Environmental Economics

Env-Econ 101 Case Study: Inelastic Supply

We spend a lot of time talking about the elasticity of demand: That is, how consumers react to higher (or lower) prices.  Just as important, but less often mentioned--probably because it's harder to measure--is the elasticity of supply:  How does the amount producers produce react to higher prices?

First, some motivation:

Some kinds of fertilizer have nearly tripled in price in the last year, keeping farmers from buying all they need. That is one of many factors contributing to a rise in food prices that, according to the United Nations’ World Food Program, threatens to push tens of millions of poor people into malnutrition.

Housing values, water quality and economic renewal

From NOAA, May 2007:

"In almost any management area, understanding human behavior and how humans respond to the lake or ecosystem being managed is as important as understanding the ecosystem itself," says Elena Irwin, associate professor in the Agricultural, Environmental, and Development Economics Department at Ohio State University.  Irwin and fellow university researcher Tim Haab...found that both water clarity and quality correlated with increased property values, but "water clarity seems to have the biggest bang for the buck in terms of housing price," Irwin says..."If you increased the depth of water clarity by two meters, it was found to increase the average housing value by $4,300," she explains.

This is an increase of between four and five percent of the average home value in the study region. "The take-home message," Irwin says, "is that improved water clarity is a benefit. Lake managers should have the lake water quality in mind as they prioritize and make decisions and goals related to a healthy ecosystem."

From the Columbus Dispatch, today:

Cleveland's economy could get a boost of up to $3.7 billion if the federal government invests in a comprehensive effort to protect, restore and clean up the Great Lakes...The report released by the Brookings Institution on Wednesday concludes that Cleveland would enjoy a $2.1 billion to $3.7 billion economic lift, mainly in increased property values near Lake Erie.

 

316(b) update: the economic analysis

As a follow-up to my previous 316(b) post, here is a link to the EPA's benefit-cost analysis of 316(b) dated February 2002:

• http://www.epa.gov/waterscience/316b/phase2/econbenefits/

Chapter D finds that EPA's proposed rule resulted in highest net benefits. From what I understand about this issue, the proposed rule doesn't require "impingement and entrainment controls" at all power plants and "alternative less stringent requirements based on both costs and benefits are allowed." In other words, some little fishes will get sucked in to some machinery.

The net benefits of this option are estimated to be $452 million (2001 dollars). However, a more stringent option found net benefits to be only $3 million below. The $3 million difference is neither economically nor statistically significant.

At the time the courts shut down the benefit-cost analysis notion for the quoted phrase above, the power industry was in the process of conducting the necessary analysis to determine the best course of action.

316(b): Environmentalists vs benefit-cost analysis

Court sets Fall date for debate on water standards:

In accepting an appeal on the role of cost-benefit analysis in establishing standards under the Clean Water Act, the Supreme Court on Monday set the stage for what could be an important post-Election Day debate over environmental policy.

When are river clean-up and household democracies the same?

We try to run our house like a democracy--everyone gets a vote.  But because my wife and I are outnumbered 3-2, we always lose.  We do what we want anyway.  Kind of like this:

The people of Logan County rejected a request in the November election to pay for the clearing of debris and logjams from 27 miles of two waterways.

That vote didn't matter.

The cleanup involves five western Ohio counties in the Upper Great Miami River watershed, and Logan County was the only one where petitioners took it to the ballot. The other counties already had decided to move ahead, so the vote could not stop the $1 million project.

Voters, by and large, didn't understand that. Now, the bills are due and residents are angry.

But here's the even cooler part--depending on where you live, you get a different payment scheme.

I'm a new southerner

The winter issue of New Southerner (the mainstream magazine of alternative thinking) is now online and my interview, previewed here and here and here and here and here and here and here and here, shows up under the "Fuss" heading: Coal-to-gas is not a long-term solution, economist warns.

Why are economists always "warning" about something? What is the antonym of warning? Pleasantly surprises?

Coal-to-gas is not a long-term solution, economist pleasantly surprises

I'm a subject matter expert: Part 7

Here is part 7 of my 7 part series:

What can I do, as an individual, to help make the transition to a more sustainable economy?

That is a terrible question to ask an economist because my answer will seem so strange. I don’t think people should go out of their way to live greener, etc., unless this is what they enjoy doing.  I expect people to respond to economic incentives and right now we don’t have the right incentives in place to transition to a more sustainable economy. Higher prices for products that generate pollution during the production and consumption process are necessary to get consumers to change behavior in a big way. Instead of spending a bunch of time recycling and buying green-labeled paper towels, consumer-voters should do as much as possible to get a $1 per gallon increase in the gas tax.

I'm a subject matter expert: Part 6

Here is part 6 of my 7 part series:

How can businesses effectively deal with the impact of environmental legislation? For example, American automakers complain about the costs of manufacturing vehicles that get better mileage. Are their complaints legitimate?

The goal of business firms is to maximize profits. Environmental regulations raise the cost of production and that reduces profit. Business firms will attempt to pass the additional cost of regulation onto consumers in the form of higher prices, but consumers will respond by buying less of the product or postponing the purchase decision.  Are the complaints from business firms legitimate? Sure, businesses complain when the government will do something to reduce their profits. Should we, as consumer-voters, be concerned about their complaints? Not so much.  My view is that businesses should develop products that consumers want to purchase within a given regulatory environment.

I'm a subject matter expert: Part 5

Here is part 5 of my 7 part series:

But won't our economy come crashing down without coal and oil? Is a change of this magnitude possible without an economic crisis?

The transition from coal and oil to renewable energy sources, if nudged along with incremental economic policies, is likely to be fairly smooth in terms of macroeconomics. In other words, energy switching will not cause another Great Depression. The major changes resulting from energy switching will be within regions of the U.S. and sectors of the economy, which undergo major transitions periodically. For example, when I was in graduate school at UK during the late-1980s the IBM typewriter plant was a major employer. As computer technology took over the typewriter plant shut down and lots of people lost jobs. This is an economic crisis for the families of those who lost jobs but not the sort of crisis that we want to avoid. The transition from typewriters to computers significantly cut production costs for business firms and increased overall employment. The transition from oil and coal to renewable energy sources is not likely to increase the number of jobs in the U.S., despite wild claims by those who are currently pushing government policies to mandate renewable energy sources, but there would be positive economic effects such as the improved health and recreation from improved air and water quality and mitigation of climate change.

I'm a subject matter expert: Part 4

Here is part 4 of my 7 part series:

Are there viable alternatives to coal and oil?

Er, define viable. There are currently no viable alternatives to coal and oil without government subsidies. However, over time this is likely to change. If oil production begins to slow as predicted by some geologists its price will rise. If the United States pursues climate change regulation, such as the Leiberman-Warner cap-and-trade bill currently being debated in Congress, then the price of coal-generated electricity will rise. With further research and development subsidies and technology-forcing mandates, such as the requirement in the 2007 Energy Bill that 10% or so of electricity must be generated by wind and solar, the cost of renewable energy is likely to fall in the future. As the price of coal and oil rises and the production cost, and therefore price, of renewable energy rises falls, renewable energy sources will become more economically competitive alternatives to coal and oil.