Measuring the Impact of Terror: An Event Study of the Tel Aviv Stock Exchange
Piotr Konwicki, World Economics, March 2018
Events observed in Israel include terror attacks, controversial elections and unexpected wars, the impact of which can be analysed on the Tel Aviv Stock Exchange in terms of abnormal returns. Results show that defence and high-tech industries react positively to these events while other industries have a negative reaction. Recent data demonstrate that these events create positive abnormal market reactions when Israel is at war with Palestine and Lebanon because of the high number of defence and high-tech companies listed on Tel Aviv Stock Exchange. A phenomenon of the ‘normalisation of terror’ can be observed in the stock exchange, as the market reacted negatively to events in 2002 but has become more resilient to recent events.
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The EMU Versus the EPU: A historical perspective on trade, payments and the European financial crisis
Juan Carlos Martinez Oliva, World Economics, June 2013
This article draws upon the analogy between the current European institutional setting, in the face of the current European crisis, and the rules and institutions that were established in the post-war years to achieve trade liberalisation and a multilateral payments system in Europe. Differently than in the past, a feature of today’s crisis is that trade and payment imbalances have been overlooked, under the assumption that in a closely-integrated single-currency area, trade and payments imbalances do not matter. The implications are discussed in the light of the need to overcome the present crisis and to proceed towards integration goals.
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The Diseconomies of Terrorism
Peter J. Phillips, World Economics, December 2011
The Global Terrorism Database (GTD) contains many active and inactive terrorist groups. The defining characteristic of the terrorist groups contained in the GTD is smallness. Unlike the modern business enterprise, for example, there appears to be no trend towards ‘bigness’. This paper presents an analysis of the size distribution of terrorist groups and the implications of this size distribution for the technological conditions under which the output of terrorism may be increased. With net internal and external diseconomies to larger-scale production of terrorism, we should observe relatively small terrorist groups and little or no tendency for the number and size of terrorist groups in the ‘terrorism industry’ to increase. These facts do characterise the empirically observed size distribution of terrorist groups, and imply that the technological conditions under which the output of terrorism may be increased are characterised by internal and external diseconomies to larger-scale production of terrorism.
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Endangering the War on Terror by the War on Drugs
Deepak Lal, World Economics, September 2008
The century-old US War on Drugs based on supply control measures is endangering its War on Terror in Afghanistan. With opium poppy cultivation the most profitable crop available to Afghan farmers, the Taliban has been able to use the illegal profits from the trade to buy arms and recruit farmers by offering protection from US led aerial spraying of the crops. These supply control measures are not warranted by welfare economics, classical liberal social ethics, or the actual outcomes of the US War on Drugs. The best policy to deal with US drug addiction would be to legalize drugs, concentrating on enforced treatment of chronic drug users. A successful War on Terror requires an end to aerial spraying, the buying up of Afghan opium and its conversion into morphine, for which there is excess demand in the Third World.
The Opium Economy: A Possible Approach to Reform
Jeremy Berkoff, World Economics, December 2007
This paper reviews options for reform of the opium economy within a holistic world context, emphasising the economic forces at work at each stage of the marketing chain. Rather than choosing between prohibition and legalisation, the paper proposes an incremental approach that would move steadily from a prohibitionist framework to one that was increasingly liberalised. The approach focuses on squeezing-and ideally eliminating-the profits earned in the illicit trade. It would do this by: diverting trade from illicit traffickers to public agencies; enhancing illicit costs by continued active interdiction; and, in due course, adopting forms of predatory pricing to further squeeze illicit profits. As the illicit trade withered, local markets in consuming countries might become feasible, which-as in the case of alcohol and tobacco-could be regulated and taxed with the aim of minimising harm, suppressing demand and promoting appropriate treatment and education.
Ethics of the Discount Rate in the Stern Review on the Economics of Climate Change
Wilfred Beckerman & Cameron Hepburn, World Economics, March 2007
Any comparison of the costs and benefits of climate change is dominated by the chosen discount rate. But, although the Stern Review emphasises the ethical nature of the parameters entering into its choice of a relatively low discount rate, its discussion of the ‘pure time preference’ parameter is unbalanced. In particular, no consideration is given to the role of ‘agent-relative ethics’, which (i) has a wellestablished philosophical pedigree going back to David Hume; (ii) is likely to correspond closely to world-wide public attitudes towards intergenerational welfare; and (iii) would entail discounting a unit of welfare accruing to future generations compared to an equal unit accruing to people alive today at a positive rate. The authors also discuss the other ethical parameter upon which the discount rate depends, namely the elasticity of marginal utility with respect to consumption. In the conventional model, this simultaneously reflects different aspects of inequality aversion as well as risk aversion, which complicates its interpretation. Finally, they discuss the divergence between market rates of discount and the low rate chosen in the Review, and the limitations—on the one hand—on the normative significance of market rates, as well as the danger—on the other hand—of relying on rates chosen by elites or philosopher kings.
A Review of the Stern Review
Richard S. J. Tol & Gary W. Yohe, World Economics, December 2006
The Stern Review on the Economics of Climate Change was published on 30 October 2006. In this article Richard Tol and Gary Yohe, while agreeing with some of the Review’s conclusions, disagree with some other points raised in the Review and they address six issues in particular: First, the Stern Review does not present new estimates of either the impacts of climate change or the costs of greenhouse gas emission reduction. Rather, the Stern Review reviews existing material. It is therefore surprising that the Stern Review produced numbers that are so far outside the range of the previous published literature. Second, the high valuation of climate change impacts reported in the Review can be explained by a very low discount rate, risk that is double-counted, and vulnerability that is assumed to be constant over very long periods of time (two or more centuries). The latter two sources of exaggeration are products of substandard analysis. The use of a very low discount rate is debatable. Third, the low estimates for the cost of climate change policy can be explained by the Review’s truncating time horizon over which they are calculated, omitting the economic repercussions of dearer energy, and ignoring the capital invested in the energy sector. The first assumption is simply wrong, especially since the very low discount rates puts enormous weight on the other side of the calculus on impacts that might be felt after the year 2050. The latter two are misleading. Fourth, the cost and benefit estimates reported in the Stern Review do not match its policy conclusions. If the impacts of climate change are as dramatic as the Stern Review suggests, and if the costs of emission reduction are as small as reported, then a concentration target that is far more stringent than the one recommended in the Review should have been proposed. The Review, in fact, does not conduct a proper optimization exercise. Fifth, a strong case for emission reduction even in the near term can nonetheless be made without relying on suspect valuations and inappropriate summing across the multiple sources of climate risk. A corollary of this observation is that doing nothing in the short term is not advisable even on economic grounds. Sixth, alarmism supported by dubious economics born of the Stern Review may further polarize the climate policy debate. It will certainly allow opponents of near-term climate policy to focus the world’s attention on the estimation errors and away from its more important messages: that climate risks are approaching more quickly than previously anticipated, that some sort of policy response will be required to diminish the likelihoods of the most serious of those risks, and that beginning now can be justified by economic arguments anchored on more reliable analysis. These six points are discussed in separate sections before the authors reach their conclusion.
To What Extent Should Less-Developed Countries Enforce Intellectual Property Rights?
Gilles Saint-Paul, World Economics, September 2005
This paper discusses a number of issues in the context of the debate on intellectual property in less developed countries (LDCs). It starts by discussing the consequences of IP enforcement in LDCs for global innovation and welfare in poorer countries. It then considers the costs and benefits of IP enforcement for a small, open LDC, abstracting from global issues. Finally, it discusses the potential merits of an industrial policy based on open-source software. The analysis suggests that the view that it is best for LDCs to free ride on the global IP regime is overblown.
The Economics of Copyright
Ray Corrigan & Mark Rogers, World Economics, September 2005
The copyright industries—such as music, film, software and publishing—occupy a significant and growing share of economic activity. Current copyright law protects the creator for up to 70 years after their death, significantly longer than patent protection (20 years after invention). Copyright law aims to balance the incentive to create new work against the costs associated with high prices and restricted access to this work. This paper reviews the economic issues behind copyright and how these are challenged by changes in technology and market structure. While economics provides a powerful conceptual framework for understanding the trade-offs involved, the paper argues that our empirical knowledge base is very weak. Much more empirical analysis is needed to understand the impacts of changes to copyright legislation. Without such analysis, policy and legal debates will continue to be based largely on anecdote and rhetoric.
The Costs of Violent Crime
Giles Atkinson, Susana Mourato & Andrew Healey, World Economics, December 2003
This paper reviews a number of studies that have sought to estimate the economic costs of criminal offending and, more specifically, violent crime. Firstly, it discusses those approaches that have sought to describe the ‘big picture’ by calculating the aggregate burden of all crime. These studies yield useful overall summaries about the magnitude of the crime problem but also reveal how little is known about the value of the ‘intangible’ effects of violent crime (e.g. the anxiety suffered by potential victims or the pain and suffering imposed on actual victims). Secondly, the authors review the growing number of contributions that have begun the process of filling this gap through novel applications of nonmarket valuation methods in a crime context. In particular, the findings of a recent attempt to estimate the costs of categories of violent crime (of varying levels of severity) in the United Kingdom using the contingent valuation method are discussed. Whilst valuing the intangible costs of violent crime is a challenging task, a more explicit assessment is needed not just to improve the transparency of public decision-making but also to ensure that policy benefits of crime prevention can be compared directly with the costs of implementation.
An Economic Analysis of the Mafia
David Maddison & Marilena Pollicino, World Economics, June 2003
This paper reviews the current economic thinking on the Mafia phenomenon. It distinguishes the Mafia from ordinary criminal gangs by the desire of the former for the exclusive right to commit criminal acts. The existence of the Mafia in particular locations at particular times is explained by the abdication of power or by the state’s unwitting creation of illegal markets. The Mafia’s involvement in the supply of illicit goods is due to its ability to prey on common criminals, while its involvement in the supply of legal goods is in order to police anti-competitive agreements amongst businessmen. Contrary to common belief, there may even be instances in which the Mafia promotes public welfare. More research is required to explain the continuing popularity of the Mafia and to identify the social costs that make it worthwhile tackling the Mafia.
Valuing the Future: Recent advances in social discounting
David Pearce, Ben Groom, Cameron Hepburn & Phoebe Koundouri, World Economics, June 2003
One of the most controversial areas of economics is the practice of discounting: attaching a lower weight to future costs and benefits than present costs and benefits. Discounting appears to offend notions of sustainable development and the interests of future generations. Recent advances in the theory of discounting hold out strong hope that the ‘tyranny of discounting’ can be avoided through the use of time varying discount rates (TVDRs). This paper reviews the recent rationales for TVDRs and applies the results to issues such as nuclear power and global warming control.
Cartels: Where is the case for criminal sanctions?
Jennifer Skilbeck, World Economics, June 2003
Imprisonment of directors and employees for taking part in cartel activity is becoming an increasingly common penalty in western jurisdictions. Generally it is the only competition law offence that attracts a criminal sanction either as a matter of law or practice. This article examines the evidence in support of the alleged “harm done” by cartels, which it finds insubstantial, and refers by contrast to the limited academic literature available which suggests that generally cartels may be relatively ineffective and probably less damaging than other competition offences such as monopoly pricing or exclusionary behaviour.