I should send Ed Mills two copies of the 2008 Chinese Translation of my Green Cities book. Maybe he would like this one more than the original english version? I still like my book a lot. My co-author Siqi Zheng helped make this translation happen. I'm grateful to her for her help.

If you bothered reading my last blog entry, I wanted to expand it a little. As you might remember, I briefly listed what I think are the 6 biggest issues in environmental economics. I would encourage all young environmental scholars to be working on these topics!

Let me return to endogenous technological innovation. Intuitively, if the people of Berkeley all install solar panels do firms in this industry enjoy large learning by doing effects? Does their cost of production decline as a function of cumulative experience? Why does this matter? If learning by doing effects are large, then we can be optimistic that a big green demand push today (either due to government subsidies or population expressed environmentalism) will help to lower the price and raise the quality of future green products. Just as the Pentium computer is better than the old 386 PC, learning by doing would mean that future solar panels will be of higher quality than products today because the producers gained experience. The devil here is how you measure these learning gains.

A second source of endogenous technological innovation is the induced innovation hypothesis. As the price of inputs (such as energy costs) go up, which firms are nimble enough to change their production processes to minimize their consumption of the now costly inputs such as oil? We know that Southwest Airlines has done well recently in terms of profitability because it hedged gasoline prices and bet that gas prices would go up and they locked in to purchase gas at a lower price but in the medium term if they are betting that gas prices will stay high are they ordering air planes that are more fuel efficient? What strategies are they embracing to deal with expensive natural resources in the short run, medium term and long run?

I can see how a business professor can write nice single company case studies here. The challenge would be how you pool these case studies to be able to conduct a statistical analysis of how heterogeneous firms respond to expectations of rising natural resource prices.