Wednesday, August 31, 2005

U.S. Decision to Release Oil Sends Prices Below $70

How do people form expectations of future oil prices? How does government action today affect those expectations? Environmentalists who want lower greenhouse gas production and Peak Oilers who want less consumption must hope that people expect that gas prices will rise.

Can government policy play a role in "lulling" people into thinking that price spikes are unlikely? A quote from today's New York Times really grosses me out.

"Releasing oil from the reserve is a "good first step," because it tells investors and the market that the government is available to help ease energy constraints, said Lawrence Goldstein, president of the Petroleum Industry Research Foundation. "It's probably more psychological than physical but it's an important step. It breaks down the mindset that you are on your own.""

On an unrelated note, there is a great profile of Jagdish Bhagwati at this site:
http://www.imf.org/external/pubs/ft/fandd/2005/09/people.htm. Somebody has to win the Nobel Prize in economics in mid-October. Unless they want to give the prize again to Jim Heckman, why not Jagdish?

Tuesday, August 30, 2005

Oil Prices: Why Are Economists Such Optimists?

The Oil Drum has recently presented a fascinating one-sided debate in which many folks mocked economists for not understanding key issues related to Peak Oil . As an economist, who is married to an economist and spends 85% of his academic time with other economists, it was quite good for me to see how smart people think about a key policy issue.

Steve Levitt posted a very reasonable discussion of his optimism that incentives for conservation and production would play a key role in mitigating any future “oil crisis”. The responses posted to Oil Drum boiled down to calling him “na├»ve” and ideologically driven in his faith in free markets.

While no economist can predict what “magic bullet” will allow us to substitute away from oil, is it such a horrible bet to claim that in a world with millions of inventors and billions of venture capital dollars that somebody will come up with a “Google” like idea for re-inventing vehicles to green them?

Why is oil different from other commodities? The Oil Drum is riding high now that oil prices are so high but the Oil Drum is not clear on how it knows that demand elasticities are close to zero and supply elasticities are close to zero. In the very short run maybe this is true but Keynes is wrong --- in the long run we’re not dead—we’ve substituted to something new.

This whole discussion brings me back to Paul Ehrlich. I read something by Prof Ehrlich claiming that the reason his predictions in Population Bomb turned out not to be true was because of his book. Warning people of a coming crisis, stopped the crisis.

Monday, August 29, 2005

Expected Future Oil Prices and Activist Government Policy

Everyone knows that expectations play a key role in economic life. If I expect to live to be 100 years old, I save more than if I expect to live to age 45. How do people and firms form expectations over the future price of oil? If people expect that the price of oil will stay or rise above $3 per gallon, we all agree that buyers will demand "greener" vehicles and producers would invest more in green R&D to develop such vehicles.

Economists such as Manski of Northwestern have been working on methods to elicit individual's subjective guesses about future unknown events. For example, we'd each love to know what the price of oil will be in the year 2008. Suppose that today 65% of car drivers thought that the real price of oil will be above $4 per gallon. This "fat right tail" of the distribution would create demand today for green car purchases between now and the year 2008.

In a recent posting, I discussed a moral hazard problem that may or may not be true. If people today believe that government will step in and take activist steps to "guarantee" that prices do not soar to such hights then fewer "green cars" will be demanded today and suppliers will be less likely to develop them.

This is the reason that stories such as:
http://news.yahoo.com/s/ap/20050829/ap_on_go_pr_wh/katrina_bush , do not make me happy.

I agree with some folks who commented on my last posting that activist government may not really be able to make a real dent in reducing oil prices by shifting supply but the key issue is perception. Do "the people" believe that they are implicitly insured against rising oil prices? If they believe that the government is protecting them then they will invest less in "self protection" such as buying a green car or configuring their lives such that they can easily substitute away from oil when its price rises.

So this is really a posting about free market environmentalism. If the government could pre-commit to not get involved with the oil market how would this affect the demand and supply for green cars?

Deaths from Natural Disasters in Rich and Poor Nations

Between 1980 and 2002, India experienced fourteen major earthquakes that killed a total of 32,117 people while the United States experienced eighteen major earthquakes that killed only 143 people. A disproportionate share of the deaths caused by such environmental shocks as earthquakes, floods, cyclones, hurricanes, and extreme temperature events are borne by people in developing countries. The Intergovernmental Panel on Climate Change reports that 65% of world deaths from natural disasters between 1985 and 1999 took place in nations whose incomes were below $760 per-capita.

In a recent paper published in the May 2005 issue of Review of Economics and Statistics titled “The Death Toll From Natural Disasters: The Role of Income, Geography, and Institutions”, I used several data sets to investigate what types of nations suffer the least when disasters strike. Income matters! There is no Environmental Kuznets Curve for deaths from disasters. Fewer people die from comparable shocks (measured by the Richter scale for Earthquakes) in richer nations relative to poorer nations.

Why is income such a good “insurance policy” against such shocks? Rising incomes lead people to purchase higher quality structures that might be better able to withstand natural shocks. Richer people will demand homes located in safer communities and homes that are built out of stronger more durable materials. Once the shock has taken place, death counts can be higher if the nation does not have access to good medical care and emergency treatment and crisis management. Government regulation also plays a role in protecting the populace in richer nations. Richer nations will be able to invest and enforce zoning and building codes. Building codes internalize externalities of structural soundness of a building and this has a social value that the owner is unlikely to internalize and it improves the quality of life of people in an immediate vicinity affected.

I post this today in the face of the hurricane striking New Orleans. There will certainly be property damage but given the advance notice and the mandated evacuation deaths will be minimal.

Sunday, August 28, 2005

Will Beijing Be a Green City by 2008?

Does economic development exacerbate or mitigate urban environmental problems? The environmental Kuznets curve literature continues to debate this question. In my book manuscript titled Green Cities, I explore what we now know about this topic. Today, Jim Yardley in the New York Times’ piece “Beijing’s Quest for 2008: To Become Simply Livable” explores some of the challenges this growing city faces.

Beijing has a major incentive to “green” itself. The 2008 Olympics will be held there and the world will be watching. The city has a master plan with the vague goal to become a “city suitable for living”. What exactly does this mean? Should the 15.2 million inhabitants of the city simply be polled asking each “do you like your city?” “Is your quality of life higher than it was 4 years ago?” Instead, Yardley’s article points to objective measures of quality of life such as gridlocked traffic, air pollution, garbage and water supply.

Critics claim that the city needs more planning. This strikes me as ironic. If a non-democracy like China can't implement plans, who can? It is claimed that rampant development has destroyed much of the historic old city and made a mess of the emerging new one. The quotes in the article sound like a replay of New York City’s Robert Moses’ critics such as Robert Caro in the Power Broker. As I recall, the Moses story is that in his quest to build highways to connect the New York City suburbs such as Long Island to Manhattan he destroyed many old neighborhoods. These tended to be neighborhoods where minorities with little political clout lived and these individuals received no compensation for their loss. To quote Yardley’s article “More recently, the hutongs have been steadily demolished, dislocating untold thousands of people, to make room for the thousands of development projects swallowing the city.”

Are the critics right that planning improves urban quality of life? In theory, planners can internalize externalities that profit maximizing developers would ignore. But in the real world, do planned cities yield better cities? People keep moving to Las Vegas and other sprawl cities, many people are voting with their feet that they like sprawl.

Similar to the Robert Moses case in New York City, a fascinating issue arises concerning “What is good urban policy?” Any policy change involves winners and losers. In basic econ, we teach if the winners win more than the losers lose, then this is a good public policy. Unfortunately, from the standpoint of pareto optimality, the losers are rarely compensated. Anticipating that they will not be compensated, the losing interest group has every incentive to kick up a political fuss. Perhaps in a non-democracy such as China, this doesn’t matter.

The New York Times article highlights that China is in the midst of a major urbanization trend. Where should all of these rural people who are moving to cities live? 300 million people are expect to migrate to cities in the next 15 years. Beijing will sprawl in the country side.

Vern Henderson at Brown has documented that despite the popular fascination with mega-cities, much urbanization takes place in medium size cities getting bigger. If rural migrants have many choices over what urban areas to go to, then they can "vote with their feet" and avoid cities known to have major environmental problems.

Saturday, August 27, 2005

Oil: The Optimist vs. Pessimist Debate

Oil Drum and other blogs are drawing wide attention debating whether we are near an end of the oil age. The Oil Drum pointed me to a 8/13/2005 letter by Matt Simmons in the Washington Post that argued that Daniel Yergin is too optimistic about the future of oil. I have a few questions for Mr. Simmons.

He highlights that he has recently conducted an intensive study of oil production capabilities in Saudi Arabia and has concluded that “obscure Saudi technical papers create serious doubts about Saudi claims of adequate supplies of oil for decades to come. The Saudis and OPEC have been quietly admitting that they will not be able to meet world oil demand in 10 to 15 years which is at odds with Yergin’s Cambridge Energy Research Associates and other optimists.”

Taking Matt Simmons’ findings to be true, he has performed an important task. The 2001 Nobel Prize in economics was awarded to Akerlof, Spence and Stiglitz for their work on asymmetric information. Capitalist markets function better when buyers and sellers are equally informed. Famous examples of the problems of asymmetric information include the market for used cars; sellers sell only “lemons” and potential buyers cannot cheaply certify product quality and the market for health insurance; only sick people want to buy it.

Returning to Simmons, his findings help level the information “playing field”. If oil consumers, auto makers, and rival oil producers thought that Saudi Arabia has been telling the truth by claiming that it has ample reserves then this retards the incentive to invest in green cars, conservation and new exploration. By “getting the information out”, utility maximizing consumers and profit maximizing firms will now have an incentive to respond. If General Motors had thought that Saudi Arabia has ample oil, it may have invested little in green car development and ex-post greatly regretted this decision once the “truth” is revealed.

I would like to ask Simmons; “If every person on the planet read your report on the Saudi’s oil overstatement of reserves, would you still think that we’re heading into a “crisis”?” Does Simmons believe that “educated” economic agents can adjust to the now anticipated decline in Saudi oil production? A vast majority of economists would say yes.

A second issue here is whether Simmons’ evaluation of Saudi Arabia’s reserves is kosher. Turning to game theory, if Saudi Arabia will not allow in an independent team of auditors to measure their reserves, does this signal that Simmons is right?

If a capitalist firm such as General Motors knows that “it does not know” the truth about an important future event, such as Saudi oil supplies, how does it plan for this event? Does it take a risk averse strategy and invest more in fuel efficient vehicles?

Friday, August 26, 2005

An Economic Analysis of Economics Blogs: Part II

Bloggers are not paid for the quantity or quality of their entries. Usually, suppliers produce zero when offered a price of zero. Why is the supply curve for blogs different than the supply curve for hotdogs?

One explanation is complementarities. Camera companies may give away free film to sell more cameras. Bloggers may give away their thoughts for free in return for two expected payments. First, we may view this as good advertising for our published academic research. If I impress you with a good blog, you might use Econlit or google scholar to track down some of my formal work. Second, some bloggers may be using their blog entries to signal to journalists that they could offer a good quote on a particular policy issue. In this sense, blogging is a type of advertising that may help reporters cheaply locate the “spice” they are looking for.

Another obvious reason for why bloggers blog and may even invest a fair bit of time at this activity is status. What can a middle aged academic who is not at a top 20 research institution do to raise his visibility? Academic economists rarely go to the library and actually read the American Economic Review or other leading journals. Blogging is a relatively cheap way to reach others. Blogs like all ideas are public goods. The Internet offers a zero cost distribution network to billions of people. Somebody out there may even consider some us to be clever and insightful.

How much do people gain from reading economics blogs? Since the price equals zero for accessing everyone’s blogs, we have no way to sketch out a demand curve and measure consumer surplus. In recent years economists such as Hausman have used statistical methods to measure the consumer surplus from new goods such as Cell Phones and HoneyNut Cereals. But putting a dollar value on the benefits of economics blogs would be harder problem to solve.

Blogs and the Grand Canyon are both “non-market” goods. Perhaps surprisingly, it is easier to measure the value of the Grand Canyon because we can use Travel Cost methods. Intuitively, if I see you drive your family from Chicago to the Grand Canyon using $700 in hotel bills and $400 in gas and time spent commuting, then you must value visiting the Canyon by at least $1100. Otherwise, you wouldn’t have chosen to make this trip. If we collected data on how much time different readers spent reading blogs and knew each reader’s value of time (hourly wage), then this information could be used to generate a lower bound on the value of blogs. We need to open up some markets here and see whether people vote their wallets. David Warsh may offer one market test.

David Warsh of Economic Principals is thinking of having a two tiered pricing system where blog readers who have sent him $50 per year gain early access to his weekly columns. It will interest me how many people take him up on this offer. Some leading economics blogs ask readers for contributions. Are economics blog readers free riders? Somebody has to act in accord with economic theory!

Thursday, August 25, 2005

Do You Need a PHD to Write a Good Economics Blog?

For the last month, I’ve been pretty carefully reading many economics blogs. I’ve wondered what determines whether a site is popular and I’ve tried to learn about what blog authors consider to be a “good posting”. In my opinion, a large (90%?) of the blog entries posted on Economics Roundtable require no graduate training in economics to produce. Is this surprising? Is this bad?

Many blog entries seek to help readers save time by pointing them to interesting articles out there on the web. These bloggers are economizing on transaction costs for time poor readers. The bloggers have paid the search costs of finding interesting stuff for like minded readers and are kind enough to lead the readers to these posts. These blog entries sometimes offer a witty line or two about the posting and then verbatim quote the source. In many cases these quotes are not from the American Economic Review or NBER but instead are from popular outlets such as the New York Times, Wall Street Journal or the Economist.

A second set of blogs focuses on political economy/macro topics such as privatizing social security, the Fed’s Monetary Policy, Housing Price bubbles and the Bush Presidency. Many of these blog entries seem to feed off of Paul Krugman’s New York Times pieces; either agreeing or disagreeing with the Man. Here I am not sure how modern graduate training in economics can inform these pieces. Ed Prescott won the Nobel Prize in Economics in the year 2004 for his work on dynamic general equilibrium models applied to macro. The macro bloggers are not basing their entries and predictions based on such models.

A third set of blogs, and I view this as the minority group, are using economic theory to discuss real world issues. My favorites blogs here are Becker/Posner, Jim Hamilton, and the Freakonomics blog. I would like to hear more from Steve Levitt on that site.

In general, I am surprised by how few of the big ideas economists have generated since 1970 are reflected in the Roundtable postings. The posting rarely use incentive theory, or game theory (strategic thinking) to discuss real world issues. New empirical work is rarely discussed for helping improve our understanding of causality and what is effective policy and how we know this. For example, I really like the monthly thursday pieces in the New York Times by Alan Krueger and by Hal Varian (see page 2 of the business section). These guys are "modern". Why aren't other smart economists following their lead?

Why are modern ideas "under supplied" in this market? It must be related to supply and demand factors in the blogging market. What are the suppliers (the bloggers) maximizing? It isn’t profits! If its “hits” to their website, then we have an incentive to simplify our message to attract more folks to our sites. After teaching intro economics at Columbia for 7 years, I certainly believe that sophisticated points can be discussed without getting too fancy with math and econometrics. This is exactly what Krueger and Varian have done so well in their Times pieces.

What do blog readers demand? As I discussed above, it appears that many want to be pointed to the “new news” of the day on the topic that moves them.

My friends keep asking me: "why are you blogging?". My
quick answer is that I'm trying to learn a new style of writing and I enjoy being able to post my thoughts. My wife appreciates that I waste her less of her time with my random outbursts and that I watch less TV now.

I’ve read a post on Dan Drezner’s blog where he asked why there weren’t more top political scientists blogging. Would Roundtable be better on average if economists from the top 25 schools participated more?

Wednesday, August 24, 2005

Good Neighbors are Good for You

For decades urban economists have tried to unravel the “chicken and egg” issue of why people who live in high poverty areas are less likely to succeed. Do such ghettos self select “bad apples” who choose to live there because of the cheap rent? Or does living in ghetto poverty have a causal scarring effect such that a person is less likely to go to school, get a job and function relative to what this person would have achieved if he had grown up in a “good” neighborhood?

While most economic empirical research is based on non-experimental data, in recent years HUD’s Moving to Opportunity program has offered a unique opportunity for leading economists to take a new look at neighborhood effects. Without experimental data, it is very difficult to disentangle the “chicken and egg” issues I mentioned in the above paragraph. Since this experiment tracks a “treatment” group and a “control” group, progress can be made in learning about the benefits of growing up in a lower poverty community.

The results of this experiment are discussed in: “ Experimental Analysis of Neighborhood Effects Jeffrey R. Kling, Jeffrey B. Liebman, Lawrence F. Katz NBER Working Paper No. 11577 (www.nber.org)

“Families, primarily female-headed minority households with children, living in high-poverty public housing projects in five U.S. cities were offered housing vouchers by lottery in the Moving to Opportunity program. Four to seven years after random assignment, families offered vouchers lived in safer neighborhoods that had lower poverty rates than those of the control group not offered vouchers. We find no significant overall effects of this intervention on adult economic self-sufficiency or physical health. Mental health benefits of the voucher offers for adults and for female youth were substantial. Beneficial effects for female youth on education, risky behavior, and physical health were offset by adverse effects for male youth. For outcomes exhibiting significant treatment effects, we find, using variation in treatment intensity across voucher types and cities, that the relationship between neighborhood poverty rate and outcomes is approximately linear.”

It is true that the authors can only study the “treatment effect impact” for those who sign up for the experiment. If the benefits of growing up in low poverty communities vary across individuals, then it is intuitive that those who think that they will gain the most from participating in this program will be most likely to sign up.

Free Riding and Climate Change

I've been surprised by the unilateral actions some states are taking to reduce their greenhouse gas emissions. Why aren't states such as California and New York free riding? Do they think they are large enough to make a difference? What could be the mechanism?

"California, Washington and Oregon are in the early stages of exploring a regional agreement similar to the Northeastern plan. The nine states in the Northeastern agreement are Connecticut, Delaware, Maine, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island and Vermont. They were brought together in 2003 by a Republican governor, George E. Pataki of New York, who broke sharply and openly with the Bush administration over the handling of greenhouse gases and Washington's refusal to join more than 150 countries in signing the Kyoto Protocols, the agreement to reduce emissions that went into effect earlier this year.

Mr. Pataki, who may be considering a run for the Republican nomination for president, has refrained from criticizing President Bush directly, but he has repeatedly said that the states need to act on their own even if the Bush administration has not made the issue a priority." (9 States in Plan to Cut Emissions by Power Plants in NYT article by Anthony DePalma.)

While Mr. Pataki will score some green points for his innovative environmentalism, it seems that the real reason that states are taking action is as a form of a demonstration project to show the rest of the nation that it is feasible to do.

"We're not going to solve the problem of global warming in the Northeastern states," said Dale S. Bryk, a senior attorney with the Natural Resources Defense Council who has been watching the regional effort since it was proposed by Governor Pataki in a letter to the other governors in April 2003. "but we're showing that we have the American ingenuity to do this and we're setting a precedent in terms of the design of the program."

A second mechanism that a state such as California can point to is that its market is so large that car manufacturers have to abide by its rules. It buys enough cars that it can provide a "big push" for new technologies to be developed.

What I find interesting here is free-riding by Red State/Blue State delineation.
Red state (anti-environmentalists) members are less likely to form these regional
pacts than Blue state (greens). In a couple of years, the Red States will be free riding letting the blue states pay for their environmentalism. The Blue state environmentalists must be hoping that a future democratic president will point to their precedent to make it national policy and to coerce Red states to enact such regulation.

Tuesday, August 23, 2005

Obesity and Sprawl

The New York Times reports new facts today about obesity. About 24.5 percent of American adults are obese, the report said, and in 12 states more than a quarter of all adults are obese, Mississippi, Alabama, West Virginia, Louisiana, Tennessee, Arkansas, Texas, Michigan, Kentucky, Indiana, Ohio and South Carolina. The states with the smallest percentage of obese adults are Colorado, Massachusetts, Rhode Island, Connecticut, Vermont and Montana.

Here is a map presenting the current data.



Some public health officials have blamed suburbanization as a leading cause of this trend. What would be convincing evidence that sprawl makes us fat? Ideally, we would want to randomly assign people to different population densities and weigh them 12 months from now. Suburbanites do drive more than urbanites. But suburban areas have more golf courses, tennis courts, basketball courts and easy access to other recreational facilities. Ideally, a study would collect detailed time surveys to see what suburbanites and urbanites do all day long. I have trouble believing that suburbia "causes" people to gain weight. Instead, I would argue that it is self selection due to the urban marriage market. Many urbanites are singles. If I watched TV, I could name many shows ranging from Friends to Seinfeld presenting young people without children who are mingling. Suburbia self selects married people with young children. As I've recently learned, children are quite time consuming and from personal experience I've seen that I now exercise less than I used to.

A more interesting explanation for the recent rise in obesity comes from behavioral economics. Many behavioral researchers make the point that we all have self control problems. We all have "cravings" for ice cream and other munchies. In the past, it was difficult to satisfy these cravings. Transportation costs were higher. We'd have to bake our own cookies or catch a bus to some store. Now, in this car age with easy access to 7-11 and other food vendors, we can too easily satisfy our cravings. Students have dorm room fridges and they aren't filled with fruits and veggies. While this is satisfying in the short run, in the long run we get fat. Put simply, we are now "too close" to our calories. An obvious addditional factor that has been well documented is that food producers have been too productive at producing "super sized" cheap unhealthy food. If people didn't have self control problems, this would be a "good thing". We would have access to greater variety of foods and face lower prices at the market.

Are there any policy implications here? Do you support a potato chip tax?

Could Paul Ehrlich Win His Bet?

These are strange days. The New York Times’ editorial writers now side with Julian Simon (see John Tierney’s 8/23/2005 op-ed titled “The $10,000 Question”). Could economic optimists be wrong about oil price dynamics over the next 20 years? The “new” conventional wisdom argues that suppliers and demanders, anticipating rising prices, will adapt in advance and pre-empt a price spike. Let me play Devil’s Advocate.

Concern #1 Job Sprawl

A growing share of households lives and works in the suburbs. If the price of gasoline did triple, could these folks substitute to the bus or rail transit? I don’t think so. Given that vehicles are durables that a household expects to own for about ten years, consider a suburban household who owns two vehicles that are both 5 years old and that get 25 MPG. If the price of gasoline tripled, these vehicles would have a very low re-sale price as many suburban households scrambled to downsize and buy a new more fuel efficient vehicle. Middle class suburban households would bear the price impacts.

Concern #2 Green R&D by Vehicle Manufacturers

How much money are car makers such as Toyota really investing in green technologies? My intuition tells me that they invest more if they expect that the real price of oil will rise over time. How do such car makers form their expectations of future gas prices? Are they simply extrapolating based on past gas price trends? Are they hiring fancy economic consulting companies to form forecasts for them? How do these economic consulting firms forecast? Using structural models of supply and demand? Or do these consulting firms charge a lot for simple time series extrapolations?

Economists have written a lot about the induced innovation hypothesis. One nice study documented that air conditioners become more energy efficient when the price of electricity is higher. Another study documented that patents geared toward inventions that conserve on energy consumption increase when energy prices are higher. These examples highlight the importance of expectations of future oil prices. But where do these expectations come from? Rational expectations economists and behavioral economists would give different answers to this question. I’d like to know what the important decision makers at the major vehicle makers are thinking. If they guess wrong and bet that gas prices will stay low, is it easy to enter this industry? If there are MIT engineers designing green cars, can they get big loans from the capital market to scale up their dreams in the state of the world where gas prices rise?

In China in the year 2015, what will be their fleet’s average fuel economy? Are planners there taking pro-active steps to economize on gasoline consumption?

Concern #3 Green Car Production Capacity

If the price of gasoline tripled, do vehicle makers have the capacity to scale up their production of hybrid vehicles? How easy is it for these producers to substitute from producing conventional vehicles to these “special” vehicles?

Has the conventional wisdom now shifted from “doom and gloom” Club of Rome to Lomborg optimism? Can this have a lulling effect such that Ehrlich wins his bet?

Sunday, August 21, 2005

Oil, Activist Government and a Moral Hazard Problem

Economists like to teach their students about the moral hazard problem. Micro economists point out that a home owner is more likely to smoke in bed if she has house insurance that will build her a new house if her home burns down. Macro economists point out that developing nations are more likely to engage in excessive risk taking when they anticipate that the IMF will provide a bailout if their investments sour.

In both cases, expectation of ex-post insurance encourages too much risk taking ex-ante. Home owners and developing nations engage in less self protection than they would have in the absence of the expected insurance.

I wonder if this simple idea applies in the case of oil consumption.

Suppose that the United States government could pre-commit to not take any active role in responding to future oil price increases by encouraging greater supply. This government would not lobby OPEC to increase supply or consider drilling in domestic federal lands in response to higher oil prices. In my thought experiment, I’m cutting off government “insurance” in the oil market. The rational forward looking household would say to itself; “Today the price of gasoline is $3 per gallon. My best guess of the future is that there is a 50% change this price will remain at this level. There is a 25% chance this price will rise to $7 per gallon and there is a 25% chance the price will decline to $2 per gallon.” (Note I’m making up these numbers but each household would have every incentive to go through this scenario planning.)

Households who anticipate a high probability of a really high future price would recognize that in the state of the world where their fears are realized and prices do soar that government has pre-committed to not step in and help them. In the absence of government intervention, these people would have to fend for themselves. How would they do this? The rational household would be likely to take pro-active actions now rather than wait. Such households would purchase greener durables, and configure their lifestyles to protect themselves from being ex-post “price gouged”.

If each of the 300 million people in the U.S followed this strategy, the U.S’s ecological footprint would shrink sharply.

Economists love to talk about “crowding out”. This is a simple idea. For example, the existence of Social Security means that people save less for their own retirement. Another example is that federal transfers to the poor displace private charity. In this post, I’ve suggested a more dangerous “crowd out”. When people anticipate that government intervention will protect them against future price spikes, they have little incentive to take precautionary steps today that in aggregate would green our economy.

The Impending Oil Crisis?

Today gasoline prices are near $3 per gallon. Saudi Arabia has 22% of the world’s known reserves. The New York Times’ Peter Maass (see 8/21/2005 “The Breaking Point”) has convinced himself that this nation’s supply will contract in the future just as demand for oil (think of China’s car fleet growth) is rising. Will the real price of gasoline triple over the next 20 years?

Suppose it did. Suppose the price of gasoline increased to $10 per gallon (inflation adjusted). Given today’s vehicle fleet and its average fuel economy, the average household consumes about 700 gallons of gasoline a year. $7000 per year expenditure on gasoline is a fair bit of money. If the average household earns 70,000 per year and nets $40,000 after taxes then the expenditure share would be 7/40. I agree that this is a large budget share but I don’t view it as crushing.

Economists have been quick, as usual, to point out that incentives effects cannot be ignored. Steve Levitt’s recent Freaknomics blog lists possible adjustment margins (see
http://www.freakonomics.com/2005/08/peak-oil-welcome-to-medias-new-version.html)
Consumers would respond to higher prices by buying smaller, more fuel efficient cars. My month in Rome showed me what a vehicle fleet looks like when gas prices are really high! Only rich people would drive SUVs. The demand for hybrids would soar and this would create a “big push” encouraging auto makers to develop more fuel efficient vehicles.

According to economic optimists, the short run dynamics would be a pinch ugly as middle class households who own SUVs would scramble to “downsize”. We would see more middle class folks on the bus. Teenagers would drive less and walk more and be less fat. Oil companies would respond to higher prices by investing more in equipment that increases their efficiency in extracting oil from strange places. More exploration would take place and some of extra wells would be found and this would increase supply.
How short would the “short run” be? As usual heterogeneity issues arise. People who love to drive and keep their houses warm during winter would be hit hard.

Would a serious recession break out if gas prices went that high? I am not a macro-economist. Go to Jim Hamilton’s blog for a discussion of such issues. It does strike me that transportation plays a key role in providing many goods in my life. The price of California fruit exported to Boston would rise sharply due to trucking costs. Trade across nations and across regions has increased our variety of our consumption but I don’t think that economists have paid enough attention to transportation costs as an input in this increased variety.

The New York Times article makes the intuitive point that Saudi Arabia and other major sellers of oil want the price of oil to be high today but not too high. A very high price would accelerate efforts for conservation and innovation that would reduce future demand for oil. Investment in vehicle fuel economy and hybrid vehicle R&D is a type of insurance policy. A profit maximizing company such as Ford or General Motors will be more likely to invest in these technologies today if they believe that the price of gasoline will be $10 per gallon in ten years. How does such a company form expectations of the future price of gasoline? Extrapolating along past time series data on oil prices?

The New York Times is worried about the “ugly scenario” where it turns out that Saudi Arabia has been lying about its inventories of oil and over-estimating how much oil it really has. If for profit vehicle makers take the Saudi’s word for their true capacity and choose not to invest in fuel efficient vehicles because they expect the price of gasoline to stay low, then a crisis could ensue. In this state of the world, we could be “shocked” by the Saudi announcement that they have “little oil left” and we don’t have the “green cars” ready to go.

Is this scenario likely? Competition provides some source of optimism. Around the world there are many car makers. If one of these companies is betting that real oil prices will rise and is making R&D investments in green technologies to prepare for that day, then this company could seize the market when gas prices rise to $10 a gallon.

Given that raising U.S gas taxes is a non-starter as a public policy, should the U.S government be subsidizing the development of “Green Cars”? The benefits of such a policy are that it would reduce our carbon dioxide emissions and it could reduce U.S demand for gasoline which could lower the chances of a serious price spike in the future. How should the U.S government enact such a policy? I like the idea of a “Big Push” where the government pre-commits to pay a price per green-vehicle to any manufacturer that makes one. This would encourage these manufacturers to start practicing building these cars. I have no idea how strong are “learning by doing” forces here but this would play a key role in determining the long run benefits of such subsidies.

Saturday, August 20, 2005

The Benefits of Big City Deindustrialization

Between 1969 and 2000, the number of manufacturing jobs in New York county, which includes New York City, declined from 451,330 to 146,291. Big city manufacturing job loss is not unique to the United States. Over the last thirty years, London has lost 600,000 manufacturing jobs--and gained 600,000 jobs in business services, as well as 180,000 jobs in entertainment, leisure, hotels, and catering.

The popular media has done a good job documenting how this sectoral transition affects land use in big cities. Today's New York Times discusses land use changes near the United Nations in an article titled "Developers Find Newest Frontier on the East Side. "Long ago, the area's breweries, slaughterhouses, coal yards and warehouses began yielding ground to the United Nations and other residential and commercial buildings."

The popular media has not done a good job investigating what are the "Green City" benefits from deindustrialization. Scholars such as William Julius Wilson have pointed out that manufacturing jobs paid high wages and that many minorities held these jobs in big cities. But, manufacturing imposed serious environmental costs for cities. Look at Chicago and Pittsburgh's air and water quality in the past relative to today. In many industrial cities such as these, the "death of manufacturing" has been a good thing for the environment.

This dynamic has played out to an even larger extent in Eastern Europe's ex-communist cities. It took me a fair amount of work but I was able to build data sets in the 1990s for major cities in Hungary, Poland the Czech Republic to document this fact. To see this paper; read http://www.bepress.com/bejeap/topics/vol3/iss1/art4/

I recognize that sectoral shifts (such as the death of steel plants) disrupts people's lives. It is difficult for a 55 year old home owner in Pittsburgh who worked in a steel plant to reinvent himself as a computer programmer when the steel industry declines. Despite the short run costs imposed by the decline of big city manufacturing, the public health benefits from these large cities making a transition to clean services must be huge.

Friday, August 19, 2005

GIVING 'HYBRIDS' TRACTION: "VEBLEN" STATUS FOR BUYING GREEN CARS

I've published only one editorial piece in my life. It was published in the Boston Globe February 25, 2001, Sunday ideas section. After 9/11/2001, I wrote an editorial titled "Will Wall Street Leave Wall Street?" but I was unable to publish that one so my batting average is .500.

Here I show you my editorial and then offer a few thoughts.

"It seems as though everything has been tried. In St. Louis, a new tailpipe testing program was launched to cut down on polluting emissions. In Europe, 800 cities and towns closed off their central streets to traffic for one day each year for "Car Free Day." In Glasgow, a tiny device known as a "green filter" was attached to cars' fuel systems, with environmentalists looking to introduce the product in China, Taiwan, Malaysia, and Singapore.

Unfortunately, despite some progress against their pollution, we are confronted by a more basic reality: We love our cars, but our cars don't love us - or at least not our environment.

In 1994 alone, residential vehicles in the United States traveled 1,793 billion miles, a distance equal to more than 70 million trips around the world - along the way creating hazardous smog and contributing to the serious threat from global warming.

What's an environmentalist to do? Some have been pushing for electric cars. To reduce its smog, California initiated a controversial program in 1990 designed to force automobile manufacturers to sell electric cars by 2003. Such cars would have zero tailpipe emissions. To date, however, battery-powered cars have proved very expensive and can travel only 50 to 100 miles before needing to be recharged.

A more realistic approach is through so-called hybrid or "clean" cars, which combine gasoline and electric power. Japan has led the way with Toyota's Prius and Honda's Insight, two new hybrid vehicles that run on battery power when stuck in traffic and switch to the gasoline engine on the highway. They cost 20 percent more than similar old-style vehicles, but they are highly fuel efficient, achieving over 50 miles per gallon, and emit 75 percent less than standard low-emissions vehicles.

And now US automakers have announced that they are planning their own version of hybrid, albeit at a lower voltage than the Japanese models. The models to be offered by General Motors and Ford will feature electrically assisted gasoline engines. They won't be quite as environmentally friendly as the "full hybrids" made by the Japanese automakers, but they also won't be quite as pricey. And the electric-assist feature is expected to be widely available, in a variety of models.

But will people buy these cars?

In marketing surveys, people invariably say the right thing - that they will purchase environmentally friendly products even if they cost a little more. Unfortunately, this talk often does not translate into purchases for the same reason that so many people don't vote. Each person reasons that his or her actions will have no overall impact. If no one is watching what you do, why bother?

So the trick may be in getting people to watch.

In his late 19th-century work, "The Theory of the Leisure Class," the economist and social scientist Thorstein Veblen coined the now-famous phrase "conspicuous consumption" to refer to consumer preferences often dictated less by quality than their high price.

Veblen's message is still relevant. Peer pressure and social status remain important motivators for consumers. Our car sends a message about us. Our boss and our neighbors know what car we drive. Ownership of a Mercedes or a Porsche signals that a person is wealthy and sophisticated.

So, using the "conspicuous consumption" principle toward a better end, how about promoting "clean cars" as similar status symbols? Indeed, if vehicles such as the Prius and Insight could achieve the social status of a Mercedes, the environmental movement's goals - specifically, the 7 percent reduction in greenhouse gas emissions required by the Kyoto Protocols - could be met, even without an active federal environmental policy.

On the surface, auto manufacturers - the very group that has traditionally opposed tighter environmental standards and fuel-economy regulations - would seem an unlikely source for championing clean cars. But such companies, needing to distinguish their product from their competitors', are always seeking their niche. Thus, Volvo is pitched as the "safe" car, Ford's T-Bird is the "macho" car, a VW the quintessential "yuppy" car.

Indeed, in this affluent age, there is evidence that marketing a product as "green" can pay; witness the success of Seventh Generation products, made from recylced materials.

Only last summer, in an effort to reposition itself as the environmentally friendly gas station giant, BP Amoco unveiled a $7 million rebranding campaign, complete with a new green, yellow, and white BP sunburst-shaped symbol.

To successfully market hybrid cars as coveted status symbols, auto manufacturers would need to be creative. Strange bedfellows such as the Sierra Club and Toyota might work together to generate "green" buzz. Celebrities might be enlisted to promote the virtues of clean cars as green cars. The manufacturers could come up with distinctive colors - a classy, unusual green, or perhaps a sky blue - so that green cars would stand out in a crowd. On a new Web site called cleangreencars.com, buyers of green products could be eligible to post a blurb or a video about themselves.

The possibilities are endless and the need is real. Between 1988 and 1994, average household vehicle miles grew from 18,600 to 21,100 due to sprawl, income growth, and low gas prices. And it will only get worse, unless we act.

What better way than to appeal to human nature's desire for recognition? After all, we want fame and we want clean air. Two for the price of one is a pretty good deal."

This popular piece was well received but what frustrates me is that I have been
unable to get my hands on data to study "who buys hybrids". Returning to my post
a couple of days ago on Green Party communities and their consumption patterns, I wanted to extend that study to examine whether the Berkeleys and Cambridge, MASS of the world are more likely to buy these hybrids. Unfortunately, I haven't been able to acquire this data.

The even harder empirical question to answer is whether greens buy these cars because they seek to minimize their environmental impact or because they care about the Warm Glow of doing a good deed and being seen doing it. To answer this question, I would need to collect some data on the car purchasing patterns of hermits!

The New York Times Takes a Gutsy Stand Against Excess Cow Manure --- Externalities and Scale Effects

Today There is an Editorial in the New York Times titled "How to Poison a River". The interesting environmental economics embodied in this editorial relates to scale effects. A 30 dairy cow farm is cute. A 3000 dairy cow farm represents a potential environmental "hot spot" if the manure produced in total by these cows is not disposed of properly.

"New York is increasingly a state of mega-dairies, and when things go wrong with such operations, they go wrong in a mega-way. The Marks Farm near Lowville, N.Y., has a herd of some 3,000 dairy cows. Their milk is trucked away regularly, but their liquefied manure is stored in a reservoir with earthen walls. How much manure? Before Aug. 11, the reservoir at the Marks Farm contained some three million gallons. Sometime in the next day, one of the walls blew out and released most of that waste into the Black River, a popular fishing stream and a water source for towns downstream. In case you have trouble visualizing it, three million gallons of liquid manure is roughly equivalent to the water in six Olympic-size swimming pools.
The result has been a major fish kill and the loss - at least temporarily - of all recreation on the river. The mess has been gradually diluted and will finally make its way into Lake Ontario, where it will do the fish there no good. With any luck, what this spill will leave behind is a resolve to place new limits on concentrated animal feeding operations - as these mega-farms are known - in New York. As always, advocates of industrial farming argue that the increase in the number of large dairies and the inevitable loss of small ones are just a result of market forces and economic efficiency. But this has always been nonsense.

Mega-dairies, like huge hog confinement operations, are all too often forced upon local communities against their will. Some New York towns have tried to restrict the expansion of industrial farms nearby. But whenever that happens, the State Department of Agriculture and Markets has sued, or threatened to sue, under the state's Right to Farm Law.

That law made sense when farms were smaller and incapable of causing serious air pollution or a manure spill of massive proportions. Farmers still need to be protected against frivolous lawsuits, but the state needs to get out of the business of forcing industrial farms on communities that don't want them. And when farms operate at the scale of Marks Farm, they need to meet far stricter environmental standards than currently prevail. This disaster should never have had a chance to happen."

INTERESTING POINTS

1. How many people get their water and fish Black River near Lowville, N.Y? While Senatorial Candidates for Hilary's seat should know this, I do not know this. The social costs of this salient event hinge on how many "victims" live near this cow manure event.

2. The New York Times is trying to create a salient event here to change state law. Note that the law they are trying to change is not an environmental law but an agricultural law; the State's "Right to Farm Law". To this Newspaper's credit, they are correctly arguing that an unintended consequence of the increased scale of milk farming is an increased probability of an environmental "disaster" like this one.

3. The obvious solution to lowering the likelihood of future "manure spreads" is to require large milk farms to have double hulled reservoirs just like tankers are sometimes required to --- to lower the probability of an oil spill. In both cases, I would like to know what is the marginal cost of such regulation. But, the New York Times is claiming that these costs would be worth the benefits!

Thursday, August 18, 2005

Residential Racial Segregation: A Surprising Trend

As the black middle class grows, many black households choose to live in the suburbs in more integrated communities. One prominent urban economics study documented that black youths are more likely to drop out of the labor force and stay in school for fewer years when they live in more segregated metropolitan areas relative to observationally identical black youths who live in less segregated metropolitan areas (See Cutler and Glaeser 1997). Aggregate trends (based on census tract data) show that overall residential racial segregation has declined over the last 30 years. These data seem to show that black households want to live in integrated communities and that their children benefit from growing up in such communities.

I love studies that challenge the conventional wisdom. Recently I read such a study that challenges the above paragraph. It argues that an important trend over the last 30 years has been rising black educational attainment. In the year 2000, a larger percentage of the black population has college degrees than in 1970. The paper argues that in 1970 a black household who wanted to live in a residential community with lots of college graduates had to live in a white community. Back then, there were very few communities that featured a large share of residents who are black and college educated. Unlike in the past, today there are more residential communities featuring a large share of residents who are both black and college educated. The authors report evidence that racial segregation is decreasing less over time in metropolitan areas where black educational attainment is rising.

Separate When Equal? Racial Inequality and Residential Segregation by Bayer, Fang, and McMillan
“In contrast to conventional wisdom, this paper identifies a powerful mechanism which can lead to persistent and even increasing residential segregation when racial differences in education and other sociodemographics narrow. We document that middle-class black neighborhoods are in short supply in many U.S. metropolitan areas, forcing highly educated blacks either to live in white neighborhoods with high amenity levels or in more black neighborhoods with lower amenity levels. A simple model then shows that increases in the proportion of highly educated blacks in a metropolitan area may lead to the emergence of new middle-class black neighborhoods, relieving the prior neighborhood supply constraint and causing increases in residential segregation. Cross- MSA evidence from the 2000 Census indicates that this mechanism does in fact operate: as the proportion of highly educated blacks in an MSA increases, so the segregation of educated blacks and blacks more generally goes up. Our empirical findings are robust and have important implications for the evolution of residential segregation.” http://www.nber.org/papers/w11507

This paper uses empirics to flesh out an argument that would resonate with Malcolm X.

A recurrent theme in my blog is returning over and over again to heterogeneity. In today’s entry black middle class households differ with respect to their preferences over community attributes. I’m sure that there are some households who greatly prefer to live in an all black community. This could be due to reverse-racism but a more plausible explanation is that this group wants access to stores and services that are more likely to be available in such a community. In addition, minority households may find day to day life less stressful in a social environment where they are the majority group.

In a diverse world, there are also black college graduates who want to live in integrated communities. The challenge in doing empirical work is to try to estimate the distribution of "types". Intuitively, what percent of college educated blacks want to live in all black communities versus what percent desire to live in integrated communities?

Are there important public policy issues here? Is it a “bad thing” if the black middle class self-segregates? Returning to the social capital literature and in particular Robert Putnam’s work, I don’t see how “bridging” social capital can take place across groups if such residential segregation takes place. In the elite universities I’ve taught at, I’ve seen extreme levels of racial segregation among students in terms of who eats with who and who studies with who. The Deans try to build a diverse community but I’ve been disappointed by how little “bridging” I see across groups.

Before public policy debate can take place, we need to know the basic facts and have some understanding of what might be the causal process generating the facts. Bayer, Fang, and McMillan’s paper plays a key role here. (If you want a copy of this paper, Bayer is at Yale’s Economics department)

Wednesday, August 17, 2005

Testing the Pollution Havens Hypothesis

As nations trade more, do poorer nations specialize in exporting dirty goods? This would allow richer nations to specialize in cleaner service industries and might explain why we see richer nations having lower levels of air pollution than poorer nations.

While many of my students have an intuitive belief that this argument holds, the empirical data supporting this claim is not so strong. My favorite explanation for why the evidence is not strong is that domestic pollution havens exist. In the United States, environmental regulation is not uniformly enforced. Under the Clean Air Act, areas assigned to non-attainment status face stricter regulation than areas that are cleaner. Dirty companies can avoid political risk and exchange rate risk by locating in a "domestic" pollution haven. The good news in terms of public health is that these tend to be sparsely populated areas. Thus, if a dirty plant raises local pollution levels but only 8 people live nearby could the social costs of this activity be that high?

A second explanation for why the international pollution havens hypothesis literature finds mixed results has been emphasized by Brian Copeland and Scott Taylor. They point out that "dirty industries" also happen to be capital intensive industries. Think of industries such as steel production or oil refining. These are not labor intensive industries. So what?

The "Factor Endowment Hypothesis" actually predicts that richer nations will
specialize in exporting dirty goods (because these industries are capital intensive and richer nations have the capital) while the "pollution haven hypothesis" posits that poorer nations with more lax regulation will specialize in these industries. Given that these two hypotheses work in opposite directions, it should not be surprising that so many empirical studies of the pollution havens hypothesis yield mush.

Perhaps not surprisingly, when Yutaka Yoshino and I looked at world trading patterns over the years 1980 to 1997 we found that middle income nations were the pollution havens. These nations were exporting a lot of dirty goods relative to their exports of clean goods. These nations have some capital but are likely to have more lax regulation than richer nations. We wrote a paper that was part of a bigger special issue on Pollution Havens. http://www.bepress.com/bejeap/advances/vol4/iss2/

Our paper focused on a simple idea that didn't work out as well as I had hoped. More and more nations are participating in Regional Trade Agreements such as NAFTA. In a world of regionalized trade, I wanted to test whether relative income matters. If a middle class nation is the poorest nation in its trading bloc, is it a growing pollution haven? To be honest we did not find strong evidence supporting this claim.

Some recent empirical research has found evidence that increased regulation in one nation induces a "displacement" effect such that the dirty activity migrates to less regulated areas. Here is a quote from a nice paper by Levinson and Taylor (2004).
"This paper uses both theory and empirical work to examine the effect of environmental regulations on trade flows. We develop a simple economic model to demonstrate how unobserved heterogeneity, endogeneity and aggregation issues bias measurements of the relationship between regulatory costs and trade. We apply an estimating equation derived from the model to data on U.S. regulations and net trade flows among the U.S., Canada, and Mexico, for 130 manufacturing industries from 1977 to 1986. Our results indicate that industries whose abatement costs increased most experienced the largest increases in net imports. For the 20 industries hardest hit by regulation, the change in net imports we ascribe to the increase in regulatory costs amounts to more than half of the total increase in trade volume over the period." http://papers.nber.org/papers/W10629 by Levinson and Taylor

When I talk to people about the pollution haven hypothesis, they often point to Europe and ask whether Romania will be a pollution haven for France and Italy. These nations are physically close to each other. I think that it is no accident that the EU nations are requiring Eastern European nations to adopt strict environmental regulations as a requirement for entry in this trading bloc.

While people often wonder whether Africa will be a pollution haven for the rest of the world, geography does matter. In previous research, I found that heavy to ship manufacturing goods where less likely to be exported further distances back to the United States. In a world of zero transportation costs, certain nations might be more likely to be pollution havens but this is not our world!

More frustrating for empirical economists is that we have mainly looked at manufacturing trade patterns. Ideally, I would like to see trade in garbage, nuclear waste, mining and commodities and other natural capital measures.

Tuesday, August 16, 2005

Keeping Up With the Joneses: Relativity Theory Revisited

Would you prefer to earn $100,000 a year and live in a community where everyone else earns $75,000 a year or to earn $150,000 a year and live in a community where everyone else earns $200,000 a year? More concisely, is your own thermometer of your own well being a function of your absolute level of income or relative income compared to your peer group?

The public policy implications of these questions are obvious. If we are jealous “relativists” then a growing macro economy in which income inequality is rising could lower aggregate well-being! When I taught intro economics at Columbia University, I used to crack a bad joke about relativity. “During war time, if your house is ½ destroyed by bombs while your neighbors’ homes are destroyed are you going to tell me that you are now happier?” Looking back, I should have done a better job making the case for and against the “relativity” hypothesis. When I was a graduate student at the University of Chicago, the consumers we studied were not envious. They gained utility solely from their own consumption and only cared about their own household’s expected present value of earnings.

Recently, empiricists have been exploring the “relativity hypothesis”. I post this as part of my Urban Economics blog because most peer groups are defined spatially by one’s residential community. Consider Erzo Luttmer’s recent paper “Neighbors as Negatives”.
http://www.nber.org/papers/w10667
“This paper investigates whether individuals feel worse off when others around them earn more. In other words, do people care about relative position and does lagging behind the Joneses' diminish well-being? To answer this question, I match individual-level panel data containing a number of indicators of well-being to information about local average earnings. I find that, controlling for an individual's own income, higher earnings of neighbors are associated with lower levels of self-reported happiness. The data's panel nature and rich set of measures of well-being and behavior indicate that this association is not driven by selection or by changes in the way people define happiness. There is suggestive evidence that the negative effect of increases in neighbors' earnings on own well-being is most likely caused by interpersonal preferences people having utility functions that depend on relative consumption in addition to absolute consumption.”

A second example of this type of empirical work was published in the 8/16/2005 Science Section of the New York Times in Eric Nagourney’s Vital Signs section. He cites some sociologists (Firebaugh and Tach) who use the General Social Survey. This survey asks 16000 people ages 20 to 64; “are you happy?” Taking people’s answers seriously, these researchers run a regression to estimate a happiness production function. Controlling for a person’s age, physical health, education and other factors, if people who are the same age as the respondent are richer, then the person is predicted to be less happy. This study strikes me as a little bit weird that the “peer group” is everyone your age. This is quite a different peer group then looking at the set of people who live within 2 miles of your house. I’m 39 years old and I’m trained in labor economics but I only have a vague guess concerning what is the average income of other 39 year olds throughout the United States. If I don’t know their average income, can this really affect my happiness?

Luttmer’s empirical design (presented above) strikes me as a much beter way to test the relativity hypothesis than what Firebaugh and Tach have cooked up. Unlike these sociologists, he is able to exploit spatial differences in peer groups.

But, the fundamental weakness in this literature is addressing heterogeneity. Put simply, people differ with respect to their envy. If Matt is very envious person and he knows this, he should “pick his pond” and migrate to an area where he is above average. If Matt is not an envious person, he can be the poorest person on his block and this doesn’t bug him. The advantage of being the poorest person on your block is that your neighbors are paying more in property taxes and you have access to the same local public services such as public schools as they do.

As an empiricist, I would propose the following hedonic real estate pricing test. Do smaller homes in rich communities sell for a lower price than the same home if it is located in a middle class community. If “relativity” is really true for most people, then the small home should sell for a discount in the rich community. I doubt the data will support his proposition.

In joint research with Pat Bajari of University of Michigan we have been studying the demand for single detached homes in Los Angeles County over the years 2000 to 2003. I took our whole sample of 165,000 homes and kept only the small homes. These are homes whose interior square footage is less than the 25th percentile of the entire distribution. I then ran a regression for 39,957 homes of the log(sales price of the home) as a function of the home’s age, interior square feet, exterior square feet, population density in the home’s census tract, average commute time and distance to the Central Business District. Controlling for all of these variables, I find that an extra $10,000 in median household income on the census block where the home is located raises the price of the small home by 12.7%. This is quite suggestive evidence against the “relativity” hypothesis. Again, small homes have a higher equilibrium price when they are in richer communities. Since the people who buy the small homes are likely to be poorer then their neighbors, my finding beats on the “relativity” hypothesis.

I am hopeful that economists will continue to study how emotions affect our behavior. I have written one paper on shame. A recent version is posted at: http://web.mit.edu/costa/www/papers.html

Monday, August 15, 2005

Cross-Border Pollution in Asia: Can Coase Tame a Brown Cloud?

The New York Times on 8/16/2005 discusses the export of smoke from Indonesia to Malaysia. If property rights are well defined and transaction costs are low, does the Coase theorem apply here?

"Smoke from burning jungles in Indonesia spread across wider portions of Southeast Asia on Monday, as firefighters from Malaysia moved in to help combat the string of blazes that are testing relations between the neighbors. An acrid haze covered some Indonesian cities and drifted up the northern coast of Borneo and north along the Malay Peninsula into Thailand, where officials issued health warnings. Satellite imagery showed the greatest concentration of visible fires to be in the western part of Kalimantan Province, in the Indonesian part of Borneo, spewing the haze that has become an annual scourge for the region as poor farmers, illegal loggers and plantation companies in Indonesia set hundreds of fires to clear land. Last week, the fires forced Malaysia to declare a state of emergency in two coastal cities as haze levels there reached record highs. Low visibility and pollution forced officials to close schools and shut down Malaysia's busiest port for a day." (article by Wayne Arnold titled Indonesia's Yearly Smoke Cloud Reaches Malaysia and Thailand)

At the end of the article, the New York Times actually argues that economic
development could mitigate this externality! "Malaysia's team of 125 firefighters arrived Monday in the capital of Indonesia's Riau Province, Pekanbaru, a city best known as a base for oil companies like Chevron that operate in the petroleum-rich province. Provincial authorities have long complained that too little of the oil being pumped out of Riau was benefiting its own people, doing little to alleviate the poverty that contributes to the haze problem. Poor farmers, lacking modern machinery, still rely on slash-and-burn techniques to clear new land for farming."

If the poor farmers had greater access to modern capital, they would not engage in destructive activities that exacerbate air pollution problems downwind. This raises the question; "Why don't the Malaysians provide this "green" equipment for the poor Indonesian farmers?" While this "gift" would be costly, it would seem to beat
the alternative of importing all of this soot. This strikes me as a Coasian
resolution to the externality.

The interesting economics here is that Indonesian economic development could mitigate the cross-boundary externality! In other regional public goods settings the opposite takes place. Consider increased Mexican growth in its Maquiladoras zone affecting U.S environmental quality. In this case, growth is "bad" for the neighbor's environmental quality.

While the New York Times does a nice job outlining this Indonesian case it provides
little insights concerning the bigger issue of how to mitigate cross-boundary
externalities. Hilary Sigman has examined whether nations who trade more are
more likely to resolve cross-boundary water pollution problems than nations who trade little. This paper is available at www.bepress.com in the pollution havens special issue.

For non-economists who are reading this, Ronald Coase won the Nobel Prize.
http://nobelprize.org/economics/laureates/1991/ --- part of his contribution to economics was his analysis of how to mitigate the social costs of externalities.
In all honesty, the Coase theorem is not applicable in this case. Property rights
are not well defined and transaction costs are high. In english, it is difficult
for the victims from the smoke to locate and bargain with Indonesia's farmers.

You may have noticed that I have assumed that Indonesia has the "property right"
to pollute on its neighbor. If Malaysia had the right not to be polluted on
then it clearly would have enforced this right already. In the absence of an
International Law enforcer, Malaysia will need to take pro-active actions
to provide Indonesia both with incentives and resources to mitigate this problem.

Sunday, August 14, 2005

Do Greens Buy Hummers? Free Riders versus “Good” Environmental Citizens

Economic theory predicts that common property is trampled upon and seized. Public parks, the Atmosphere, Oceans, public libraries all are polluted in part due to the fact that nobody has an explicit monetary incentive to preserve them. Each new semester, we teach students about the “Tragedy of the Commons” but does everyone free ride?

This summer I saw the net results of free riding in Rome. I spent all of June in Rome and was shocked by both the rampant dog poop on the streets and the graffiti covering so many buildings. I wondered why “quality of life” laws are not enforced in this city (maybe Rudy Giuliani should serve as Rome’s mayor?). What percent of Rome’s citizens engage in defacing the Commons? Turning this question around; in the United States, who buys hybrid cars such as the Prius and the Insight and what motivates them to do so? It is well known that relative to conventional vehicle, hybrids create less smog and less greenhouse gases. But what motivates buyers? Intrinsic environmentalism? High gas prices? Or, the Warm Glow of being seen doing a good deed?

A central theme in modern applied micro economics is recognizing that people differ. Labor economists and behavioral economists are hard at work documenting population heterogeneity with respect to earnings, ability, effort, patience, and other dimensions. About a year ago, I started working on an “environmental heterogeneity” project. In my empirical study (Environmental Ideology as a Determinant of Household Resource Consumption), I wanted to identify people who care deeply about the environment (Greens) and compare their market choices to the market choices of people of similar income and age but happen to not care about the environment (the Browns). Intuitively, I wanted to compare Paul Ehrlich’s daily choices to Dick Cheney’s daily choices. Relative to the Vice President, does Paul consume fewer natural resources in day to day life?

When I told people about this project, they told me that I was in a no-lose situation. If I found that Greens have the same private consumption patterns as Browns, then I could facetiously title the paper “Hypocrites”. If I found that Greens had a smaller per-capita ecological footprint than Browns, then some environmental groups would celebrate the paper saying that it represents objective evidence supporting the environmental movement’s success in educating people. This argument would claim that when people become “environmentally enlightened”, they choose to live their lives in a more sustainable way.

As I pursued this project, I learned that talented environmental economists had already been working on this issue using very different data than what I describe below. Matt Kotchen and Michael Moore (2004) surveyed Michigan households concerning their propensity to participate in a green-electricity program. They find that conservationists consume almost 10 percent less conventional electricity than non-conservationists and that conservationists are more likely to participate in the green-electricity program. How did they know who was a conservationist? By surveying each household, they asked questions well chosen to partition people into three sets (Greens, Browns, neither).

I approached this problem using a different data set. Unfortunately, very few household level data sets contain data both on how much resources different households consume and information about each household’s ideology. Intuitively, how do we know an “environmentalist household” when we see one? Some surveys ask people; “Are you a Republican?” This might be correlated with environmental ideology but maybe not.

To make progress on my core question, I used data solely from California. The 2001 National Household Transportation Survey provides detailed information for thousands of households on how much gasoline they consumed in the previous year. The data set provides demographic information about the household and provides the household’s residential zip code. Knowing each survey household’s zip code, I merged to each record the local community’s share of registered Green Party voters. The Green Party is a minor political party in California. In the year 2000, only .9% of the state’s voters were registered party members. At the state level, this party does not exercise political clout. Thus, it is difficult to view Green Party membership as anything but an expression of one’s core beliefs. I’m claiming that communities where a relatively large percentage of residents are Green Party members are pro-environment communities. For example during summer times, I live in Berkeley California in zip code 94707. The Green Party % registered for this zip code is 4.3%! Democrats have a 69% share here. To learn more about this Party take a look at: http://cagreens.org/platform/ecology.htm

A critic could claim that I only have a “noisy” measure of each person’s own ideological ideology because I only observe a measure of the average ideology in his local community. I agree with this point but it beats nothing! The proof is in the empirics.

The first part of the paper’s empirical findings documents that “Green Party” communities vote pro-environment on California Ballot Initiatives such as Prop 185 in 1994. Prop 185 would have raised gasoline taxes and spent the revenue on improving public transit.

To give a sense of some of my paper’s findings I’ll focus on some zip code level regressions I estimated by merging year 2000 Census of Population and Housing data with the zip code data on political party registration. The Census collects information on commuting modes and I used as the dependent variable the percent of commuters who walk or bike. Controlling for zip code average household income and population density, Democrats are no more likely to walk or bike than Republicans while Green Party communities are more likely to commute by walking or biking. In the entire state of California, only 3.9 percent of workers commute using this “green” technology. A two percentage point increase in an area’s share of Green Party registered voters increases the share of commuters who walk or bike by 3.4 percentage points. Again, this is a large effect. The right column of Table Four switches the dependent variable to the share of a zip code’s workers who commute by public transit. Public transit is used more in high population density, poorer zip codes. Controlling for these variables, both Green Party communities and Democrat Party communities are more likely to commute by public transit than Republican communities. Note that the Green Party coefficient is more than 10 times larger than the Democratic Party coefficient.”

For folks who are interested, I will post a .pdf of the entire paper to my Fletcher Web page in September. The bottom line of my study is that Greens vote green and consume green. Areas filled with Democrat registered voters vote green but have the same consumption patterns as Republican areas.

A weakness of my study is that there is no price variation. I cannot answer the question; “if gas prices increase by 20% will Greens reduce their consumption of gas by 42% while Browns will reduce their consumption by only 12%”. Ideally, future research will come up with ways to estimate how demand curves for green products differ across the population. As for profit firms such as Toyota and Honda design “green cars” such as the Prius and the Insight, their marketing departments must be trying to figure out what prices to charge for these cars and what would demand be at those prices. At what price of gasoline and at what price charged by Toyota would Dick Cheney buy a Prius? At what price of gasoline would Arnold substitute away from his Hummer collection?

AIDS in Minority Communities: The Role of Incarceration

Two Berkeley economists have written an intriguing paper documenting that an unintended consequence of increased black male incarceration rates is higher AIDS rates for African-American men and women.

Rucker Johnson and Steven Raphael’s new empirical paper titled “The Effects of Male Incarceration Dynamics on AIDS Infection Rates among African-American Women and Men” uses data from 1982 to 2001. People are divided up into different cells depending on what state they live in, their age, race and sex. The authors use several data sets to calculate for each cell (a state/age category/race category/sex category) the AIDS rate and the imprisonment rate in previous years. Regression techniques are used to study the relationship between these two variables.

Why could there be a causal relationship between increased incarceration rates and later increases in AIDS rates? To quote the authors:

“An increase in male incarceration rates may affect HIV/AIDS infection rates among inmates and members of the community at large through several channels. First, the relatively high concentration of HIV-positive people in prison (Hammett et. al. 2002) coupled with risk behavior among inmates (Krebs 2002, Swartz et. al. 2004) may accelerate the transmission rate of the disease among the incarcerated and among non-incarcerated members of the sexual networks of former inmates. Second, the temporal dynamics of incarceration, characterized by brief incarceration spells and the cycling in and out of institutions, may increase the degree of concurrent sexual relationships (sexual relationships that overlap in time) among inmates and their non-institutionalized partners (Adimora and Schoenbach 2005). This is a factor known to augment the risk of contracting and spreading sexually transmitted diseases. In addition, spells of incarceration may hasten the dissolution of sexual relationships, enlarging the total lifetime number of sex partners among inmates and their partners. An increase in incarceration rates may be viewed as an exogenous shock to an affected individual or group’s sexual-relationship market (in much the same way economists traditionally conceive of marriage markets (Becker 1981)). In particular, male incarceration lowers the sex ratio (male-to-female), abruptly disrupts the continuity of heterosexual relationships, and increases exposure to homosexual activity for incarcerated males—all of which may have far-reaching implications for an individual or group’s AIDS infection risk. Given the relatively high rate of incarceration among black men, all these avenues of HIV/AIDS transmission are likely to have disproportionate effects on the AIDS infection rates of black women and men.”

Their empirical results support their hypothesis.

“Thus far, we have documented strong partial correlations between the rate at which men and women become infected with full blown AIDS and lagged values of the incarceration rate for males in one’s demographic group defined by age, race, year, and state of residence. These correlations persist when we focus only on variation occurring within sexual relationship markets over time and after removing race-, age-, and state-specific year-to-year changes in both AIDS infection and incarceration rates. These partial correlations are highly significant and the implied lagged effects of incarceration parallel estimates of the pre-1996 AIDS incubation period distribution. Moreover, the effect sizes suggest that much of the racial differential in AIDS infection rates are attributable to historical differences in the rates at which black men are incarcerated.”

This paper documents an important public health externality exacerbated by prison terms. One wonders how many fewer AIDS cases there would be in a world where drugs were legalized?

Saturday, August 13, 2005

What is the Key to Urban Growth? Is it Gays?

If a city wants to grow, what should it do? Should it build a new baseball stadium, or a new arts center, or build new rail transit? Should it cut taxes? Should it fight urban crime? Should it hope that Global Warming will raise its average winter temperature from 25 to 50 degrees?

1. Warm winter climate certainly predicts growth. Between 1969 and 2002, Las Vegas’s population grew by 173 percent and Phoenix’s grew by 124 percent, while the Detroit and Philadelphia metropolitan areas hardly grew at all. Using data for 922 U.S cities with more than 25,000 residents in 1980, I have found that population growth between 1980 and 2000 was highest in warm winter, low rain cities like San Diego.

2. Fighting crime would help grow a city’s home prices and its population. Berry-Cullen and Levitt published a paper in the Review of Economics and Statistics a few years ago documenting the 2nd fact. Population flight from center city to the suburbs accelerates as urban crime increases. Amy Schwartz has a paper in the Journal of Housing Research documenting the first fact based on New York City’s recent crime decline. She measures how much home prices have increased in this city in the 1990s as crime fell in certain neighborhoods such as the Bronx and Harlem.

3. With regards to the other physical infrastructure investments listed above, I’m not optimistic that any of these “treatments” on their own would help a city grow.

What else would help a city? Some Urban Theorists have suggested that cities need to attract more skilled, creative people. According to Richard Florida (see his The Rise of the Creative Class), cities need to attract creative types. “If cities want to succeed, they need to think about providing lifestyle, or consumption, advantages to their residents.”

Prof. Florida provides a distinctive policy prescription. To build up a creative class, he argues, cities need to attract bohemian types who like funky, socially free areas with cool downtowns and high population density. In a recent book review in September 2005 issue of Regional Science and Urban Economics (Elsevier), Ed Glaeser uses data from 242 major U.S cities to test whether Florida’s two “leading indicators” of creativity; the gay index or the bohemian index actually are correlated with urban population growth between 1990 and the year 2000. Controlling for a city’s overall percent of adults who are college graduates in 1990, these “funky” indicators are not statistically significantly correlated with later growth. Glaeser concludes that it is human capital and not “funky capital” that plays a key role in urban growth.

Prof. Florida seems to be arguing that gays and bohemian types cause a city to have high quality of life. An alternative hypothesis is that cities with such high quality of life self select gays to live there. A paper published in the Journal of Urban Economics a few years ago was titled “Why Do Gays Live in San Francisco?” The paper’s argument was pretty simple. Many gay households have few children and thus can economize on land consumption. Such households, especially those with income, will choose communities where price per square foot of land is high because they demand relatively little space.

This Journal of Urban Economics paper did not explore whether the presence of gays and bohemians in a city boosts that city’s quality of life. To make this argument, a social scientist would have to explicitly model production functions. If all gays open up exotic restaurants then I can see how a city that attracts this group would have a greater diversity of consumer products. Alternatively, one might argue that on average that gays have higher disposable income and that they eat out more, shop more, than other adults. In this case, the cumulative purchasing power of this group living in relatively high density would provide incentives for distinctive sellers to locate near them. This might setoff a chain reaction creating a creative funky cluster that footloose computer programmers might want to live near.

My own view is that urban environmental quality plays a key role in attracting skilled people. If I can quote from my forthcoming piece in the New Palgrave Dictionary of Economics: “Urban economic development policy makers have pursued very different growth strategies. Some cities subsidize sports stadiums while others build airports or downtown cultural centers. Such targeted investment is unlikely to yield the key urban anchor. This essay has argued that cities than can provide and enhance urban quality of life will attract the high skilled. An end result of attracting this group is a more vibrant, diversified local economy. As per-capita incomes continue to rise, the demand for living and working in high quality of life cities will increase. The empirical literature continues to examine what are the key pieces of quality of life.”

Friday, August 12, 2005

Productivity Growth and Urban Garbage Dump Space

When Fresh Kills garbage dump in Staten Island was closed in 2001, a big question was "what would happen to New York City's garbage?". Who would it be exported to and at what price?

In the 8/12/2005 New York Times there is an article titled "Waste Yes, Want Not" (by Jeff Bailey) that documentes productivity growth at dumps. More waste is now being burried at the same sized dumps than in the past. Dump capacity for the 3 largest waste companies has increased by roughly 20% over the last 4 years.

"a remarkable productivity story playing out in the trash business, quietly saving consumers, businesses and municipalities billions of dollars a year. It is an unlikely industry for such a leap in efficiency.

Simply put, operators of garbage dumps are stuffing more waste than anyone expected into the giant plastic-lined holes, keeping disposal prices down and making the construction of new landfills largely unnecessary.

The clearest winner in this development is the City of New York, which exports 25,000 tons of trash a day to other cities and states, making it the waste industry's biggest customer. But the benefits stretch coast to coast and will continue for years to come."

"Waste companies and municipalities have fit much bigger dumps than originally permitted onto existing acreage, piling trash deeper and steeper, and vastly expanding permitted capacity. They are burying trash more tightly, so that each ton takes up less space, increasingly using giant 59-ton compacting machines guided by global positioning systems that show the operator when he has rolled over a section of the dump enough times. They cover trash at the end of the day, to keep it from blowing away, with tarps or foam or lawn clippings instead of the thick layers of soil that formerly ate up dump capacity.

Some operators are blowing water and air into landfills to hasten rotting and thus the shrinkage of buried garbage piles, creating more capacity.

Each practice is fairly prosaic, and many operators have yet to adopt the improved methods, but taken together the waste industry is in the early stages of the kind of increase in efficiency more typically seen in technologies like computer chips and turbines that generate electricity.

A well-run dump, tightly packed and using minimal dirt as cover, can hold 30 percent or so more trash than a poorly run site, said Thomas M. Yanoschak, a senior project manager at Camp Dresser & McKee, an engineering firm that advises waste sites. "Operators are much better now," he said."


THE ONE WORRYING TREND QUOTED ABOVE are the techniques that accelerate rotting. My Tufts colleagues Bill Moomaw and Frank Ackerman did some work on Japan and I believe that they documented that methane from garbage dumps produces a lot of greenhouse gases. This would mean that the garbage disposers are switching the externality from filling up land to contributing to climate change.

THE ARTICLE ALSO HAS ONE Nice paragraph about the unintended consequences of regulation.

"Environmental regulations, which many feared would cause a disposal shortage, actually helped encourage the glut. The Resource Conservation and Recovery Act, passed in 1976 but put into effect over more than a decade, requires that liners be used to protect groundwater and that systems to extract water and methane be installed. The cost of all that forced thousands of small dumps to close and encouraged huge new landfills that could pile trash hundreds of feet deep to maximize the return on investment."

So he is saying that regulation changed the industry's structure driving out the
low productivity firms and the average survivor has higher productivity.

Thursday, August 11, 2005

Can companies be shamed into environmental compliance?

I sometimes take a look at www.env-econ.net --- there seem to be a lot of different voices speaking there but it has been endorsed by AERE! The short note on the power of shame interests me. Dora Costa and I have a NBER Working Paper called "Shame and Ostracism" in a completely different setting (The U.S Civil War).

When can "shame" be an effective regulatory tool? The Media certainly cover
stories when the Toxic Release Inventory announces the leading polluters for the last year. Since TRI emissions are self-reported by firms, I've always been confused whether the anticipation of shame leads polluting companies to take "real" actions that reduce emissions or to engage in "accounting" tricks to simply look green.

How could shame green?

Case A: The CEO is a green "wannabe" (think of Bill Ford at Ford) and bad press leads him to sacrifice some firm's profits in pursuit of social goals. Clearly for this to be an equilibrium, this boss must not fear being fired by shareholders --- so either the company is a family owned firm or there is not full competition to become
boss of the firm.

Case B: Consumers of the product can credibly commit to substitute to a "greener" alternative product if the company stays brown. Shame can only work if consumers do not free ride. Each consumer has an incentive to continue to buy the product at its cheap price and let everyone else boycott. The existence of close substitutes for any given differentiated product would need to be investigated industry by industry
using the Berry, Levinsohn, Pakes discrete choice models of product demand.

Case C: Workers and compensating differentials. Suppose that a firm has
a reputation for being satanic. In an extreme case workers may be embarrassed to
tell their friends that they work there (the opposite of working for Amazon). To recruit good workers, this firm would need to pay a wage premium. If human
capital is the key input for such a firm, the shame premium could raise their
cost structure enough that it would be profitable to become a greener firm.

Is there a Case "D"? I need to think about this. It would interest me to see an analysis that classifies different polluting industries based on the 3 criteria I list above. Such an exercise would provide a sense of how much of current polluting
activity is "at risk" for greening due to shame.

Should Environmentalists Hate Sprawl? The Sprawl Brawl Part Two

What are the environmental consequences of suburban growth? The rhetoric about “sprawl” can get awfully heated. If people want to live in the suburbs, what is the negative externality this imposes on everybody else? Here are some candidates:

A. More Driving leading to more smog, more SUVs and more CO2 production?
B. Longer Commute times?
C. More road paving?
D. More water consumption?
E. More conversion of farmland into suburbia?

In an earlier post, I covered A. Candidate B is false. Using micro data from the National Household Transportation File, Ed Glaeser and I (see our 2004 Handbook Chapter titled Sprawl and Urban Growth) found that suburbanites do live further from their job than urbanites but they drive faster so their commute times to work are quite close to urbanites. If a city had 100% of its jobs in the Central Business District and if the population was moving to the suburbs, then commute times could certainly rise. But this has not happened. People and jobs have both been suburbanizing and it should not be shocking that people who work in the suburbs, live in the suburbs. The more interesting pattern is reverse commuting where people live in the center city and commute to the suburbs. Are commute times increasing in sprawling metropolitan areas? While there are certainly long distance commuters, especially in areas with high home prices such as Boston, San Fran and New York City, I do not think that there is compelling evidence of sharply rising commute times in growing areas. One data source that can be used to test this claim is the Texas Transportation Institute’s data base that provides “lost hours” to commuting for roughly 75 metropolitan areas over the last 30 years.

More road paving?

Yes, but how do we value the “lost” natural capital? I would hope that suburban highway construction consultants do discuss alternate possible routes with ecologists. I have never seen a study documenting that the presence of ecological hotspots can deter highway builders from building a highway. Kerry Smith has done some related work but I think that this is an under-researched topic. Obviously, the natural capital costs of highway construction could be minimized if ecologists do have some say in siting decisions. I would be fascinated to know more about whether with the rise of the environmental movement; do ecologists now have more say than they used to? Or does this vary by “Blue State” , “Red State”? If an environmental impact statement suggests that there will be large costs from a specific road project, what happens next? Does the EIS get filed in the garbage can or do the highway authorities have to address the statement’s points and come up with an offset plan?


More water consumption?

When people think of sprawling metro areas they think of Houston, Phoenix, Atlanta, Las Vegas. Many of these growing cities are in warm winter, low rainfall areas. If more people live in such areas and each household pursues the American Dream of a detached house on a ½ acre lot then growing grass and watering will increase local demand for water. While there are more households with more lawns and toilets demanding water, there are two offsetting trends that help to mitigate this environmental impact of sprawl. Some states such as California have had success pushing households to conserve water through encouraging the purchase of green appliances (see South Coast Regional Report and research by Chris Timmins). Other states are actively metering water consumption and making households pay the gallon. One fact that surprises me about water is that water prices are not higher in arid areas. This sounds like a bad signal. Research by tufts university researchers has documented this point (see Kirshen, Paul, Andrea L. Larsen, Richard Vogel and William Moomaw. Lack of Influence of Climate on Present Cost of Water Supply in the USA. Water Policy 6, 2004 269-279.)


More conversion of farmland into suburbia?

This must be right but let me play Devil’s advocate. If the farm is a pig farm, suburbanites might rejoice if the farmer sells out to the developer. In this case suburban housing is less nasty than the farm. You will rightly point out that this is a special case that in most cases the farmers were providing “open space” without explicit compensation from the suburban neighbors. The suburban neighbors gain “use value” (the nice view) and existence value from the farmer and lose this when he sells out to a suburban developer. The missing market in this exciting example is that the farmer had no way to collect for the services he was providing his neighbors and thus he underestimated the social value of his land when he made the decision to sell his land to the developer.

The good news here is that many local governments recognize this issue and are taking pro-active steps. Throughout the United States, municipalities are purchasing open space around their borders to guarantee that the land is not developed. For example, the city of Boulder, Colorado, has earmarked a 0.73 percent sales tax to fund the purchase of 25,000 acres to establish a greenbelt around the city. In the Seattle metropolitan area, King County has adopted a different strategy with a similar goal. Drawing upon a $50 million bond issue, the county purchases development rights for agricultural land facing pressure from developers, with priority rankings determined in accordance with the intensity of such pressures.

Such government initiatives solve a free rider problem. In the absence of government intervention, environmental organizations such as land trusts might go door to door, asking people to contribute money to help preserve open space. But few people are likely to give under these conditions. The “win-win” for any one household is to contribute nothing to such programs and let everyone else underwrite their cost. As a result, too little money is invested in protecting local public goods. Government’s unique ability to collect taxes and allocate revenue solves this problem. However, not all governments can take this approach: like many green policies, “open space” initiatives are more likely to succeed as local incomes rise. After studying voting patterns for all open space referenda in the United States between 1998 and 2003, Matt Kotchen and Powers (2005) found that richer jurisdictions and jurisdictions with more home owners were more likely to vote to hold such ballot initiatives.

So, in the presence of Private Land Trusts and local governments who are purchasing open space and development rights, as long as these organizations have capable ecologists who help them prioritize which pieces of land are most valuable, then I’m optimistic that sprawl will follow the path of least resistance and will cause less ecological damage.

What is my bottom line on the environmental cost of sprawl? Sprawl has increased carbon dioxide emissions and it has paved over some farms. Due to greener vehicles over time and water conservation efforts it has not increased urban air pollution or urban water consumption. Given the recent actions by Land Trusts and local governments, I do think that the most valuable farmland will be protected so this mitigates the social cost of land conversion. So, sprawl’s main impact is contributing to climate change. Do we follow Hamilton and others at the World Bank and value carbon dioxide at $20 per ton to calculate the marginal social cost of suburbanization? Regardless of what number we choose here, technology could mitigate this externality. If suburbanites all bought Toyota Prius SUVs maybe Al Gore would like them more.