Environmental Economics

Using the Tragedy of the Commons to the benefit of society

In a different context (Asian Carp), I have advocated for taking advantage of the Tragedy of the Commons to eliminate invasive species.  The principle is simple:  Given the proper incentives and open access, anglers/hunters/gatherers will overfish/overhunt/strip a common property resource into non-existence.  Looks like the State of Florida may be figuring this out:

Nearly 800 people signed up for the month-long “Python Challenge” that started Saturday afternoon. The vast majority — 749 — are members of the general public who lack the permits usually required to harvest pythons on public lands.

“We feel like anybody can get out in the Everglades and figure out how to try and find these things,” said Nick Wiley, executive director of the Florida Fish and Wildlife Conservation Commission. “It’s very safe, getting out in the Everglades. People do it all the time.”

Twenty-eight python permit holders also joined the hunt at several locations in the Everglades. The state is offering cash prizes to whoever brings in the longest python and whoever bags the most pythons by the time the competition ends at midnight Feb. 10.

via www.washingtonpost.com

This is awesome.  Using the power of incentives and the willingness to the many to take advantage of what would regularly be viewed as a market failure may in fact solve a different inefficient allocation of ecological resources.  An odd case of the theory of second best?

What am I missing in the whole health care mandate debate?

I'm a simple man.  And by simple I mean I seek the simplest solution to complex problems.  At times that means I miss the nuance and detail that is really at the heart of many complex problems, but that doesn't stop me from offering simple analysis.

So here's my economist take on the national health insurance, health care mandate, Obamacare, socialism...whatever...debate....

It's all about the risk pooling. 

Insurance markets work when non-systemic risks are pooled across a population.  Let's use car insurance as an example.  For the most part, the probability of me getting in an accident is independent of the probability of you getting in an accident unless you happen to be driving next to me at 75 mph while I eat a Whopper with one hand and check my Facebook status with the other.  By pooling the independent risks, insurance companies can offer relatively low priced insurance against one or the other of us getting in an accident.  So states require (mandate) that in order to drive, you must have insurance, thereby reducing the external costs of my bad habits on you.  If you don't have insurance, you aren't supposed to drive and if you are caught driving without insurance you face stiff penalties.  The result: Users of the product that causes the risk (driving) have insurance--most of the time.  You can choose not to buy insurance and not drive.

So what about healthcare?  Shouldn't it work the same way?  In theory, yes.  Users of health care could be required to buy insurance against catastrophic outcomes.  By pooling the risks across large populations, the individual cost of health care will be lower than the expected cost to you if you bore the full risk of your own health.  Risk pooling reduces costs and protects againsts catastrophic outcomes.  And, just as with car insurance, if you choose not to buy health insurance, you lose the right to consume healthca...oh, wait. 

Human decency has to be factored in.

In the absence of health insurance, individuals can still not be denied health care (at least emergency care, which is expensive).  So what happens when an individual chooses to forego health insurance?  The cost of the uninsured care, guaranteed by human decency, gets rolled into the premium of those already insured.  In other words, health care costs rise.  Further, if individuals know that health care will be provided regardless of the willingness or ability to pay or willingness or ability to be insured, there is a perverse incentive to underconsume health insurance and further reduce the size of the risk pool in the insurance market (we call that moral hazard). 

So what are the possible solutions?

1. Rely on people to 'do the right thing.'  But each person's definition of right might be different.  While I think it is right to participate in the insurance market, others might think it is right to take advantage of the rules of the game. And as we know, economic incentives are powerful things.
2. Have the government act as the insurer of last resort.  This is the model we currently have.  The government offers subsidized insurance for those who are unable to afford health insurance (medicare/medicaid) and then acts as the insurer of last resort for the unisured.  The result: the cost of providing insurance to the uninsured and underinsured are passed on to the insured through higher taxes and higher insurance premia.
3. Mandate that everyone buy health insurance and play by the same rules, and penalize those who opt out.  The results 'should' be more efficiently priced insurance premia for those already insured, reduce costs of providing health care to those unable to afford insurance, and a less morally hazardous (I made that up) risk pool.

So what am I missing?

Let me have it.

Looking for a Natural Resource/Water Economist/Modeler

Sign #1,986 the economy might be on the upswing:  We're hiring.

The Ohio State University-Assistant Professor: The Department of Agricultural, Environmental, and Development Economics (AEDE) is searching for a tenure-track assistant professor. The position is funded jointly with the university initiative in Climate, Water, and Carbon (CWC), and is one of several such positions in various departments. We seek outstanding applicants with high potential for achieving scholarly excellence in natural resource economics and modeling, with primary interests in regional and/or global water resource issues. Complementary interests in climate change, land use, and energy issues would be helpful.  Expectations include teaching and research to serve AEDE’s mission, and collaboration with colleagues in the CWC initiative. Faculty members are expected to achieve national scholarly recognition, and to contribute to outreach and public engagement.  The appointee will have an academic year (9 month) appointment with competitive salary and benefits package. 

Was California's Proposition #2 a case of 'save me from myself'?

We had a departmental seminar yesterday by Professor Dan Sumner of the University of California at Davis and former Assistant Secretary for Economics at the U.S. Department of Agriculture.  He spoke on Proposition #2 in California: the animal welfare proposition*.  In particular, the passage of the proposition requires egg laying hens be housed in cages which allow them to stretch their wings for a majority of the day.  In his discussion Professor Sumner raised an interesting behavioral anomaly (in a scratch-your-head kind of way). Before proposition #2, cage-free eggs were already available in supermarkets alongside traditional cage eggs.  Yet, cage-free eggs accounted for only a tiny portion of total egg sales in California.  Proposition #2 passed with roughly 63% of the vote, thereby banning cage-egg production in California.  If Californians really cared about the welfare of hens, wouldn't they have bought cage-free eggs without the regulation?

Why would 63% of Californians vote to impose a restriction on themselves (and others) which they have failed to reveal when free to make the choice on their own? 

*Here is Wikipedia's summary of Sumner's work on Prop 2: "In July 2008 the University of California, Davis conducted a study through their University of California Agricultural Issues Center (AIC). The study concluded that "the best evidence from a variety of sources suggests that (non-organic) non-cage systems incur costs of production that are at least 20 percent higher than the common cage housing systems". This is due to higher feed costs, higher hen laying mortality, higher direct housing costs, and higher labor costs. The study also estimated that almost the entire California egg industry would relocate to other states during the 5-year adjustment period. The study does not analyze implications for animal welfare. By demonstrating that most egg producers would leave the state, the report estimates that the initiative would not affect how eggs are produced, only where eggs are produced."

We can never have too many explanations of "The Basic Economics of Carbon Permits Versus Carbon Taxes"

The Basic Economics of Carbon Permits Versus Carbon Taxes

via econospeak.blogspot.com

Some interesting takes on social norms in the second half.

Getting farmers on board with Cap and Trade

First a quote:

"Farmers were reluctant when fertilizer was first proposed ... or seed technology ... but they embraced the technology, and the result is agriculture production that is the envy of the world," [U.S. Secretary of Agriculture Tom] Vilsack said. "I understand the concern in farm country, but if [Cap and Trade] is done properly, it is going to ultimately, in the long term, the short term and the medium term, it is going to be a benefit to farmers."

The issues are simple.  Cap and Trade doesn't cover agriculture, but farmers are worried that Cap and Trade in the energy sectors will result in higher energy prices, higher fertilizer prices and ultimately lower profits.  The USDA agrees:

"Ask yourself some questions about climate change and then answer them."

From an Ask the Expert column I wrote for onCampus: The Ohio State University faculty staff information hub (aka on-line newsletter):

What are the basics of the recent energy policy proposals in Congress?
There are two energy bills moving through Congress right now: The American Clean Energy and Security Act in the House of Representatives (*cosponsored by Waxman-Markey) and the Clean Energy Jobs and American Power Act in the Senate (**sponsored by Boxer-Kerry). The meat of both energy policy proposals is a Cap and Trade program for carbon dioxide emissions — a principal greenhouse gas to which climate change is attributed — in the US. Cap and Trade is a program for capping total carbon dioxide emission and creating a market for carbon dioxide (CO2) emissions among potential polluters. Regulators decide the total amount of CO2 society desires (the Cap) and then allocates permits or allowances to emitters totaling that amount. These allowances are fully marketable commodities (the Trade)***.

Read on to find out the potential economic impacts of Cap and Trade and why Ohio (and you) should care...

"A Trove of Externalities"

From the inbox:

I'm just skimming through the morning research feeds, and saw something that might interest you if you didn't see it already. The National Research Council just completed its report on externalities of energy production and use:

The web version is free, but for some reason they charge a hefty fee to download the PDF

From the conclusions to the summary (Hidden Costs of Energy: Unpriced Consequences of Energy Production and Use):

In aggregate, the damage estimates presented in this report for various external effects are substantial.  Just the damages from external effects the committee was able to quantify add up to more than $120 billion for the year 2005. Although large uncertainties are associated with the committee's estimates, there is little doubt that this aggregate total substantially underestimates the damages, because it does not include many other kinds of damages that could not be quantified for reasons contained in the report, such as damages related to some pollutants, climate change, ecosystems, infrastructure and security. 

Yep, you read that run-on sentence correctly--costs of climate change are not included and they still get a pretty big number.  And...

But even if complete, our various damage estimates would not automatically offer a guide to policy.  From the perspective of economic efficiency, theory suggests that damages should not be reduced to zero but only to the point where the cost of reducing another ton of emissions equals the marginal damages avoided.  That is, the degree to which a burden should reduced depends on its current level and the cost of lowering it:the solution cannot be determined from the amount of damage alone. 

In other words--clean-up is costly.  We have to weigh those costs against the benefits of clean-up (reduced damages).  Policy shouldn't be determined by the shock value of big numbers.

HatTip: Alan Dove

Anyone know of an environmental economist who has experience valuing sports arenas and has opinions on job creation being used as an argument for government policy?

From NBC Los Angeles:

Gov. Arnold Schwarzenegger said he's going to sign an environmental exemption bill that will clear the way for construction of the LA Stadium. 

State senators approved the bill, which would nullify a lawsuit over the project's environmental impact report by citizens in neighboring Walnut. Schwarzenegger is expected to sign the bill in support of the stadium because its impact on the local economy and its ability to generate jobs.

Sounds like a call for a very famous environmental/sports economist...

In the interest of yesterday's Nobel announcement...

Thanks to the Nobel committee for their good timing.  A PhD student of mine, Matt Interis* (now at Mississippi State University) wrote his dissertation on social norms and their role in the management (or mismanagement) of public goods.  He currently has two papers under review dealing with questions surrounding the governance of public goods and the role norms play in the design of efficient public goods policy.  The abstracts for both papers are below.  If you have an interest in reading either paper, let me know...

*Apparently Mississippi State has a dress code.  I'm pretty sure Matt had to borrow a tie for that picture.