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?

Just Drill, Baby

Republican presidential candidate Mitt Romney will lay out policies on Thursday aimed at achieving North American energy independence by 2020 by pursuing a sharp increase in production of oil and natural gas on federal lands and off the U.S. coast.

I know I'm dense, but can someone please explain to me why a market-favoring conservative would want complete North American energy independence?  This is like saying I want food independence for my neighborhood.  Sure, it reduces reliance on food from those other evil suburbs around Columbus, but it also makes my food more expensive, reduces my choices--where am I going to get my unsustainable seafood if I can't import from the Chesapeake Bay region--and makes me generally worse off.

Romney is to predict that a full-blown energy plan will create 3 million jobs in energy sectors and other areas, part of an ambitious effort to create 12 million jobs during a Romney presidency.

"I want every American who wants a good job to be able to have one," Romney told Republicans at a fund-raising event in Little Rock on Wednesday.

Aha! It's the old jobs thing.  Last time I checked, job creation is a cost of a policy, not a benefit.

via www.chicagotribune.com

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.

The cost of a statistical life is...

We often to talking about the value of a statistical life (John, why don't we have a primer on VSL in Env-Econ 101?), but less frequently talk about the cost of saving a statistical life.  So here you go:

A U.S. aid program aimed at helping foreign countries battle the AIDS epidemic saved 740,000 lives from 2004-2008, according to a study published Tuesday.

The U.S. President's Emergency Plan for AIDS Relief, or PEPFAR, was started by former president George W. Bush in 2003 with a five-year, $15 billion investment in global AIDS in 15 countries.

The analysis by scientists at Stanford University School of Medicine in California examined health and survival information for 1.5 million adults in 27 African countries.

The analysis found that in nine of the African countries targeted by the program, 740,000 lives were saved during a four-year span compared to countries were PEPFAR was not implemented.

"PEPFAR's success with HIV may be considered the clearest demonstration of aid's effectiveness in recent years," said the study in the Journal of the American Medical Association.

via www.mnn.com

Quick math:

$15,000,000,000 / 740,0000 lives saved = $20,270.27 per life saved.

 

If they are more than willing and able, why don't they?

The toxic blue-green algae that will spread across the western basin of Lake Erie this summer likely won’t be as dense as last year’s record bloom, experts say. However, the researchers who track Erie’s water woes say the algae could appear a month early this year, tainting water by June instead of July.

...

Blue-green algae, or cyanobacteria, are common in most lakes but grow thick in sun-warmed water by feeding on phosphorus from manure, fertilizers and sewage that storms wash into streams and ultimately lakes. The algae can produce as many as four toxins that can sicken people and kill pets.

...

State officials are beginning to focus on farms to combat the algae. For example, farmers who tend crops near Grand Lake St. Marys face mandatory limits on how much manure they can spread on fields. The state also sprayed the central portion of the lake with alum, a compound that starves algae.

...

As for Lake Erie and the much larger, 4 million-acre Maumee River drainage area, the state is pushing a voluntary program that encourages farmers to limit the use of chemical fertilizers and to reduce runoff.

...

Some clean-water advocates say they doubt the state’s Lake Erie strategy will work without mandatory limits.

“Usually, it takes more than volunteerism to make that happen,” said Sandy Bihn, the director of the Lake Erie Waterkeeper group.

Larry Antosch, the environmental policy director for the Ohio Farm Bureau Federation, said no mandate is needed.

“I think the farmers in the watershed would be more than willing and able,” he said.

via www.dispatch.com

Raise your hand if you are willing to impose cost on yourself for my sake.

Aguanomics: Monday funnies

David Zetland:

XKCD captures the story of my life (aka, if I had a nickel...)

via www.aguanomics.com

That is so weird, I was thinking the exact same thing today.

Market Forces >> Good riddance CCX

Yes, I'm afraid it is a hostage pic, John. Thanks for the plug. This just in over at Market Forces:

The Chicago Climate Exchange, one of the first voluntary cap-and-trade programs, is shutting down next month. That's bad news for the planet, isn't it? Just take a look at today's Wall Street Journal editorial page for an apparent confirmation. There the news is being celebrated as "cap and retreat." Check.

That should indeed be confirmation enough. Sadly, what's good for theJournal tends to be bad for the planet. Here that may not hold, although it's not for the reasons the Journal thinks.

One among many

The full editorial is behind a firewall. That's just as well. The rest is as wrong as the beginning. Let's start with the only direct quote. The Journal opinionators say the CCX advertised itself as "North America's only cap and trade system for greenhouse gasses." In fact, CCX's own webpage says it's "North America's only cap and trade system for all six greenhouse gases." That makes all the difference.

Carbon dioxide, the main greenhouse gas, is or will be covered in at least 15 states. RGGI covers 13 Northeastern states with its carbon cap, and Californians just reaffirmed with a clear vote of 60 to 40 to put in place theirs (which also covers all six greenhouse gases). New Mexico has announced similar plans.

Volunteerism won't do

There's also a much larger point here. The CCX was voluntary. Companies volunteered to sign up. It doesn't take a Ph.D. in economics to realize that the only companies who sign up for reasons other than marketing purposes are the ones that have allowances to sell. Those that need to buy them, stay as far away as possible.

No market can operate under these conditions. If anything, it's surprising the market held up as long as it did—no doubt due to companies' willingness to write off their participation as a marketing expense. Why else would the price for a ton of emissions ever be much above zero?

Thanks for the memories

CCX did provide some valuable lessons for participants. Chief among them, how to implement such a trading system internally, how to minimize emissions and make money, and whether and how it would be different from SO2 trading, something many CCX participants did successfully for over a decade.

But CCX was never meant to be anything other than a precursor for a U.S.-wide system.

The same, of course, goes for most state-wide initiatives. New Mexico's plans will put the state ahead of most others in the U.S., but Santa Fe alone will not prevent China from pulling farther ahead of the U.S. in generating sustainable jobs, or decrease the billions we send to the Middle East every year.

 

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.