Environmental Economics

Daily Supply and Demand: Can companies pass higher fuel costs through to customers?

St. Joseph Equipment is a farm, construction and forestry equipment dealer that can have as many as 50 vehicles on the road at any time.

So when gas prices went up, the La Crosse, Wis., business, felt the pinch.

The company's fuel prices rose 30% over a year, forcing its owners to pass the additional costs to their customers.

"We have to be careful what our competition is doing," said co-owner Sherry Wuebben, adding, "we are certainly passing on as much as we can."

 

via money.cnn.com

Higher gas prices (and input) decreases the supply of final products and increases final product prices.  The degree to which the price increase will be passed through to (absorbed by?) customers depends on the elasticity of demand--that is, how responsive customers are to price changes.  The less responsive to price changes (the more inelastic is demand), the more the price increase will be passed through to consumers.  If there are readily available substitutes for the final product as seemes to be indicated by "We have to be careful what our competition is doing," demand will be more elastic and the degree to which the higher fuel costs can be passed through will be lessened.

If my posts seem abnormally gloomy lately, there's a reason

 

"We're expecting maybe 1 to 2 more inches by mid-week, so it's going to be close [to a record for April]," said Mike Gallagher, a meteorologist with the National Weather Service.

The forecast calls for heavy rain early in the week and at least a 50 percent chance of thunderstorms today, Tuesday and Wednesday, with the best chance coming Wednesday night.

Yesterday was the 17th day of rain this month.

via www.dispatch.com

I'm coaching a 9U travel baseball team.  Of the 6 scheduled games, we've played 2.  We have games scheduled Tuesday, Wednesday and Thursday.  It's supposed to rain all three days.

User fees

In addition to cutting university budgets (15.5% is the latest number), the state of NC is proposing to cut ferry budgets. Both proposals are efficient if the supplier is allowed to raise prices. The Ferries are being allowed:

If the proposed transportation budget is adopted by the full General Assembly and Gov. Bev Perdue:

* DOT will be required to collect tolls on its four free ferry routes, and to raise rates on the three ferries that charge tolls now, probably starting in early 2012. The budget requires DOT to increase ferry toll revenues by $5 million during fiscal year 2011-2012, which starts in July, and by $7.5 million the next year. DOT is conducting a traffic and revenue study now, to help determine how high the new ferry tolls will be.

DOT will have to raise rates on the routes tolled now – two across the Pamlico Sound, linking Ocracoke Island to the mainland at Swan Quarter and Cedar Island (now $15 per car), and one across the Cape Fear River between Southport and Fort Fisher ($5).

And for the first time, riders also will pay on routes that now are toll-free:
- Currituck to Knotts Island across the Currituck Sound.
- Bayview to Aurora across the Pamlico River
- Cherry Branch to Minnesott Beach across the Neuse River
- Hatteras to Ocracoke Island across Hatteras Inlet

via projects.newsobserver.com

I'm not sure why these ferry rides were ever free unless there are politically important reasons to subsidize visits to these destinations. I can think of phosphate mining in Aurora and tourism at Ocracoke but I'm stumped on the other two. Anyway, a free ride is both inefficient and inequitable. Free is inefficient because passengers will catch a ride as long as the benefit of a ride is positive while the additional costs of a ride are ignored. Free is inequitable because the cost is spread among millions of people who never catch a ride.  

Pricing a ferry ride is similar to the park pricing problem.

Note: NC universities are allowed to raise tuition but there is an annual cap on the amount, something like 6%.

The limitations of behavioral economics

It's Friday night and I'm getting ready for a night of clubbing. Just one more post ...

I just reviewed a nudge style paper, and it was cool, but the extensions don't seem to be there:

Or take a recent study in Sacramento, Calif., that tried to curb household electricity consumption. (Prime Minister Cameron has repeatedly cited this research.) While traditional energy bills inform customers only about their own consumption, these bills directly compared them with their neighbors. The hope was that homeowners would compete to use less energy. But usage fell only about 1.5%. That won't do much for energy independence or to fight climate change.

There are two problems with these reforms inspired by behavioral economics. The first is that the nudges of policy makers must compete against the nudges of the marketplace. A fast-food meal might contain a frightening number of calories, but it's also delicious. (Fat and sugar taste good.) In these cases, the nudge that appeals to our irresponsible side often wins.

The second problem is that such nudges are ill-equipped to solve thorny societal problems. Take energy consumption. As the behavioral economists George Loewenstein and Peter Ubel have pointed out, the most effective way to reduce energy consumption is to increase its cost through higher taxes on carbon. That solution, of course, isn't popular or trendy, which is why most politicians aren't interested. Nevertheless, such an old-fashioned fix, rooted in the assumptions of classical economics, would be far more effective than a redesigned electricity bill. Sometimes, we don't need a nudge. We need a shove.

via online.wsj.com

So, say we impose voluntary contribution type climate policies but we force firms to opt-out instead of allowing them to opt-in. Would we get more voluntary contributions?

"BP to Pay $1 Billion for Gulf Restoration"

I burned one of my freebies on this one, I should at least get a blog post out of it:

BP will provide $1 billion for early oil spill restoration efforts in the Gulf of Mexico in a voluntary agreement with the federal government and five states, company and government officials announced on Thursday.

The agreement, the largest of its kind in an oil pollution case, does not absolve BP of legal liability for the explosion and spill that occurred April 20, 2010, or from the costs of any additional economic and environmental damages. The company faces fines and penalties of as much as $21 billion as a result of the disaster, the worst offshore drilling accident in United States history. The company could face additional penalties under a Justice Department criminal and civil investigation.

The advance payment, to be divided among the states and the two lead federal agencies overseeing restoration efforts, will be used to rebuild coastal marshes, replenish damaged beaches, conserve ocean habitat and restore barrier islands.

The $1 billion does not represent the governments’ estimate of the ultimate environmental cost of the explosion and spill, which poured nearly five million barrels of oil into the gulf over 87 days last year. Federal and state officials are conducting a review known as a natural resource damage assessment to measure the injury to the gulf habitat and devise a plan for restoring it, a process that generally takes years. Any restoration efforts financed by the $1 billion will count toward the company’s final liability, officials said.

via www.nytimes.com

Freakonomics on hypothetical bias

And it's mostly bungled:

... Note especially the final line in the excerpt below. It’s a lovely, concise summary of the difference between declared and revealed preferences — and why, if you’re at all interested in describing how the world actually works, you should put all your energy into chasing the latter and ignoring the former.

...

Sales of Green Works have fallen to about $60 million a year, and those of other similar products from major brands like Arm & Hammer, Windex, Palmolive, Hefty and Scrubbing Bubbles are sputtering. “Every consumer says, ‘I want to help the environment, I’m looking for eco-friendly products,’ ” said David Donnan, a partner in the consumer products practice at the consulting firm A. T. Kearney. “But if it’s one or two pennies higher in price, they’re not going to buy it. There is a discrepancy between what people say and what they do.”

via www.freakonomics.com

Here is what I wrote when I read that line:

Differences between what people say and what they do is called hypothetical bias. The cool thing is there are ways to mitigate and even eliminate the bias so that data from what people say they will do can be used to make more accurate forecasts.

Yet, the offending line is partly correct. If all you care about is understanding how people behave under usual conditions then you want revealed preference data. But if you are interested in how people might behave under unusual conditions (e.g., when policy might change environmental quality) and there is no variation in usual conditions then you need stated preference data. And, I know Freakonomics is pushing field experiments as the only way to understand behavior under unusual conditions and that is where the "all your energy" stuff comes from but that is either narrow minded or plain ol' rent seeking. Open minded social scientists understand that a picture becomes more clear as the types of data and theories applied to a problem increases. Field experiment, stated preference, attitudinal, etc, data are complements, not substitutes. If stated preference data is cheaper than conducting field experiments then the rational researcher should choose stated preference data.

Here is another statement of that in my SuperFreakonomics review, motivated by the guys dumping on lab experiments.

Texas governor fails to recognize the difference between an efficient and an equitable distribution of water

Texas Governor Rick Perry called on Texans to pray for rain as cooler temperatures on Thursday helped firefighters contain wildfires that have charred more than 1.5 million acres across the state.

via www.reuters.com

... FLASH FLOOD WATCH REMAINS IN EFFECT THROUGH SATURDAY AFTERNOON...

THE FLASH FLOOD WATCH CONTINUES FOR

* PORTIONS OF INDIANA... KENTUCKY AND OHIO...

via www.weather.com

Daily demand and supply (Earth Day edition)

Are green cleaning products subject to the laws of demand and supply?

But America’s eco-consciousness, it turns out, is fickle. As recession gripped the country, the consumer’s love affair with green products, from recycled toilet paper to organic foods to hybrid cars, faded like a bad infatuation. While farmers’ markets and Prius sales are humming along now, household product makers like Clorox just can’t seem to persuade mainstream customers to buy green again.

Sales of Green Works have fallen to about $60 million a year, and those of other similar products from major brands like Arm & Hammer, Windex, Palmolive, Hefty and Scrubbing Bubbles are sputtering. “Every consumer says, ‘I want to help the environment, I’m looking for eco-friendly products,’ ” said David Donnan, a partner in the consumer products practice at the consulting firm A. T. Kearney. “But if it’s one or two pennies higher in price, they’re not going to buy it. There is a discrepancy between what people say and what they do.”...

Sales have gone south, too. In the 12 months through March, sales of Nature’s Source Scrubbing Bubbles all-purpose cleaner have dropped 71 percent, to $589,614, according to the SymphonyIRI Group, which tracks sales at mass-market United States stores, excluding Wal-Mart. Nature’s Source Windex dropped 35 percent, to $1.8 million. Nature’s Source Scrubbing Bubbles tub and tile cleaner dropped 61 percent, and Nature’s Source toilet bowl cleaner dropped 78 percent.

And that was as prices on all of those items were reduced.

via www.nytimes.com

The recession officially ended in June 2009. According to the BEA [PDF], per capita disposable personal income increased by about 2.7% from the fourth quarter of 2009 to the fourth quarter of 2010. As income went up, demand for green cleaning products fell ("prices on all of those items were reduced"), suggesting that these are inferior goods. But that makes little sense. Is there a lag between income changes and changes in demand for green cleaning products? We know there is a lag between employment growth and income growth so maybe the demand for green products is more closely correlated with employment and income expectations.

Update: See this post on some of Matt Kahn's research.

Another update, this one from the blog formerly known as Green, Inc:

Similarly, sales of Seventh Generation rebounded to “solid double-digit growth” in 2010, after a relatively meager 2 percent gain in 2009, said John Replogle, chief executive.

Up above I didn't make a clear distinction between name brand products with green flavor and actual green companies with green products. Sales of green products from green companies has been increasing. These are the true normal goods. The income elasticity of Seventh Generation products is positive.

Note: Differences between what people say and what they do is called hypothetical bias. The cool thing is there are ways to mitigate and even eliminate the bias so that data from what people say they will do can be used to make more accurate forecasts.

Gas Price Quote of the Day

Prodded by growing public frustration over sharply rising gasoline prices, the Justice Department on Thursday announced the formation of a team -- the "Oil and Gas Price Fraud Working Group -- tasked with the goal of ensuring consumers are not victims of price gouging.

...

While promising official vigilance, the attorney general acknowledged regional differences in gasoline prices, and said, "It is also clear that there are lawful reasons for increases in gas prices, given supply and demand."

via www.cnn.com

OK, maybe not everyone in the political arena is an idiot.

And do we really need to go down the price gouging road again?

Logical fallacy

From the blog formerly known as Green, Inc:

All those homeowners who have been installing residential solar panels over the last decade may find it was a more practical decision than they thought. The electricity generated may have cost more than that coming from the local power company (half of which, nationwide, comes from burning coal), but if they choose to sell their homes, the price premium they will get for the solar system should let them recoup much of their original capital investment.

That is the conclusion of three researchers at the Lawrence Berkeley National Laboratory, who looked at home sales — both homes with photovoltaic systems and homes without — in California over an eight-and-a-half-year period ending in mid-2009. The abstract of their study states, “the analysis finds strong evidence that California homes with PV systems have sold for a premium over comparable homes without PV systems.”

The premium ranged from $3.90 to $6.40 per watt of capacity, but tended most often to be about $5.50 per watt. This, the study said, “corresponds to a home sales price premium of approximately $17,000 for a relatively new 3,100-watt PV system (the average size of PV systems in the study).”

And the bottom line: “These average sales price premiums appear to be comparable to the investment that homeowners have made to install PV systems in California, which from 2001 through 2009 averaged approximately $5/watt.”

If the California findings can be extrapolated nationally ...

via green.blogs.nytimes.com