Environmental Economics

Haab on HABs (yes, they are pronounced the same)

Last week I mentioned I mentioned that I would be presenting (yesterday) to The Ohio State University Environmental Professionals Network Breakfast Club on the topic of "Ohio's Water Resources and Citizens at Risk - Ag-related Practices and Policies to Prevent Harmful Algal Blooms, Post-Toledo."  I (along with each of two other panel members) was given 5 minutes to give opening remarks before moderator driven Q&A. Rather than my normal rambling unstructured style of presentation, I decided to give a speech--which means actually writing a speech.  So here is the speech I gave (speech I read is probably a better way of putting it) to a audience of 230 representatives of ag and non ag sectors.  I'm told there will be video at some point.  I will let you know if video emerges--provided it doesn't make me look like a complete bungling idiot.

We’ve heard a lot today about solutions for high phosphorous loads in Lake Erie and the resulting harmful algal blooms.  As an environmental economist, I’m told my role in this discussion is to provide a balanced look at the potential costs of reducing phosphorous loadings into Lake Erie, the benefits of those reductions to society, and the burden of the costs of phosphorous reductions.

Some of you may be wondering, what is an environmental economist? An environmental economist is an economist who applies the science of economics to environmental issues.  I am not an environmentalist.  Don’t get me wrong, I care about the environment.  But I am realistic about the role that incentives, trade-offs, and profits play in finding solutions to environmental issues that lead to sustainable human well-being.   I recognize the reality that the economy and the natural environment are inextricably linked and attempting to separate the study of each creates a situation in which neither is sustainable.  Economic, social and environmental sustainability requires the realization that no single solution exists.

So what then, from my perspective as an environmental economist, is the fundamental issue surrounding harmful algal blooms?  Excess nutrient loads into Lake Erie are the result of misalignment of incentives.  The profit incentives of the on-farm sector fail to fully capture the costs of nutrient application decisions to the non-agricultural sectors.  The cost-savings incentives of industrial and municipal sources of run-off fail to fully capture the downstream costs of urban run-off.  The consume-now incentive of today’s consumers fails to fully capture the cost of today’s decisions on future generations.

None of these statements are judgments on the intent of individual farmers, or municipal decision makers or society today in making decisions that impose excess costs on others.  In fact, in my experience, most people want to do the right thing.  Farmers care about environmental issues.  Municipalities care about water quality.  Today’s generation cares about the future.  Yet when consumption and production decisions are made, reality differs from intent. 

For example, when I drove here this morning, I gave no thought to the cost my car exhaust imposes on others.  I know that my exhaust contributes to increased atmospheric pollution.  I know that by driving I increase the likelihood of health issues for those with breathing issues.  I know that my driving contributes to long-term climate change.  Yet, other than being a genuinely nice person, I have no incentive to incorporate those external costs into my driving decisions.  The price of driving does not fully reflect the external costs.

Prices are the economy’s rationing mechanism.  It is prices that drive economic decisions.  Prices provide signals.  It’s prices that serve as a market’s way of reflecting the value of something.  And if prices fail to fully reflect the current and future costs and benefits of production and consumption, markets will misallocate society’s scarce resources. 

In political and social discussions we hear a lot of talk about the need for less government regulation, the need for free markets.  In general I agree with free market advocates.  But in order for a market to do its job of allocating society’s scarce resources today and into the future, that market must capture ALL costs and benefits.  Otherwise a market is not truly a free market.

In the case of the environment, we can think of the problem as one of the failure of markets to properly price the services the environment supplies.  In effect, the environment is treated as a free input in production and consumption.  It is only natural that if something is free we will use more than we would if it were priced at its true value.  If gas were free, I would use a lot more of it. 

Because the cost of environmental degradation is not captured in markets, we use more of it than we would otherwise.  It might be tempting then to conclude that markets are the problem.  I agree to a certain extent.  Markets are failing to properly account for costs and benefits.  But markets are also the solution. 

To solve the harmful algal bloom problem, we need to find ways to better capture the external costs of using nitrogen and phosphorous in the markets in which they are used—and then allow the resulting incentives to work to solve the problem.  To do so, we can focus on the quantity of phosphorous, or we can focus on the price.  Quantity restrictions are effective if monitored effectively, but effective monitoring is difficult.  Effective quantity restrictions will reflect in market prices.  However, ill-designed quantity restrictions can result in regulatory costs that are higher than needed. 

Regulating prices, on the other hand, allow the users to make decisions that reduce their own costs.  By allowing the freedom to choose how to adapt to higher prices, price-based policies can achieve the same outcomes as quantity restrictions at lower cost.  Prices also provide incentives for innovation.  As prices rise to reflect the full costs, users will have the incentive to find lower cost alternatives.  New investments in research and development will lead to new lower-cost technologies.  Market-based price regulations allow the market to allocate society’s scarce resources efficiently.

However, many price-based solutions have a negative reputation.  As I mention each of these, I’m sure each will garner some sort of negative reaction:  taxes, subsidies, cap and trade, user fees.  But as an environmental economist, I recognize that solutions that build environmental costs into market decisions allow individuals to make the decisions that are in their own best interest. The result is what’s best for society.

Unfortunately, we are talking about a problem of magnitude that hoping people will do the right thing is not an option.  While voluntary programs are attractive politically, achieving a 40% reduction in Lake Erie phosphorous loadings, if that is indeed the goal, is going to require more than reliance on goodwill.  Real, sustainable, solutions are going to require a recognition that prices need to capture the full social costs of nitrogen and phosphorous use.  Anything short of that will lead right back here in the future, hoping the problem solves itself.

Tax Miles? I still think I have a better idea...

The California Legislature is looking at a voluntary program that would tax motorists for every mile they drive.

KCAL9’s Bobby Kaple reports that Sen. Mark DeSaulnier, D-Concord, introduced a bill to test out the vehicle miles traveled (VMT) tax because the state’s gas tax was no longer bringing in the revenue it used to due to people driving more fuel efficient vehicles.

via losangeles.cbslocal.com

It's been almost exactly 7 years now (May 8, 2007) and people still aren't listening to me. 

Taxing miles creates perverse incentives for fuel efficiency.  A $0.015/mile tax (the size of the tax mentioned in the article) is the equivalent of a $0.015 * X tax per gallon where X is mpg.  In words, a mileage tax increases the tax per gallon the more fuel efficient the car.  Now granted, with higher mpg you use fewer gallons to drive an equivalent number of miles, and in the end, everyone driving 100 miles will pay the same tax.  And from a revenue perspective, that might be OK.  But there might be a way to kill fewer birds with one stone.

As I have written a number of times, a more straightforward proposal is to simply raise the gas tax.  Reaising the gas tax accomplishes a number of things 1) It raises revenue, 2) It discourages miles driven, and 3) It increases the incentive for higher fuel efficiency. 

Because my previous posts on this have been written with an ironic twist (I propose a mileage tax that is inversely proportional to fuel efficiency and then show that such a tax is the equivalent of a $1/gallon gas tax), here's the direct, non-ironic version:  A $1/gallon gas tax...

...places a higher burden on those driving less fuel efficient vehicles--that should satisfy those blaming the SUV drivers for all of the problems*.

...places a higher burden on those driving more.  By increasing the marginal cost per mile driven, total miles driven should decrease.

...assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--[higher gas taxes] place a higher burden on higher incomes.

...provides an incentive for drivers to switch to more fuel efficient vehicles.

It's really simple.  Why worry about complicated milage programs?  The gas tax infrastructure is in place.  Raise the gas tax and meet multiple public policy and economic goals simultaneously.

Well it's about dang time...

In the mail yesterday--get yours today (it will help our publisher recoup our whopping advance):

What in the world will I ever use this for? Integration

Another in our WWWTF (What in the World Will I ever use This For?) series:

Math Concept: Integration

Having spent multiple hours over the past week helping official oldest daughter of Env-Econ (OODEE) work through calculus problem after calculus problem in preparation for the pending AP exam, I thought it might be helpful to see how she might eventually move past solving math problems to applying the concepts. Right now I'm going to focus on integration, and hopefully later I will come back and talk about differentiation (seems backwards, but integration is fresh in my mind right now).  In what follows, I assume a working knowledge of basic integral calculus--otherwise why would you care what you use this for?

As a reminder, a definite integral is defined as:

where f'(x) is the derivative of the function f(x) with respect to the variable x.

Graphically, the integral represents the area under the function y=f'(x) over the closed domain [a,b]. 

An example might help.  Consider the simple linear function f'(x)=6-2X.  What is the definite integral of f'(x) over the closed domain [1,3]?

What does this look like graphically?

 

 

Notice that for this case of a linear function (a line), the area under the function makes a triangle.  A simple way to check your integration is to just find the area of the triangle on the graph. 

The area of the triangle is  .5(Base x Height) = .5(2 x 4) = 4.  This is the same result we got for the intergral.  For more complicated functions (non-linear), the area under the function isn't a nice neat geometric shape.

I know what you're thinking: Nice pictures and it's great fun to think about math, but WWWTF? (What in the World Will I ever use This For?).  Keep reading for an application to environmental economics.

Graphic of the Day: Is it getting close to time to redefine the term 'Public' University?

From the Chronicle of Higher Education:

Incorporating ecosystem services in marine planning

I think if we tried harder, we could've squeezed a few more co-authors onto this one:

Incorporating ecosystem services in marine planning: The role of valuation

By: Tobias Börger, Nicola J. Beaumont, Linwood Pendleton, Kevin J. Boyle, Philip Cooper, Stephen Fletcher, Tim Haab, Michael Hanemann, Tara L. Hooper, S. Salman Hussain, Rosimeiry Portela, Mavra Stithou, Joanna Stockill, Tim Taylor, Melanie C. Austen

In: Marine Policy, Volume 46, May 2014, Pages 161-170.

Abstract: This paper scrutinises the use of ecosystem service valuation for marine planning. Lessons are drawn from the development and use of environmental valuation and cost-benefit analysis for policy-making in the US and the UK. Current approaches to marine planning in both countries are presented and the role that ecosystem service valuation could play in this context is outlined. This includes highlighting the steps in the marine planning process where valuation can inform marine planning and policy-making as well as a discussion of methodological challenges to ecosystem service valuation techniques in the context of marine planning. Recommendations to overcome existing barriers are offered based on the synergies and the thinking in the two countries regarding the application of ecosystem service valuation to marine planning.

If only we could figure out a way to value dolphins

Warning, blatant self-and-John-promotion ahead.

So I was reading this CNN story this morning about the recent increase in bottlenose dolphin deaths on the east coast.

The carcasses of dozens of the marine mammals, seven times more than normal, have been washing up on beaches this summer, and scientists are struggling for answers to the die-off.

In Virginia alone, at least 164 dead dolphins have been found this year, said Joan M. Barns, public relations manager for the Virginia Aquarium in Virginia Beach. Almost half of those, 78, have washed ashore in August, she said.

As of Tuesday, federal authorities say, they have recorded 228 dolphin deaths this year from New York to Virginia. In all of 2012, 111 deaths were recorded.

'Why,' you ask, 'would I bother reading about dolphins?' Well, I'm glad you asked.  First, dolphins are cute.  And B), I seem to have spent a significant portion of my adult life studying ways to use economics to inform decision makers on environmental and natural resource disasters.  So, upon reading of an anomolous (that's odd) increase in dolphin deaths, I naturally wonder, what are the costs of dolphin deaths, and what are the benefits of preventing dolphin deaths? 

So how do I find teh value of a dolphin.  Naturally I turn to the only reliable source for finding such information...Google.  So I Googled 'value of a dolhin.'  No, reallym, that's what I Googled.  because my typing skills suck.  Fortunately, Google planned for my sucky typing skills and gave me results for 'value of a dolphin.'*

The first entry that came up was this Guardian story from 2012 asking, fortuitously, 'how much is a dolphin worth?'   Using my amazing powers of recognition, I recognized the potential usefulness of the story and read:

At its most basic, the process now consuming teams of BP and government scientists and lawyers revolves around this: How much is a dolphin worth, and how exactly did it die?

...

"It is extraordinarily difficult to monetise environmental harm. What dollar value do we place on a destroyed marsh or the loss of a spawning ground? What is the price associated with killing birds and marine mammals? Even if we were capable of meaningfully establishing a price for ecological harm, there is so much that we do not know about the harm to the Gulf of Mexico – and will not know for years – that it may never be possible to come up with an accurate natural resource damage assessment," said David Uhlmann, a law professor at the University of Michigan and a former head of the justice department's environmental crimes section.

Warning: Snark ahead. Well, gee, if only the lawyers could figure out a way to value environmental harm?  Or a way to place a dollar value on dead birds or marine mammals.  Maybe, just maybe, a bunch of people should get together and think about how lessons learned from how people place values on things like blenders and hamburgers can be translated into ways to place values on things like oil spills, or fish kills, or fish species, or natural hazard mitigation.  And, maybe, with some pie-in-the-sky thinking, these new methods for valuing the impossible might develop to the point where someone could write a book explaining the methods with an obtuse title like "Valuing Environmental and Natural Resources."

Maybe.  Oh, Maybe.  Someday.  One can hope.

*Have I ever mentioned that I am convinced that Google is the greatest invention ever? 

Using the Tragedy of the Commons to the benefit of society

In a different context (Asian Carp), I have advocated for taking advantage of the Tragedy of the Commons to eliminate invasive species.  The principle is simple:  Given the proper incentives and open access, anglers/hunters/gatherers will overfish/overhunt/strip a common property resource into non-existence.  Looks like the State of Florida may be figuring this out:

Nearly 800 people signed up for the month-long “Python Challenge” that started Saturday afternoon. The vast majority — 749 — are members of the general public who lack the permits usually required to harvest pythons on public lands.

“We feel like anybody can get out in the Everglades and figure out how to try and find these things,” said Nick Wiley, executive director of the Florida Fish and Wildlife Conservation Commission. “It’s very safe, getting out in the Everglades. People do it all the time.”

Twenty-eight python permit holders also joined the hunt at several locations in the Everglades. The state is offering cash prizes to whoever brings in the longest python and whoever bags the most pythons by the time the competition ends at midnight Feb. 10.

via www.washingtonpost.com

This is awesome.  Using the power of incentives and the willingness to the many to take advantage of what would regularly be viewed as a market failure may in fact solve a different inefficient allocation of ecological resources.  An odd case of the theory of second best?

What am I missing in the whole health care mandate debate?

I'm a simple man.  And by simple I mean I seek the simplest solution to complex problems.  At times that means I miss the nuance and detail that is really at the heart of many complex problems, but that doesn't stop me from offering simple analysis.

So here's my economist take on the national health insurance, health care mandate, Obamacare, socialism...whatever...debate....

It's all about the risk pooling. 

Insurance markets work when non-systemic risks are pooled across a population.  Let's use car insurance as an example.  For the most part, the probability of me getting in an accident is independent of the probability of you getting in an accident unless you happen to be driving next to me at 75 mph while I eat a Whopper with one hand and check my Facebook status with the other.  By pooling the independent risks, insurance companies can offer relatively low priced insurance against one or the other of us getting in an accident.  So states require (mandate) that in order to drive, you must have insurance, thereby reducing the external costs of my bad habits on you.  If you don't have insurance, you aren't supposed to drive and if you are caught driving without insurance you face stiff penalties.  The result: Users of the product that causes the risk (driving) have insurance--most of the time.  You can choose not to buy insurance and not drive.

So what about healthcare?  Shouldn't it work the same way?  In theory, yes.  Users of health care could be required to buy insurance against catastrophic outcomes.  By pooling the risks across large populations, the individual cost of health care will be lower than the expected cost to you if you bore the full risk of your own health.  Risk pooling reduces costs and protects againsts catastrophic outcomes.  And, just as with car insurance, if you choose not to buy health insurance, you lose the right to consume healthca...oh, wait. 

Human decency has to be factored in.

In the absence of health insurance, individuals can still not be denied health care (at least emergency care, which is expensive).  So what happens when an individual chooses to forego health insurance?  The cost of the uninsured care, guaranteed by human decency, gets rolled into the premium of those already insured.  In other words, health care costs rise.  Further, if individuals know that health care will be provided regardless of the willingness or ability to pay or willingness or ability to be insured, there is a perverse incentive to underconsume health insurance and further reduce the size of the risk pool in the insurance market (we call that moral hazard). 

So what are the possible solutions?

1. Rely on people to 'do the right thing.'  But each person's definition of right might be different.  While I think it is right to participate in the insurance market, others might think it is right to take advantage of the rules of the game. And as we know, economic incentives are powerful things.
2. Have the government act as the insurer of last resort.  This is the model we currently have.  The government offers subsidized insurance for those who are unable to afford health insurance (medicare/medicaid) and then acts as the insurer of last resort for the unisured.  The result: the cost of providing insurance to the uninsured and underinsured are passed on to the insured through higher taxes and higher insurance premia.
3. Mandate that everyone buy health insurance and play by the same rules, and penalize those who opt out.  The results 'should' be more efficiently priced insurance premia for those already insured, reduce costs of providing health care to those unable to afford insurance, and a less morally hazardous (I made that up) risk pool.

So what am I missing?

Let me have it.

Looking for a Natural Resource/Water Economist/Modeler

Sign #1,986 the economy might be on the upswing:  We're hiring.

The Ohio State University-Assistant Professor: The Department of Agricultural, Environmental, and Development Economics (AEDE) is searching for a tenure-track assistant professor. The position is funded jointly with the university initiative in Climate, Water, and Carbon (CWC), and is one of several such positions in various departments. We seek outstanding applicants with high potential for achieving scholarly excellence in natural resource economics and modeling, with primary interests in regional and/or global water resource issues. Complementary interests in climate change, land use, and energy issues would be helpful.  Expectations include teaching and research to serve AEDE’s mission, and collaboration with colleagues in the CWC initiative. Faculty members are expected to achieve national scholarly recognition, and to contribute to outreach and public engagement.  The appointee will have an academic year (9 month) appointment with competitive salary and benefits package.