Environmental Economics

Price increases, income decreases and the demand for inferior goods

Public transportation is an inferior good.  I don't mean in the 'worse quality' sense, but in the economic sense.  As incomes increase we would expect the demand for public transportation to decrease (shift to the left), and as incomes decrease, as they would during say a hypothetical recession, we would expect the demand for public transportation to increase.  This means that if the price of public transpotation remains constant (relative to other prices), we would expect an increase in public tranport ridership tough macroeconomic times. 

But what happens if, at the same time incomes are decreasing, the price of substitute transportation is decreasing?  According to the simple supply and demand model we hold so dear, the demand for public transportation will decrease as the price of gas decreases.  So which wins?  Does decreasing income trump the increasing relative price of public transportation?  That's a question we can only answer in hindsight (it depends), but some numbers are starting to roll in:

Through Sunday, ridership this year is 14.1 million passenger trips, up 10.2 percent from the same period last year.

But gas prices have fallen recently and weekly ridership dropped to 315,419 last week after peaking for the year at 357,860 a month ago.

Still, [Central Ohio Transit Authority] officials were encouraged.

"Nobody believes at $1.70 a gallon that some people aren't going to drive," Vice President Marty Stutz said. "But if it's an up number, I'm still very happy."

I'll be at the NCEE later today

November 20, 2008 (2:00 to 3:30pm), Room 4144, EPA West

Convergent Validity of Revealed and Stated Recreation Behavior with Quality Change: A Comparison of Multiple and Single Site Demands
John Whitehead (Appalachian State University)
Seminar Series: Environmental Economics

The speaker and his co-authors consider the convergent validity of several demand models using beach recreation data. Two models employ multiple site data, the linked site-selection and trip frequency demand model and the Kuhn-Tucker demand system model. They exploit the effect of the existing variation in beach width on trip choices to analyze a 100 foot increase in beach width. They compare these models to a single site model where we jointly estimate revealed and stated preference data focusing on a hypothetical scenario that directly considers a 100 foot increase in beach width. In each case they develop estimates of the increased number of beach trips with an increase in beach width and the value of beach width. The trip estimates from each of the three models are similar and convergent valid. The convergent validity statistical test on willingness to pay suggests that the estimates converge between these models. However, the difference in magnitude is large.

The paper on which this presentation is based will likely be updated before November 20[*], and the link will then automatically update:
http://econpapers.repec.org/paper/aplwpaper/07-17.htm

Source: NCEE Upcoming Events

*Note: the paper has not been adequately updated ... but we're working on it!

Business success is not an entitlement

Is anyone buying this?

The credit crisis that is affecting us all is wounding the U.S. auto industry in many different ways. Carmakers can’t get loans to restructure and to produce new advanced technology vehicles. Suppliers and dealers can’t get loans for routine business, and customers can’t get loans for new cars. [emphasis added]

Were they trying to get loans to restructure and innovate before?  Why now?  Is it just an odd coincidence that just when the governmment decides to hand out tax money to save businesses that the Big 3 suddenly want to innovate? 

On that note, have you seen Ford's vision of innovation?

Asked if he could guarantee that Ford would make the necessary adaptations to justify large sums of taxpayer assistance, Mulally said, "Absolutely, and I don't think it;'s a promise. I think it's a promise we're already delivering upon today."'

He said that Ford's strategic plan is to "have a full portfolio of small, medium and larger vehicles that our customers want. ... So we want to be there with a full portfolio."

Mulally said the company is working on electric-vehicle technology and that "our No. 1 prioreity [sic] is to improve the internal combustion engine."

Really?  With that sort of forward thinking, I don't see any reason not to bail them out [sarc].

Three quibbles with DOT's VSL

Here is the benefit-cost analysis exam study question that I wrote in response to DOT's value of statistical life estimate of $5.8 million:

Suppose you are reviewing two meta-analyses of the VSL for use in a benefit-cost anlaysis: Mrozek and Taylor (2001) use the hedonic (labor market) pricing method and find VSL = $2.6 million across 52 studies while Blomquist (2003) uses the averting behavior method and finds that VSL = $4.3 million across 34 studies. ... (b) Using the number of studies as weights, find the weighted average VSL. ...

The DOT uses 5 VSL meta-analyses and takes the mean across the 5 as the best estimate:

• Mrozek and Taylor (2001) -- $2.6 million
• Miller (2000) -- $5.2 million
• Viscusi (2004) -- $6.1 million
• Kochi et al. (2003) -- $6.6 million
• Viscusi and Aldy (2003) -- $8.5 million

The mean of these five values is $5.8 million, which we believe would appropriately reflect the conclusions of recent studies as well as the practice of other agencies.

I have three quibbles (i.e., post title):

1. Why isn't my dissertation advisor's literature review of VSL averting behavior studies included? Because DOT only wanted meta-analyses included?
2. There seems to be some overlap in the meta-analyses (including Viscusi and Viscusi and Aldy essentially double counts a number of studies).
3. Related to #2, shouldn't the weights attached to each study be based on the number of papers included in the analyses? I would use weights in a way that I'm asking my students to do it in their exam tomorrow.

CEOs for a higher gas tax

From the WSJ's Real Time Economics blog:

Members of the Journal’s CEO Council tasked with discussing priorities for the U.S. economy and finance offered several fairly uncontroversial suggestions to the incoming administration: implement a fiscal stimulus plan without worsening the long-term deficit, appoint a panel to address financial regulation, create an economic vision.

Tucked away in the proposal, in the category of long-term tax policy, was this political grenade: “consider raising taxes on gasoline.”

...

Raising the gas tax has been seen for years as one solution to discourage gasoline consumption, a move that could benefit the nation through lower imports, a cleaner environment and a stronger push toward fuel efficiency. Some economists have even suggested offering rebates to lower-income consumers so they’re not disproportionately hit by the tax hike.

Mr. Bewkes said the group’s members, who focused on the U.S. economy and finance, generally agreed that carbon taxes are likely to be more effective than a cap-and-trade approach to dealing with carbon emissions.

Where I'll be tonight at 9 pm

It's no fun living in North Carolina when UK plays UNC in a down [i.e., every] year:

[Tonight] North Carolina hosts Kentucky in a meeting of two of college basketball's traditional powerhouses, although only one qualifies for that distinction this season -- or recently.

... It has been 10 years, and counting, since Kentucky's last NCAA title. While they've gone longer without a championship, the Wildcats have never gone a decade without a Final Four appearance.

And in the interim? ... The Tar Heels have won one championship and been to three Final Fours.

... Kentucky couldn't have gotten off to a worse start, opening its season with a 111-103 home loss to Virginia Military on Friday. Kentucky fans expected more when they brought Billy Gillespie in from Texas A&M to replace Smith, but then again they always do.

... Dynasties rise and dynasties fall. No one doubts that th[is] dynast[y] will rise again. For the moment, they remain in the shadow of their own history.

Me? I've been having my doubts for some time now.

Duh

North Carolina energy prices are rising because energy prices are rising:

Progress Energy will be allowed to recover some of its higher fuel costs by raising prices on the average household bill by more than 10 percent.

The electricity price will increase in December. Rates would likely increase again in December 2009. The state Utilities Commission approved the 10.2 percent increase Friday.

The Raleigh-based electric company agreed in September to spread the increase over three years after negotiating with the commission's Public Staff, which represents consumers and industrial customers.

In June, Progress Energy asked to raise rates by 16.2 percent to about $113 a month for an average household using 1,000 kilowatt hours of electricity. The Utilities Commission instead approved a rate that will increase bills from almost $97 to nearly $107.

Obama rears his head at climate summit

President-elect Obama shows his support for Governor Schwarzenegger's bi-partisan governors climate summit:

Among the notable quotables:

My presidency will mark a new chapter in America’s leadership on climate change that will strengthen our security and create millions of new jobs in the process.

That will start with a federal cap and trade system. We will establish strong annual targets that set us on a course to reduce emissions to their 1990 levels by 2020 and reduce them an additional 80% by 2050.

To quote James Surowiecki, "remind me again why this guy has to wait two months to become President."

I paid $1.89/gal for gas this weekend

Gas prices in North Carolina are dropping:

Gasoline prices are dropping at a rate the state has never experienced before: a $2 decline in two months for a gallon of regular.

On Sept. 15, the N.C. average for regular peaked at $4.08 a gallon. Sunday, it was $2.07. And it likely will be less today.

“After all the bad economic news we've had, isn't that a wonderful sound?” AAA Carolinas spokesman Tom Crosby said Sunday. “This is really a precipitous drop. And there's no reason why it shouldn't continue.”

Some stations in Charlotte were selling regular for $1.99 a gallon, some less. In South Carolina, which boasts some of the nation's cheapest gas, it wasn't hard to find stations in Rock Hill selling regular for $1.81 and premium for $2.02.

In October, Americans drove 11 percent less than in October 2007. Crude oil hit a 20-month low last week, dragging down gas prices.

Note the causality: the demand for gas is falling as income is falling. The lower demand drives prices lower. Don't confuse the principle of demand ... lower prices and less driving would suggest demand curves slope upwards.

Other than that silly Keynesian economics stuff about raising taxes during a recession, 2009 might not be a bad year to impose a higher federal gas tax ... say +$1/gal? Everyone is familiar with paying higher prices, many people have fully adjusted, etc.

A horsey recession indicator

From Keeneland horse sales:

The Keeneland November Breeding Stock Sale finished this afternoon with sharp declines across the board.

The 3,019 horses sold represented a 10.7 percent drop from last year's sale, but other  measures were substantially worse.

The gross of $185.6 million dropped 45.6 percent from a year ago. The average of $61,462 was down 39 percent and the median of $20,000 declined 42.9 percent.

Source: C-J.