Environmental Economics

Why do we keep getting the price of driving wrong?

For years I have railed about the need to get the price of driving right (too many posts to find and link, but here's a good one). Why, oh, why I cry, do we still keep finding needlessly complicated ways to confuse the f*** out of drivers who just want to do the right thing, but can't figure out the real cost of driving gas versus electric?

Ohio makes it especially taxing (see what I did there?):

Why it matters: Our gas tax rate is among the highest in the U.S., with the proceeds funding infrastructure needs like road and bridge maintenance.

Yes, but: An increasing number of EV drivers avoid paying this tax by not paying for gas, an issue for Uncle Sam since the cars wear down public roads like everything else.

Ohio's solution: Annual registration fees of $100 for hybrids and $200 for any plug-in EV.

I'm not opposed to a tax on EVs. They do create some externalities (congestion, electricity generation, infrastructure wear-and-tear), but I am opposed to arbitrary fees that distort the relative costs of gas vs EV. 

Let's talk to some economists and get the prices right, then let consumers make there decisions.

When is the right time to measure economic damages from a disaster?

By now most know of the train derailment in East Palestine (pronounced pal-uh-steen), Ohio and the ensuing decision to burn the chemicals spilling from the train rather than wait for a potentially more disastrous--and perhaps more lethal--explosion. What is not yet known, and likely won't be known for some time, is the scope and extent of the full set of damages. Within days of the derailment I received calls asking something along the lines:

"Would you and your team please move forward with determining the agricultural, environmental and health impacts of the train derailment in Columbiana County?" 

My standard response is along the lines:

"That’s a big (and broad) ask. We have experts who may be able to estimate the economic impacts once the scope of the damages are known. Do we know the potential for short-term vs long-term effects at this point? Estimating economic impacts/damages will require a coordinated effort between those measuring and cataloguing the physical damages and then those who are well-versed in understanding the market and non-market values associated with damage assessment (the economics folks).

I realize this is a frustrating response and likely to make people wonder what economists really do, but the need for patience in determining the full value lost is important to ensure we capture all of the damages. For example, here's a story that came out yesterday highlighting the potential scope for damages:

The East Palestine train derailment has had a far reaching impact on businesses even outside of the village.

21 News reporter Leslie Huff spoke with one farm in Columbiana who says they have lost nearly half of their business, not because there is anything wrong with their product, but because of fear of the unknown.

For Lamppost Farm in Columbiana, their sales have dramatically fell by 50%.  Executive director Steve Montgomery says concerns about product contamination is the reason they are seeing a decrease. 

These types of damages are likely to persist and the full scope of health, social, economic, and environmental damages is likely to take months if not years to know with any sense of accuracy. Does this mean we should withhold aid until all damages are known?

 

No, of course not. Immediate aid should be focused on medical and income support for those directly impacted and documented. Once the urgency of the event subsides, the the real works begins to understand and estimate the full scope of damages and the associated loss of economic value.

 

Until then, the focus should be on taking care of the people and limiting future damages.

 

Env-Econ Book Review: The Fishermen and the Dragon

I just finished reading Kirk Wallace Johnson's The Fishermen and the Dragon: Fear, Greed, and a Fight for Justice on the Gulf Coast. Here's my book review (from the view of an Environmental Economist of course).

The Fishermen and the Dragon tells the true story of the evolution of the Texas Gulf Coast crab and shrimp fisheries in the post-Vietnam era. The era is important to the story because tension builds along the Texas coast when post-war Vietnamese refugees locate to the Gulf Coast creating economic competition and (racial) tension between the existing anglers and the refugees. The racial tensions play out against the backdrop of the encroachment of the Ku Klux Klan into post-war political asylum issues and the the environmental problems that come along with rapid industrialization of the Gulf Coast. 

So why would an environmental economist care? Honestly the story has a bit of everything: Tragedy of the commons, Coasian bargaining, Ostrom-like institutional building, credible (and incredible) threats, industrial organization, the role of government in regulating the commons, natural resource damages (oil spills), environmental and health externalities, social and environmental justice. 

Part Erin Brokovich (an initially reluctant environmental crusader), part John Grisham-like southern legal thriller tinged with undertones of racism, part Pat Conroy-like description of the hardships of coastal life, this true story reads like a popular fiction thriller.

If I have one complaint, it would be that there is a slight disjoint between the story of race tensions between the refugees and local fishers, and the story of corporate greed and environmental disaster. There is overlap in the main characters, but stories seem to be separated in both time and presentation.

Nevertheless, a good read with Env-Econ lessons abound. 

I give it a solid four out of five beers raised.

 

Ummm, @PeterGleick, I addressed this 5,958 days ago: Free markets are, in fact, not free

"Dr. Peter Gleick is a leading scientist, innovator, and communicator on global water and climate issues." He is also a frequent Tweeter and sometimes instigator. Yesterday he tweeted this:

I'm fairly certain Dr. Gleick knows there are a large number of 'atypical' economists who understand the non-market values of water (I'm not sure what a non-economic value is because value is inherently economic). Anyway, here's what I wrote on this exact topic (Are Free Markets Free?) almost 15 years ago...

Some thoughts on equity and efficiency

I was recently looking back on some notes I wrote a while back on the difference between efficiency and equity. These notes came about for two reasons: 1) I've had fits and starts over the years of writing a Principles-level economics book from an environmental/sustainability perspective, and in thinking about this, 2) I've realized that by presenting markets as 'efficient' in the standard Principles-level treatment, we may be missing the mark.

In deciding how best to allocate our scarce resources, there is thought to be a trade-off between equity and efficiency.  As Greg Mankiw puts it in his Principles of Microeconomics textbook:

Another trade-off society faces is between efficiency and equality.  Efficiency means that society is getting the maximum benefits from its scarce resources.  Equality means that those benefits are distributed uniformly among society's members...When government policies are designed, these two goals often conflict...In other words, when the government tries to cut the economic pie into more equal slices, the pie gets smaller.

I agree with Mankiw, to an extent; given the social goal of maximizing the size of the economic pie, a policy that aims at equity creates incentives inconsistent with the goal.  But what is missing from this discussion and what is implicit in Mankiw's definition of efficiency is that everyone is OK with the goal of maximizing the size of the economic pie.  Efficiency does not imply the goal of maximizing total economic productivity; to the contrary, maximizing total economic productivity is the subjective goal to which the objective definition of efficiency is being applied. 

This distinction is important because it is often assumed that there is a one-to-one correspondence between total economic productivity and total societal well-being or happiness.  Therefore to improve societal well-being, concerns of equity must be thrown away since total economic productivity can only be maximized through efficiency.  Hence the trade-off.  But what if there is not a one-to-one correspondence between happiness and total economic productivity?  Does that render the concept of efficiency--and consequently economics--useless?  

Quite the contrary and this is where some of the critics of economics overreact when they see Mankiw-like definitions of efficiency.  Efficiency is usually defined with the underlying social goal of maximizing total productivity.  But what if society values equality?  That is, what if total productivity is only part of what determines well-being and people actually care about the distribution of resources--at least minimally. 

The trade-off that is typically discussed between equity and efficiency is really a trade-off between equity and total economic productivity.  The logical problem comes in assuming that total economic productivity and total well-being are the same.  But what if part of our societal goal is some concept of equity?  Can we still achieve it efficiently?  According to our definition of efficiency-- achieving a defined social goal using the least amount of society's resources as possible—yes, we can still achieve any societal goal efficiently if we allocate resources to align with the stated goal.  Efficiency doesn't have to be predicated on the particular goal of maximizing total economic productivity.  The social goal may be total economic productivity, or it may be any one of a million other distributions of social well-being.  No matter the goal, economics provides a valuable set of tools for understanding how to achieve those goals using the least amount of society's resources--and thereby freeing those resources for other uses (or nonuses).

Abstract Monday: Correcting On-Site Sampling Bias

Today's entry in Abstract Monday is a little technical, but it's a problem I've been interested in for a long time, and it looks like my and John's former colleague, Ju-Chin Huang*, and co-author have found an improvement (if not solution).  If I ever get around to writing a second edition of my nonmarket valuation econometrics book, this is definitely going to be in there.

*I'm sure John will agree, Ju-Chin was the smartest of the three of us.

 

Title: Correcting On-Site Sampling Bias: A New Method with Application to Recreation Demand Analysis

Author(s): Wei Shi and Ju-Chin Huang

Journal: Land Economics, 2018, 94(3): 459-474

Objective: A new method for dealing with truncation and endogenous stratification in on-site sampling of recreational site users.

 

Background: Assessing recreational site use can involve random samples of the general population, random sample of subsamples of users (e.g. boat owners), or on-site sample of current visitors.  While convenient, and often less expensive, on-site samples of current visitors introduce modeling challenges due to truncation (no non-users are sampled), and endogenous stratification (the probability of interviewing an avid visitor is higher--sometimes called avidity bias).  Both biases have puzzled recreation demand models for decades and the literature is still fraught with examples of misunderstanding and confusion about the correct way to handle on-site sampling. Most past studies have tried to simultaneously solve both problems, but such solutions depend critically on the assumed statistical distribution of trips.  Separating the issue of stratification from truncation may provide recreation demand estimates that are less sensitive to distributional assumptions. 

 

Methods: Shi and Huang first correct endogenous stratification by weighting the assumed expected number of trips taken, after truncation at zero, by the inverse of the observed number of trips.  This weighting effectively 'scales down' the probability of interviewing those who take large number of trips, creating a sample that more closely mimics the likelihood of a sample drawn from the general population.  The weighted sample is then used to estimate a truncated count data model, thereby separating the issue of truncation from the issue of endogenous stratification.

 

Results and Conclusions:  Using simulations and a case study, Shi and Huang demonstrate that the distribution free re-weighting approach to on-site sampling reduces the sensitivity of results to the researcher-assumed distribution of trips.    

Daily Demand and Supply: Bill Nye Explains the Law of Demand...and Carbon Pricing, MFers.

Warning:  NSFW (Unless you work at a University and part of your job is to watch stuff like this and post it on a blog).

The highlights of this have been around all week, but most of the clips are just Bill Nye the Science Guy saying "motherf***ers.   But this segment on Last Week Tonight really does a nice job of simply explaining how Carbon Pricing works.  If you don't want to watch the whole thing, just fastforward to the 9:27 mark or so, and sit back and enjoy.

Bill Nye explains the Law of Demand from 10:21 to 10:37.

Now if I can just figure out how to use this in class without trigger warnings.

Friday Beer Post: The best reason yet to oppose a trade war (and there are a lot of reasons)

This is appalling!

I'm aghast!

I need a beer.

Around this time last year, the Beer Institute (BI), a national trade association representing the American brewing industry, warned that President Donald Trump’s aluminum and steel tariffs would cost the beer industry $347 million annually and potentially lead to the loss of 20,000 jobs.

Well, as it turns out, the BI’s worst fears are coming true.

The Washington, D.C., lobbying group tapped Austin, Texas-based Harbor Aluminum — a research firm that specializes in the global aluminum industry – to study and estimate the cost of aluminum tariffs under section 232 of the Trade Expansion Act of 1962 since they were imposed on March 8, 2018.

According to the firm — which compiles, develops, and analyzes industry data and market intelligence for more than 300 companies across the aluminum supply chain — the U.S. beverage industry paid about $250 million for aluminum cansheet between March and December of last year.

During that same period, however, the United States Department of the Treasury collected just $50 million, while U.S. smelters and rolling mills pocketed the rest.

“We see beer as the crown jewel of American manufacturing,” BI president and CEO Jim McGreevy told CNBC last week. “This is really hurting us.”

Here’s the rub: The U.S. cansheet used to produce beverage cans contains 70 percent domestic scrap metal, which is exempt from tariffs. The other 30 percent comes from imported primary aluminum.

But according to the BI, domestic beverage manufacturers paid a tariff on 100 percent of the cansheet used to make beverage cans.

Harbor Aluminum estimates that U.S. rolling mills and smelters raked in $173 million and $27 million, respectively, over a 10-month period by charging end users a “tariff-paid price” on the entire aluminum cansheet used to make beverage containers.

In other words, rolling mills and smelters are effectively stealing from beverage manufacturers by overcharging for cansheet as if it was made entirely from imported primary aluminum.

“Brewers are paying a tariff price even on domestic aluminum,” McGreevy said via a press release. “I have heard from brewers large and small from across the country who are seeing their aluminum costs drastically increase, even when they are using American aluminum.”

Speaking to CNBC, McGreevy said many brewing companies have decided to absorb the increased costs of aluminum, while others have raised prices and passed it along to consumers.

“Any downstream user of aluminum is being affected by this increased tax,” he said. “Repeal, in our view, is the only way to go.”

In a conversation with Brewbound last March, Robert Budway, the president of the Can Manufacturers Institute (CMI), said President Trump’s 10 percent tariff on aluminum would add about 1 penny to the cost of every can. At that rate, a brewery making 10,000 barrels would be forced to pay an additional $20,000 annually.

Last June, MillerCoors CEO Gavin Hattersley said the tariffs would cost his company $40 million. And according to McGreevy, Minnesota’s Summit Brewing shelled out an extra $160,000 in 2018.

“This is affecting brewers of all sizes,” he told CNBC.

Approximately 60 percent of the beer produced and sold in the U.S. is packed in aluminum cans and bottles, the BI estimates.

In addition to the BI and the Brewers Association, the American Beverage Association and the CMI oppose tariffs on steel and aluminum.

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.