Environmental Economics

"A Reading for the Pigou Club"

Mankiw:

From The New Yorker.  One disappointing quotation:

"We would never propose a carbon tax, and have no intention of proposing one," [White House spokesman Jay] Carney told reporters.

via gregmankiw.blogspot.com

Basking in reflected glory

A couple of my co-authors in Time magazine (Will hurricane Sandy drive down coastal home prices): 

... Anyone shopping for a home should consult National Flood Insurance Program maps to understand what the estimated risk of flooding is for their property, protect themselves with flood insurance, and possibly even decide against buying a home at all if it’s located in a flood-prone area. Unfortunately, however, humans don’t always act rationally — and according to a forthcoming paper by economists Okmyung Bin and Craig E. Landry, they also tend to have extremely short memories when it comes to natural disasters.

Bin and Landry studied real estate prices in Pitt County, North Carolina before and in the aftermath of Hurricanes Fran and Floyd in 1996 and 1999, respectively. According to their research, prior to Hurricane Fran there was no differential in home prices between those in flood-prone areas and those outside — as there hadn’t been a significant flooding event in Pitt County since the 1950s. Immediately after Hurricane Fran, however, home prices inside the flood zones predictably fell in price, selling for 5% less on average than homes outside flood zones. After the particularly ruinous Hurricane Floyd, this price difference became an even-more-extreme 8%.

But what surprised Bin and Landry was that the differential evaporated completely by 2005, a mere six years after Floyd devastated much of Pitt County. In other words, it doesn’t take long for prospective home buyers to forget the dangers of living in flood-prone areas. According to Landry, “We were really surprised by this result. We expected to see a decay, but not to see it disappear completely.”

To explain their confounding results, Bin and Landry turned to a concept in behavioral economics called the “availability heuristic.” Basically, what this theory argues is that human beings are less able to judge the probability of an event occurring which they have not recently experienced themselves. A person who hasn’t lived through a flood will downplay the probability of his house getting flooded, and the same goes for someone who hasn’t experienced a flood very recently.

Society would be better off if we had endless access to below value goods and services

Wouldn't it be great if we were all on the southeast portion of our demand curves? Therefore, creating a market for wildlife is not fair:

It especially bothers him — and other hunters — that those with means can buy public licenses through private outlets, paying thousands of dollars to move to the head of the line. More than any state in the West, Utah has expanded hunting opportunities for the well-to-do and has begun to diminish them for those seeking permits directly from the state.

State wildlife managers recognize this, but they say their motives are grounded in animal — if not social — welfare. Utah has embraced an increasingly free-market model as a way to raise more money for conservation.

Here is how it works: the state has enticed ranchers with an allotment of vouchers for lucrative hunting licenses that they can sell for thousands of dollars as part of a private hunt on their land. Many used to complain bitterly to state officials about elk and other game eating forage meant for their cattle.

The vouchers for hunting licenses, handed out for more than 10 years now, give them ample economic incentive to nurture big game on their land and not get frustrated with ranching and sell their land to developers.

Another program, smaller in scope but much more controversial, allows private nonprofit groups to auction off a few hundred licenses to the highest bidder or run their own drawing in exchange for supporting conservation projects. State wildlife managers say that with species like elk, the system is working to produce more game for all. ...

This new approach, some say, violates a century-old American ethic, articulated by Theodore Roosevelt, himself an avid hunter, that wildlife belongs to all, and not just to those with land or wealth.

via www.nytimes.com

But, it is efficient. It sounds like wildlife managers in Utah have moved towards allocating scare resources to their highest valued uses with the private landowner program. It is less clear for the "more controversial" program since those revenues are being directed to things that might not be considered "conservation" by some. 

My opinion is if something is not fair it is better to address fairness directly, through reallocations in the distribution of income, than my screwing up the more efficient allocation of resources in individual sectors of the economy. That way, society can directly address the benefits and costs of inequity and focus on the efficiency of projects and policies. 

Happy Monday