Environmental Economics

Another fracking fight

Many Texans have long held the oil and gas industry as dear to their hearts as a prairie range full of feeding cattle. Now suddenly that love is being tested here in a local election, where a grass-roots campaign against gas producers has pushed the industry into a corner.

The battle is over a proposed city ban on hydraulic fracturing — the technique of blasting shale rock with water, sand and chemicals to dislodge oil and gas, often called fracking — in a referendum on Nov. 4. No city in Texas has ever come close to passing such a measure.

But in this college town of 130,000 outside Dallas, the producers find themselves in an uphill battle against a diverse band of doorbell ringers and lawn-sign distributors who are working day and night.

The debate in Denton echoes themes heard in communities around the country, pitting economic arguments like job creation and school funding against quality-of-life and environmental concerns like noise, traffic, fumes and fears that fracking might endanger local water supplies.

via www.nytimes.com

Just keeping you in the loop people.

"A Challenge to Three Widely Held Ideas in Environmental Valuation"

Matt Interis:

Environmental valuation is the branch of environmental economics in which researchers estimate the economic value of environmental goods and services. Environmental valuation has been practiced for decades. However, there are some ideas in the field of environmental valuation held by many environmental economists and nonenvironmental economists that appear to be outdated. This article discusses three such ideas: 1) that it is better to estimate willingness-to-pay values than willingness-to-accept values; 2) that stated preference valuation methods are questionable because they are based on hypothetical choices rather than real choices; and 3) that it is better to use a repeated-choice question format than a single choice format in choice experiments. We discuss the origins of each idea and why the idea became prevalent in the first place.We then review recent literature, which casts doubt on the idea. We conclude with a reminder for researchers—in environmental economics and in other economic fields—to periodically reassess ideas they currently hold in light of recent research developments and in light of the context in which they are used.

via ageconsearch.umn.edu

I agree with each of the three points.

Addendum:

Adam in the comments says: "You agree that the three points are valid critisms, or you agree that they are outdated?" So, here is some explanation:

1. If there are reasons why WTA is theoretically preferred, and WTP and WTA are expected to differ, then one should attempt to estimate WTA for the loss (in addition to WTP to avoid the loss)
2. Hypothetical choices contain too much information, some of it unobtainable with revealed preference data, to dismiss it out of hand.
3. I'm being a bit disingenuous with my agreement on this one. I don't think the implications of repeated questions in choice experiments has been explored enough to blindly accept the practice. In contrast, repeated questions in CVM studies are frowned upon (sometimes for good reason). I just had a revise and resubmit rejected at JEEM (grrr) and repeated questioning was one of the reasons given, even though the variation across questions was similar to choice experiments (i.e., the bid amount didn't change). My hunch is that many choice experiment studies won't pass a scope test if only the first question is used, which is the standard upon which CVM studies are judged. That said, I think it would be a shame if we go to all the trouble to develop a hypothetical choice scenario, ask one question and move on to the next section of the survey. 

Ergo, no discussants

The SEA meetings are just around the corner. I just sent this email:

AERE/SEA session participants,

By now you have probably received one or more emails from the SEA explaining your duties. I apologize that I have not made this clear earlier but the AERE sessions at the SEA meetings run without discussants. We usually have a pretty good discussion in the Q&A session after each paper. Over the years I've only received positive feedback from paper presenters and audience members. Authors may wish to circulate their papers ahead of time but even this is not required.

Several years ago, at some point during the AERE/SEA cocktail hour, I had a discussion with several leading* economists where we were complaining about the practice of paper discussants at regional economics conferences. Here are the key points:

1. When paper discussants are well-matched with a paper and are motivated they give great feedback. This is wonderful for the presenter and the audience.
2. Paper discussants are often ill-matched to the paper, unmotivated or receive the paper with insufficient time to prepare (I've received a paper right before a session and the presenter "looked forward to my comments").
3. When ill-matched they run through the regression user's handbook, suggesting tests for multicollinearity and heteroskedasticity. Sometimes the discussant mutters gibberish. 
4. Being assigned as a discussant is considered a burden. The same people would much rather attend a session and spontaneously ask a question. 
5. Audience members are often frustrated because they don't have time for Q&A. 

So, we dropped discussants at the AERE sessions several years ago. The experiment was successful in that crowd-sourcing the discussant time worked well. Of course, not having discussants requires attendance at sessions by an engaged audience. Lack of attendance is not a problem at the AERE sessions where 15-20 participants is the norm. Engagement is not a problem either. 

*Note: I'm using the term "leading" loosely. 

Picture of the day: Turnbull WTP with our A-P Sounds data in R

I just previewed Stated Preference Methods Using R by Aizaki, Nakatani and Sato.The A-P Sounds data that Tim, Ju-Chin Huang and myself used to get to know each other better is provided with the book and used as an example. Here is the double bounded Turnbull:

 

Here is the endorsement I wrote for the book:

There are a number of very expensive statistical packages that can be used to analyze stated preference data. R is free so it is wonderful for teaching undergraduate students and others who don’t have access to expensive packages. Aizaki, Nakatani and Sato have provided a valuable reference book for stated preference researchers and teachers who want to use R. I used the book to install R and the contingent valuation package in a few minutes. I was estimating CVM models soon afterwards. I’m especially excited that the package contains an easy to use nonparametric willingness to pay estimator that is superior to the spreadsheet methods I’ve been using for years. The package includes very well known (Exxon Valdez) and less well known (Albemarle-Pamlico) contingent valuation data. These data allow the user to play around with the package and compare results to what has been published in the literature. This book is an ideal reference for advanced undergraduate and graduate courses in environmental valuation. 

Picture of the day

Photo Credit: PC

"Who will win the next Nobel Prize in economics?"

Tyler Cowen:

I am predicting William J. Baumol, possibly with William G. Bowen, for work on the cost-disease.  As you probably know, this hypothesis suggested that the costs of education and health care would continue to rise in relative terms, thereby creating significant economic problems.  Not a bad prediction for 1966, and of course it has become a truly important issue. ...

... Baumol has numerous other contributions, including contestability, operations research and economics, entrepreneurship, externalities and Pigouvian taxes ...

via marginalrevolution.com

Baumol has a bio (written by Ian Sheldon) in this book: http://www.amazon.com/exec/obidos/ASIN/1440801193/typepad0c2-20.

More required reading: 

Baumol, William J. "On the increasing role of economic research in management of resources and protection of the environment." Annu. Rev. Resour. Econ. 2, no. 1 (2010): 1-11.

Abstract: This paper follows precedent in mixing substantive matters related to resource and environmental economics with an autobiographical framework. Unavoidably, this pushes the contents toward my own contributions to the field—especially those that, in my belief, have not received the attention they merit. After following precedent and beginning with some words on my origins and my subsequent affiliations, I focus on several examples showing how economic analysis has helped to illuminate this subject that is so critical for the general welfare. I begin with the origins of our understanding of externalities and their increasing role in the literature on the subjects under discussion here. Second, I turn to the issue of effective policy measures and the political obstacles that impede their adoption. As part of this, I discuss markets in emission permits as a way to make the Pigouvian taxation approach more palatable. I show that these two are basically equivalent, but the same is not true of the carrot and the stick approaches—i.e., taxes on emissions and subsidy rewards for reducing such environmental damage. Third, I use a Leontief approach to show how the benefits of the use of substitutes for scarce resources are commonly exaggerated and can inadvertently hasten depletion of a scarce resource, despite appearing to contribute to preservation. Finally, I turn to as-yet-unpublished material, which shows that the cost disease model I have used to account for the persistent, cumulative, and rapid rise in the real cost of activities such as health care, education, and the performing arts also describes and explains the pecuniary source of much of the threat that currently besets the environment—paradoxically doing so through the decreasing real costs of other products that are an inescapable companion to the rising costs that beset other economic activities.

"My favorite things Kentucky"

Tyler Cowen:

1. Popular music: The Everly Brothers, I recommend this song.  There is also Loretta Lynn and Dwight Yoakum and Merle Travis, I like this video.  In jazz there is Lionel Hampton.

2. Visual artist: Edgar Tolson, that image is not fully safe for work.  John James Audobon worked in the state quite a bit.

3. Movie, set in: Goldfinger, though of course immobilizing that stock would not affect the world price of gold very much.  And keep in mind the nominal price of gold was pegged back then under Bretton Woods — should we really have expected a lot of goods and services deflation, just because some nutcase set off a bomb?  I don’t think so.

4. Monk: Thomas Merton.  He was an excellent writer, as a monk I cannot judge.

5. Author: Hmm…I don’t really like either Robert Penn Warren or Hunter S. Thompson.  So Thomas Merton wins a second category, try The Seven Storey Mountain.

6. NBA player: The incandescent Rex Chapman, recently arrested for shoplifting.  I liked Pervis Ellison too, believe it or not.

7. Movie director: I believe John Carpenter grew up there, he has several excellent films, including The Thing, Starman, Dark Star, and Escape from New York.  I don’t actually enjoy the D.W. Griffith movies.

8. Poet and impresario: Muhammad Ali.

For some inexplicable reason Victor Mature was one of my father’s favorite actors.  There is also Johnny Depp and George Clooney.  Economist Milton Kafoglis passed away not long ago.  How about the Kentucky Colonels?

via marginalrevolution.com

Not surprisingly, the list is a bit highbrow for me. I'd go like this:

1. Popular music: My Morning Jacket, Kentucky Headhunters

2. Visual artist: Stephen Powell, according to his bio he estabalished Centre College's glass program the year I graduated. 

3. Movie, set in: Goldfinger is a good one but how about Coal Miner's Daughter? or the Hatfields and McCoys miniseries? Those accents are Kentucky.

4. Monk: Who could quibble with Thomas Merton?

5. Author: Sue Grafton

6. NBA player: Darrell Griffith (I was never a fan of King Rex). I was in high school when UofL, led by “Dr. Dunkenstein,” won their first NCAA championship. The next year they had one of their scrimmages at our high school gym. 

7. Movie director: According to Wikipedia John Carpenter was born in Bowling Green and went to WKU. But should this even be a category? I would have made it movie stars and gone with Jennifer Lawrence (Katniss Everdeen! Duh). Even inflation adjusted, she is the highest grossing action heroine. 

8. Poet and impresario: I also can't quibble with Muhammad Ali. 

The list was annoying (no mention of KFC, horses or bourbon) until we got to "How about the Kentucky Colonels?" I remember listening to Colonels games on the radio: Louie Dampier, Dan Issel, Wil Jones and Artis Gilmore. And with WKU's Jim McDaniel they had two (2!) 7 footers. I recommend this book: http://www.amazon.com/Kentucky-Colonels-American-Basketball-Association/dp/1935001825 (Note: I'm not sure about Tyler Cowen's Colonels link).

New working paper

http://econpapers.repec.org/paper/aplwpaper/14-09.htm: 

Predictive Validity of Stated Preference Data: Evidence from Mountain Bike Park Visits Before and After Trail System Expansion

Kevin Atkinson and John C. Whitehead ([email protected])

No 14-09, Working Papers from Department of Economics, Appalachian State University

Abstract: This paper investigates the validity of stated preference data for use in recreation demand estimation. We use stated preference and revealed preference data from users of a mountain bike park collected before and after an expansion of the trail system. The ex-ante stated preference data elicited before the change exhibits hypothetical bias, but, it would provide useful information for demand prediction.

Key Words: hypothetical bias, recreation demand, revealed preference, stated preference

Kevin is an undergraduate economics major who'll be applying to graduate schools this year. This paper is revised from the paper he presented at the National Conference on Undergraduate Research. 

The first review of Environmental and Natural Resource Economics: An Encyclopedia

From Booklist:

Arguably, our adherence to the free-market model of economics has been among the major factors that have contributed to environmental deterioration. This is because environmental benefits are treated as public goods and are hence underpriced and undervalued. This work introduces readers to some of the factors that have caused that economic model to fail, some of the most prevalent solutions to address these failures, the challenges of these solutions, and some of their successes. Government regulation has traditionally been used to safeguard the interests of those not represented in the economic transaction. More recently, economists have tried to use corrective mechanisms to account for environmental costs. The result has been not only greater government regulation but also publicity campaigns to raise consumer awareness. This has led to international agreements (albeit applied unevenly) that consider the environment.

The entries in this book highlight areas where market-based economic models are inadequate and need to be supplemented to protect our natural resources. An introductory essay summarizes key economic concepts, environmental concerns, and some of the methods used to address these concerns. Entries related to basic economic concepts (specifically market failure and contemporary movements to correct for these failures) are well written. Entries that address valuation models require additional resources for readers who want a working background in these methods. Other entries profile the work of prominent environmental economists, events, and environmental policies. The work is well suited as a supplemental reference for introductory college-level environmental-economics courses.

— Muhammed Hassanali