Environmental Economics

Gina McCarthy: The Role of Environmental Economics in U.S. Environmental Policy

Abstract:

This Editorial, written by a former United States Environmental Protection Agency (EPA) Administrator under President Barack Obama, is adapted from the author's keynote address on June 25, 2018 at the World Congress of Environmental and Resource Economists in Gothenburg, Sweden. It reviews the important history of environmental economics and how it has influenced rulemaking at the EPA. It discusses how attacks on science are being used to weaken environmental regulations and how these attacks extend to the science of environmental economics. It concludes with a call to action that reminds environmental economists that continuing to do good science is as important as ever.

Here is the link: https://doi.org/10.1093/reep/rez001

If I'm standing in the bathtub, and the tub fills with water, am I sinking?

This seems like a big deal...

Indonesia is moving its capital city away from Jakarta, according to the country's planning minister.

...

Jakarta is also one of the fastest-sinking cities in the world.

Researchers say that large parts of the megacity could be entirely submerged by 2050. North Jakarta sunk 2.5m (eight feet) in 10 years and is continuing to sink an average of 1-15cm a year.

For the geographically challenged, Jakarta is home to 10 million people. 

More than New York City.

I'm certifiable

Abstract Monday

A while back I tweeted: 

Econ-world: Anyone else wish econ journals would require abstracts be written like some medical journals? Just wondering. https://t.co/yEBdJb31cN

— Tim Haab (@tim_env_econ) November 2, 2018

Even though I only got 3 likes on the Tweet (sad face emoji), I've been thinking about how I might use alternative abstracting formats as I write, and read, papers.  So today I decided to try it with a 'recent' paper I've been wanting to read.  Here's my attempt at writing an abstract/summary of a paper in medical journal style. 

NOTE:  This is my attempt to summarize someone else's publication.  All stupid mistakes and misinterpretations are mine and NOT the authors of the paper. 

Who knows, if I like how it turns out, and I can find the time, I might make Abstract Mondays a regular thing.

Title: Decoupling the Value of Leisure Time from Labor Market Returns in Travel Cost Models

Author(s): Patrick Lloyd-Smith, Joshua K. Abbott, Wiktor Adamowicz, and Daniel Willard

Journal: Journal of the Association of Environmental and Resource Economists 2019 6:2, 215-242 

Objective: To improve the measurement of the value of people's leisure time by allowing for different values for each individual derived from a stated preference survey.

 

Background: The opportunity cost of leisure time is a key piece in calculating a 'price' for travel (the travel cost).  Traditional methods of estimating/calculating the value of time rely on labor market theory resulting in individuals trading off labor and leisure at the wage rate, or some fraction thereof.  Measurement error (self-reported income), non-labor income, labor-force non-participation, and individual differences call into question the link between fixed wage rates (or proportions thereof) and the opportunity cost of time.  Improved methods are needed to accurately reflect the value of time in travel cost models.

 

Methods: Stated preference questions are added to a recreational fishing survey to assess how respondents react to hypothetical trade-offs between time and money.  Respondents are offered hypothetical payments for participation in hypothetical activities that take time: participation in an 8-hour focus group, and work sorting paper files. The responses to the hypothetical money/time trade-offs are used to structurally estimate and individual-specific marginal utility of income in a Kuhn-Tucker site choice/quantity recreation demand model.  Results are compared to standard methods of valuing time at a fraction of the wage rate.  The value of price and site quality changes are calculated using traditional and new methods. 

 

Results:  The stated preference method produces an average value of time of "$35 (median $31) with a range of $11-$112" per hour.  The traditional wage-based method produced estimates of "$38 (median $34) with a range of $0–$429".  Traditional methods typically use 1/3 the wage rate to allow for non-marginal trade-offs between labor and leisure.  The correlation between the stated-preference estimates, and the 1/3 wage rate estimates is 0.34.  Kuhn-Tucker demand system estimates show "relatively modest" improvements in model fit using the stated preference value of time estimates. The welfare impacts of three policy scenarios are estimated: A price increase, and two fishing site closure scenarios.  The use of stated-preference value of time vs the fractional wage causes little difference in welfare impacts for the price change scenario.  The stated-preference approach leads to a 38% and 43% increase in the estimated welfare loss dues to Summer and Fall site closures compared to the fractional wage approach.  Using the full wage (90% of wage rather than 33% of wage) yields average results closer to the stated-preference approach, but does not fully explain the difference.

 

Conclusions: Using stated-preference to elicit the value of time introduces flexibility and captures heterogeneity in the value of time across individuals that traditional wage-based approaches fail to capture at a relatively low additional survey cost.  

Here we go again: DRIVE LESS! is the answer

Every 6 years or so (I'm rounding) gas prices rise, and the results are predictable:  Price go up because of some supply shock, the news starts to cover it, people start to complain, politicians start to rumble about price gouging and restricting prices, supply increases, prices fall, and everyone calms down.

While higher gas prices can be caused by a number of things (supply decreases both domestic and international,demand increases, increased taxes,...), there is only one guaranteed, fool-proof, tested, economically justified way for you, as an individual, to lower gas prices:  COMPLAIN!

Oh wait, that's not right.  No it's: DRIVE LESS!

So here's my once every 6 year reminder (I'm rounding) of the economics of the Env-Econ Drive Less! solution to higher gas prices.

April 26, 2006: I launch the Drive Less! campaign on NPR

January 17, 2012: Here we go again.

April 25, 2019:  GASP! $4 gas is here...what should we do?

Consumers could start driving less, rethinking large purchases and changing their summer travel plans should the national average price near $3.25 per gallon, [AAA spokesperson Jeanette] Casselano said. While the national average probably won't hit $4, Casselano said $3.25 is possible.

[emphasis added]

Glad to see the Drive Less! campaign is having an impact.

 

Hey #EconTwitter (and blog readers), I'm curious as to your reaction to this principles-level definition/discussion of efficiency (and equity) and ultimately the definition of the study of economics

At our most basic, economists are trying to solve a complex allocation problem:  Given a scarce amount of resources, how do we decide who gets what, when and how? 

In solving the allocation problem, most economists focus on allocations of society’s scarce resources that meet the social goal of maximizing the well-being of society.  Because it is assumed that well-being is highly correlated with economic value, the social goal of maximizing well-being is often translated to mean maximizing the total economic value (or productivity) of society.  If we maximize the value from the scarce resources then an allocation is thought to be efficient.   An allocation is inefficient if a different allocation can be found such that the total value to society is higher using the same amount of society’s scarce resources.

Read on...

Only someone poorly trained in the dark arts would have expected otherwise

From the WaPo (Trump’s washing-machine tariffs cost U.S. consumers $815,000 for every job created):

President Trump has repeatedly sought to portray his tariffs on Chinese goods as a major windfall for the U.S. treasury that has extracted “billions of dollars” from China. But the reality is that tariffs are typically absorbed by consumers in the form of higher prices.

And now a new study shows just how big that markup can be.

When economists at the University of Chicago and the Federal Reserve studied the 2018 duty on washing machines, they found the expected rise in retail prices from foreign manufacturers such as Samsung and LG. Surprisingly, though, these brands also increased dryer prices. Then domestic manufacturers followed suit, simply because they could.

All told, the research shows, U.S. consumers are spending an additional $1.5 billion a year on washers and dryers as a result of the tariffs. That’s an extra $86 for each washing machine and $92 for each dryer, the authors estimate.

And less than 10 percent of that goes to the U.S. treasury — about $82.2 million — the study showed.

The authors ran their analysis using weekly price data on appliances from the market research firm Gap Intelligence. If the tariffs cost $82 million but consumers are paying $1.5 billion, where’s the rest of that money going? Foreign manufacturers are passing some costs on to consumers, while domestic ones are simply pocketing extra profits, according to the study. ...

U.S.-based manufacturers added about 1,800 jobs in response to the tariffs, researchers found. But at a total cost to consumers of about $1.5 billion, that works out to approximately $815,000 for every new job created. That figure is roughly in line with other estimates on the per-job cost of tariffs in other industries.

This is what is taught in thousands of introductory economics courses every semester. 

The "External Environmental Economics Advisory Committee (E-EEAC)"

Ha! Take that Scott Pruitt: 

The External Environmental Economics Advisory Committee (E-EEAC) is an independent organization dedicated to providing up-to-date, non-partisan advice on the state of economic science as it relates to the U.S. Environmental Protection Agency's programs. The E-EEAC was established following the dissolution in June 2018 of the original EEAC, a committee that had operated for over 25 years within the Environmental Protection Agency's science advisory board structure. The members of the E-EEAC believe that, despite the retirement of the internal committee, advances in economic research remain crucial to achieving welfare-enhancing environmental policies.

Like its predecessor, the E-EEAC consists of economists who apply their expertise to analyze the benefits, costs, and design of environmental policies. The goal of the E-EEAC is to operate in this capacity until the EPA reconstitutes an internal environmental economics advisory committee composed of independent economists.

Here is the website: https://www.e-eeac.org/. Here is a press release from CMC: https://www.cmc.edu/news/professor-mary-evans-to-co-lead-new-environmental-economics-organization. And here is another from UCLA: https://luskin.ucla.edu/ucla-luskin-faculty-launches-organization-to-fill-research-gap-at-epa/.