Saturday, April 17, 2010

The Economics of Volcanoes

Iceland seems pretty determined to make its mark in international relations. I may teach a course on Iceland and international relations next year at USC. Recently, it had a major financial crisis and now it has unleashed an angry volcano barfing smoke all over Europe. When in doubt, I turn to the New York Post's Readers for wisdom and here is what one intellectual had to say.

"roykirk

04/17/2010 3:05 PM

This is a tragic event! I demand that President Obama and former Vice president Gore call for an emergency meeting with the United Nations and pass a global treaty to immediately ban all future volcanoes and that any nation involved with the use of volcanoes be held accountable for any damage to the environment. We must not allow any country involved in the use of volcanoes to not pay the price of the damage caused to the environment and the death and destruction to property."

For environmental economists, this is a pretty funny quote.

But back to the Volcano. This "natural experiment" will yield several nerd papers;

1. Does particulate matter cause health damage? Public health nerds will exploit the short run unexpected increase in pollution to study health impacts. Self protection offsetting is minimal in this setting. Time diaries could be collected here to see if households in affected European cities did change their behavior to minimize pollution exposure.

2. Do airplanes contribute to our economy? This is a new twist on Robert Fogel's famous work on the role of the railroads in the U.S economic development in the 19th century. I realize that the airplane disruption is temporary but it is interesting how robust our transportation system is (rail for planes) in the face of a disruptive shock.

3. I wonder if we really do get a test of the geo-engineering claims about particulates blocking sun light and hence lowering temperatures. This isn't economics but it speaks directly to whether geo-engineering could achieve its stated objectives.

4. Regional Cross-boundary externalities --- This is a new version of "Acid Rain" (from the U.S to Canada) or the Mekong River --- China's dams affecting water access down river in Vietnam. In this case, there is nothing that Iceland can do to mitigate or exacerbate the problem. The externality "inelastically" supplies itself. Suppose the Volcano smoke is a permanent new effect (caused by climate change?) --- how will the geography of European economic activity be affected?

Now, Los Angeles is not suffering from volcano smoke. It is 70 degrees and blue skies. The future is here.

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