Tesla Motors produces electric vehicles. Yesterday, it had its IPO and its current market share price is higher than expected . While I have never written a "finance paper", this case study offers a great opportunity for environmental economists to conduct some simple "event study" before/after comparisons;

Some Questions:

1. As Congress announces new tighter fuel CAFE standards, could this lower Tesla's stock price as other manufactures would invest more in electric cars? As California tightens its Pavley Standards what happens to Tesla's stock price rate of return? Relative to a control group (say the average stock price change for General Motors and Ford), does Tesla earn "excess returns" if government passes Climate Change legislation such as a carbon tax this would increase Tesla's stock price.

2. How positively correlated is the change in Tesla's stock price with increases in gas prices? If gas prices are rising and expected to stay high (peak oil), this should increase the demand for electric vehicles and raise Tesla's stock price.

3. How does the Tesla stock price move as Nissan makes new credible announcements about the development of its electric "Leaf"? It looks to me that the Leaf will be a "poor man's Tesla". If they are close substitutes, then Tesla's stock holders better be ready for some sleepless nights as they wait for Nissan Leaf announcements.

The beauty of a stock market is the real time continuous trading provides up to date information about the collective wisdom of this "green" company's financial health. This will help economists to see if the "green economy" is succeeding. A company such as Nissan makes many different cars and the Leaf is just one part of its portfolio --- thus its stock price isn't that informative about the expected profitability from making green, electric vehicles.

Since we all embrace the efficient markets hypothesis, the Tesla stock price today provides the best guess about the expected present discounted value of profits to be earned by electric car sales. This is a very good indicator of where the market thinks this new product is heading and I will be tracking it!

As you may recall, I have written a pretty good paper analyzing voting patterns on California's environmental initiatives (see Kahn and Matsusaka 1997 ). So, given that I'm a self proclaimed expert on this stuff --- I must ask that you vote "No" on Proposition 23 in November 2010.

This proposition would gut AB32. Here is a direct quote; "Suspends Air Pollution Control Laws Requiring Major Polluters to Report and Reduce Greenhouse Gas Emissions that Cause Global Warming Until Unemployment Drops Below Specified Level for Full Year. Initiative Statute. Suspends State laws requiring reduced greenhouse gas emissions that cause global warming, until California’s unemployment rate drops to 5.5 percent or less for four consecutive quarters."

Given that the State's unemployment rate is 12% this 5.5% goal is in the distant future.

I do not believe that AB32 is a job killer. Its implementation would represent a change in the "rules of the game" and would incentivize Californian households and firms to rethink many aspects of our day to day life. The net effect of this regulation will be lower greenhouse gas emissions and a leadership position in the world's "green economy". Somebody has to be the global guinea pig, and I believe that California is well positioned to play this role.

How many new jobs will this legislation create? I'm not sure but some very smart, well meaning people have devoted ample effort to shaping this regulation. They have devoted this effort at ARB out of a sincere desire to achieve "sustainable growth". In my interactions with the staff at the Air Resources Board, I see no truth to claims that this is a centralized power grab by lovers of "big government".

Direct democracy is pretty funky stuff. Here is what California will vote on in the fall.

Secretary of State Debra Bowen Assigns Numbers to Ballot Measures Certified for

November 2 General Election, Invites Ballot Arguments



SACRAMENTO – Secretary of State Debra Bowen today announced the proposition numbers for the 10 measures set to appear on the November 2, 2010, Statewide General Election ballot and invited interested Californians to submit arguments to be included in the Secretary’s Official Voter Information Guide. The guide, also known as the ballot pamphlet, is mailed to every voting household in California.



The 10 propositions on the November 2 ballot are listed below, along with the Legislative Counsel’s digest or the Attorney General’s title and summary.



Proposition 18 SBx7 2. Safe, Clean, and Reliable Drinking Water Supply Act of 2010. (Chapter 3, 2009). (1) Under existing law, various measures have been approved by the voters to provide funds for water supply and protection facilities and programs. This bill would enact the Safe, Clean, and Reliable Drinking Water Supply Act of 2010, which, if approved by the voters, would authorize the issuance of bonds in the amount of $11,140,000,000 pursuant to the State General Obligation Bond Law to finance a safe drinking water and water supply reliability program. The bill would provide for the submission of the bond act to the voters at the November 2, 2010, statewide general election. (2) This bill would take effect only if SB 1 of the 2009-10 7th Extraordinary Session is enacted and becomes effective. (3) This bill would declare that it is to take effect immediately as an urgency statute



Proposition 19 Changes California Law to Legalize Marijuana and Allow It to be Regulated and Taxed. Initiative Statute. Allows people 21 years old or older to possess, cultivate, or transport marijuana for personal use. Permits local governments to regulate and tax commercial production and sale of marijuana to people 21 years old or older. Prohibits people from possessing marijuana on school grounds, using it in public, smoking it while minors are present, or providing it to anyone under 21 years old. Maintains current prohibitions against driving while impaired. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local governments: Savings of up to several tens of millions of dollars annually to state and local governments on the costs of incarcerating and supervising certain marijuana offenders. Unknown but potentially major tax, fee, and benefit assessment revenues to state and local government related to the production and sale of marijuana products. (09-0024.)



Proposition 20 Redistricting of Congressional Districts. Initiative Constitutional Amendment. Removes elected representatives from the process of establishing congressional districts and transfers that authority to the recently-authorized 14-member redistricting commission. Redistricting commission is comprised of five Democrats, five Republicans, and four voters registered with neither party. Requires that any newly-proposed district lines be approved by nine commissioners including three Democrats, three Republicans, and three from neither party. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Probably no significant change in state redistricting costs. (09-0027.)



Proposition 21 Establishes $18 Annual Vehicle License Surcharge to Help Fund State Parks and Wildlife Programs and Grants Free Admission to All State Parks to Surcharged Vehicles. Initiative Statute. Establishes an $18 annual state vehicle license surcharge and grants free admission to all state parks to surcharged vehicles. Requires deposit of surcharge revenue in a new trust fund. Requires that trust funds be used solely to operate, maintain and repair the state park system, and to protect wildlife and natural resources. Exempts commercial vehicles, trailers and trailer coaches from the surcharge. Requires annual independent audit and review by citizen's oversight committee. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Increased state revenues of about $500 million annually from the imposition of a surcharge on the VLF to be used mainly to fund state parks and wildlife conservation programs. Potential state savings of up to approximately $200 million annually to the extent that the VLF surcharge revenues were used to reduce support from the General Fund and other special funds for parks and wildlife conservation programs. Reduction of about $50 million annually in state and local revenues from state park day-use fees. These revenue losses could potentially be offset by increases in other types of state park user fees and revenues. (09-0072.)



Proposition 22 Prohibits the State from Taking Funds Used for Transportation or Local Government Projects and Services. Initiative Constitutional Amendment. Prohibits the State from shifting, taking, borrowing, or restricting the use of tax revenues dedicated by law to fund local government services, community redevelopment projects, or transportation projects and services. Prohibits the State from delaying the distribution of tax revenues for these purposes even when the Governor deems it necessary due to a severe state fiscal hardship. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Significant constraints on state authority over city, county, special district, and redevelopment agency funds. As a result, higher and more stable local resources, potentially affecting billions of dollars in some years. Commensurate reductions in state resources, resulting in major decreases in state spending and/or increases in state revenues. (09-0063.)



Proposition 23 Suspends Air Pollution Control Laws Requiring Major Polluters to Report and Reduce Greenhouse Gas Emissions that Cause Global Warming Until Unemployment Drops Below Specified Level for Full Year. Initiative Statute. Suspends State laws requiring reduced greenhouse gas emissions that cause global warming, until California’s unemployment rate drops to 5.5 percent or less for four consecutive quarters. Requires State to abandon implementation of comprehensive greenhouse-gas-reduction program that includes increased renewable energy and cleaner fuel requirements, and mandatory emission reporting and fee requirements for major polluters such as power plants and oil refineries, until suspension is lifted. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Potential positive, short-term impacts on state and local government revenues from the suspension of regulatory activity, with uncertain longer-run impacts. Potential foregone state revenues from the auctioning of emission allowances by state government, by suspending the future implementation of cap-and-trade regulations. (09-0104.)



Proposition 24 Repeals Recent Legislation that Would Allow Businesses to Carry Back Losses, Share Tax Credits, and Use a Sales-Based Income Calculation to Lower Taxable Income. Initiative Statute. Repeals recent legislation that would allow businesses to shift operating losses to prior tax years and that would extend the period permitted to shift operating losses to future tax years. Repeals recent legislation that would allow corporations to share tax credits with affiliated corporations. Repeals recent legislation that would allow multistate businesses to use a sales-based income calculation, rather than a combination property-, payroll- and sales-based income calculation. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Annual state revenue increase from business taxes of about $1.7 billion when fully phased in, beginning in 2011-12. (09-0058.)



Proposition 25 Changes Legislative Vote Requirement to Pass a Budget from Two-Thirds to a Simple Majority. Retains Two-Thirds Vote Requirement for Taxes. Initiative Constitutional Amendment. Changes the legislative vote requirement necessary to pass the state budget from two-thirds to a simple majority. Provides that if the Legislature fails to pass a budget bill by June 15, all members of the Legislature will permanently forfeit any reimbursement for salary and expenses for every day until the day the Legislature passes a budget bill. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Unknown changes in the content of the state budget from lowering the legislative vote requirement for passage. Fiscal impact would depend on the composition and actions of future Legislatures. Minor reduction in state costs related to compensation of legislators in years when the budget bill is passed after June 15. (09-0057.)



Proposition 26 Increases Legislative Vote Requirement to Two-Thirds for State Levies and Charges. Imposes Additional Requirement for Voters to Approve Local Levies and Charges with Limited Exceptions. Initiative Constitutional Amendment. Increases legislative vote requirement to two-thirds for state levies and charges, with limited exceptions, and for certain taxes currently subject to majority vote. Changes Constitution to require voters to approve, either by two-thirds or majority, local levies and charges with limited exceptions. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Potentially major decrease in state and local revenues and spending, depending upon future actions of the Legislature, local governing bodies, and local voters. (09-0093.)



Proposition 27 Eliminates State Commission on Redistricting. Consolidates Authority for Redistricting with Elected Representatives. Initiative Constitutional Amendment and Statute. Eliminates 14-member redistricting commission selected from applicant pool picked by government auditors. Consolidates authority for establishing state Assembly, Senate, and Board of Equalization district boundaries with elected state representatives responsible for drawing congressional districts. Reduces budget, and imposes limit on amount Legislature may spend, for redistricting. Provides that voters will have the authority to reject district boundary maps approved by the Legislature. Requires populations of all districts for the same office to be exactly the same. Summary of estimate by Legislative Analyst and Director of Finance of fiscal impact on state and local government: Likely decrease in state redistricting costs totaling several million dollars every ten years. (09-0107.)

I've now realized that nobody will like my forthcoming book (Basic Books September 2010) titled climatopolis . The Right Wing of the political spectrum will be unhappy that I believe the climate science that climate change could be a real threat to our society (if we don't change our ways). The Left Wing will be unhappy that I argue that free market capitalism and individual rational choice will allow us continue to thrive as climate change unfolds. Capitalism has caused climate change but its evolutionary flexibility will allow us to do a "Houdini" in the face of anticipated changes in our climate conditions. To see me discuss these "hot botton" issues watch this .

I have one fan. I'm grateful to this person for boosting my self confidence.


"DonQuixotedeKaw
3 days ago I really like this guy, he's not a hubristic gasbag.
The answer to the last question, asked at 56:45 is at the "PJ Series" playlist.
YT search; 4670D3458F353C6B

I've added this video to the far larger playlist,
"Conceiving A Panacea" 1504D87AB1D74D9C "

Time flies. For a quick proof, you can read this nerdy article about the making of the 1980 hit movie Airplane. "Do you like gladiator movies?" As a 14 year old, I think I knew that the pilot was a strange dude.

For a second piece of evidence, consider Han Solo from Star Wars. My son has watched Star Wars Movies 4-6 at least 5 times each but when my wife showed him a photo of Harrison Ford and his recent marriage as reported in People Magazine --- my son had no idea who "the old dude" was.

Imagine a place where your Blackberry doesn't work and you don't care. A place with 1700 year old redwood trees that even your 9 year old son thinks are pretty cool. This place exists. It is called Sequoia National Park . I now know more about central California than I thought I would ever know. I'm also now a fan of the Fresno Bee. Things change.

I saw the world's biggest tree (General Sherman), we saw bears, lizards, and some fast moving rapids. We ate at the same Mexican Restaurant for 3 nights in a row and I may have permanent indigestion. I even shocked the world swimming in the motel pool with my son. I was the only dude with no tattoos. I guess I'm really uncool.

Each day, we would drive two hours roundtrip into the National Park and then hike around for 3 to 4 hours. This was too much exercise and at night I could barely move. The hotel beds were too small and the toliet had a strange smell (perhaps the upstairs motel guests?) but despite these small slights --- we still had a great time.

We returned to Los Angeles and had the pleasure of finding two dog turds in our garbage cans. I knew this would happen. Garbage cans are placed in front of our home on wednesday mornings and then the garbage trucks arrive before noon to empty them. But, we were out of town and our gardeners must have been late to roll them up our driveway so some kind dog owners were nice enough to give us their precious dogs' droppings and didn't even bother to tie the plastic bag. Nice!

I'm still caught up with this bad review that Climatopolis received. It occurs to me that I'm going to be set up as the "bad boy" of the climate change set because I do not foresee "doom and gloom" in our hotter future. For those of you who want hope and optimism, I've got it for you in abundance. Our best days are ahead of us!

I want my book to be remembered as a "neo-classical economist's vision for how an economy evolves in the face of anticipated but ambiguous risk (climate change)". We learn, we experiment and we adapt. Sink or swim baby.

To provide just one example of how economists view climate change; suppose that climate change affects Los Angeles' water supply. The introduction of floating water prices (i.e higher prices to reflect increased scarcity) would go a long way to helping us to adapt. The Economist Magazine appears to agree with me. Scarcity will actually nudge us to adopt more efficient means to allocate increasingly scarce resources (i.e water) --- adopting new rules of the game help us to escape.

Switching subjects, this article on GMO salmon is pretty interesting. If the salmon double in size, what happens to the equilibrium price? Supply has shifted out but does demand shift in or remain constant? How many people will freak out about "Frankenfood"?

It is clear that Publishers Weekly is not a big fan of my work. I sense an ideological bent to the short review below. My book made this reviewer angry but he/she doesn't explain why. Part of me is pleased by this response. I've hit a nerve!

Climatopolis: How Our Cities Will Thrive in the Hotter Future.
Matthew E. Kahn, Basic, $26.95 (288p) ISBN 978-0-465-01926-7

"Kahn (Green Cities) takes a sanguine look at how cities will fare under climate change. He admits that global warming could be catastrophic, but "a small cadre of forward-looking entrepreneurs will be ready to get rich selling the next generation of products that will help us all to adapt" and that "the story will have a happy ending." Analyses of global cities yield such scattershot observations as that by helping people rebuild in disaster-prone areas such as flood zones, governments "actually put more people at risk;" that "due to its recent economic development, China will be spared horrible outcomes faced by other developing nations;" and that globalization will protect us against local agricultural failures (and if crops fail everywhere, entrepreneurs will have incentives to provide dried fruit instead of fresh). On how the urban poor will cope with climate change, Kahn shrugs his shoulders writing, "the truth is that this group has always faced hardship…the question is, how much worse will their quality of life be?" In comparison with the abundance of thoughtful and astute books predicting life under climate change, this one is remarkably shallow. (Sept.)"

The review makes no mention of the fact that I am an economist and that the book's novelty is to embrace the tools of micro-economics for thinking about our evolving response at both the individual level and the government level to the very real threat of climate change.

To get a sense of my book's tone and core logic, you have a choice. You can watch

video #1 or

video #2.

In January 2010, I had the honor of giving a speech at the UCSB Bren School. I'm not sure if I was the most dignified guest but I had a great time and made many new friends.

I believe in teaching by counter-example. If you'd like to see how not to give a big think talk on how our cities will cope with climate change, watch this .

The Song Remains the Same. The members of Led Zeppelin were wiser than we thought. Today, young men in Beijing and Shanghai are finding that they cannot afford to buy a tiny apartment . Their girlfriends are dumping them unless they can buy a car and an apartment. Is life fair? As the ratio of young men/young women goes to infinity in China this marriage market is growing tough. While I have argued before that a little bit of international migration could cure this imbalance, I'd like to discuss a different issue here.

My loyal readers are well aware of my January 2010 paper about China's cities. If you need another copy go here . In this paper, Zheng, Liu and I argue that migration across China's major cities is creating an open system of cities. Beijing and Shanghai are not the only big cities in China. If rents grow too high, both workers and firms will leave. Just as millions of people left the Northeast over the last 40 years to go to the Sun Belt, a similar trend will play out in China. Now, there is an interesting Chicken and egg issue here of who will move first but it is highly intuitive that jobs that do not feature large learning spillovers or deal making can leave Shanghai and Beijing and locate in cheaper land rent areas and workers will follow. Cities such as Houston and Phoenix have much lower home prices than Coastal U.S cities. In a similar spirit, workers in China can live in the "next tier" cities and have much lower home prices so their effective real wages will be higher and their romantic lives may improve.

So, I predict that a consequence of the runup in real estate prices in the China's Superstar cities will be a migration to the next tier cities.

I'm hoping that Peter Gordon and Ed Glaeser will join me in endorsing spending government billions so that I could have the option of taking a fast train from Los Angeles to Las Vegas . Some policies just feel like a "free lunch" and this would appear to be classic example. If anyone would like to join me in taking out an adverstisement in the newspaper, we could all co-sign it and demonstrate our united front as we create "green jobs" and improve transit access for my part of the country. Before, I get too excited here -- I should ask somebody to calculate the average cost of this train per rider. Would it be less than $10,000?

There are costs and benefits of using chemicals for growing food such as California strawberries.

There are risk costs of using Methyl Iodide;
"“I’m not in blanket opposition to the use of pesticides, but methyl iodide alarms me,” said Theodore A. Slotkin, a professor of pharmacology and cancer biology at Duke University Medical Center and a member of the scientific review committee. “When we come across a compound that is known to be neurotoxic, as well as developmentally toxic and an endocrine disruptor, it would seem prudent to err on the side of caution, demanding that the appropriate scientific testing be done on animals instead of going ahead and putting it into use, in which case the test animals will be the children of the state of California.” "


Top researchers such as John Froines from UCLA have investigated the consequences of exposure to this stuff for creatures and for humans. For some public discussion look at this .


There are also benefits from using this stuff;

"Injected into soil before crops are planted, the fumigant spreads through the soil to kill insects, weed seeds, plant diseases and nematodes. It can be applied by drip irrigation under a special protective tarp or injected into the soil using a tractor that automatically places a tarp over the ground after application."

The State has made a regulatory decision to allow this chemical to be used.

"California has provisionally approved methyl iodide and will issue a final decision after the public comment period ends June 29.

During Thursday’s hearing, pesticide regulators voiced confidence in the scientific basis for their decision.

“The review associated with this material is the most robust and extensive in the history of the department,” said Mary-Ann Warmerdam, director of the state regulatory agency.

Ms. Warmerdam said that based on the available data, the chemical could be used safely with precautions like respirators, impermeable tarps and extra restrictions on use around schools, businesses and homes.

The scientific review committee, which was commissioned by the regulatory agency, vehemently disagreed."


What can an economist do here to improve public health in this case?

1. We can devise an auditing and credible punishment system to signal to farmers who use methyl iodide that their efforts to engage in costly precautions such as; "
respirators, impermeable tarps and extra restrictions on use around schools, businesses and homes" will actually be enforced and monitored. Farms won't take these costly actions if they believe that the regulatory threat is not credible. The audit probability must be high and the punishment conditional on being caught cheating must be high.

2. There is economic geography work to be done here in identifying which farming areas are adjacent to suburban communities featuring more homes and more people. In this case, the damage caused by the pollution externality --- the release of methyl iodide --- will be larger because there will be more victims exposed. The regulatory agency could consider a "moat strategy" in which farmers owning land close to the suburbs would not be allowed to use this chemical.

There could also be a label campaign that farmers who use this chemical would need to tell future land buyers that this chemical was used there. I bet that many farmers whose land is adjacent to California suburbs are considering selling their land to suburban developers. If developers are willing to pay less $ for farmland where this pesticide has been used (and if this is common knowledge), the farmers who want an option value to sell their land to developers in the future will not use the pesticide today! This would be a free market solution to the externality problem and Coase would be proud!

3. Returning to the product label, I can't tell if methyl iodide use in growing strawberries solely affects the soil where the berry is grown? Or does the chemical also get into the strawberry fruit itself? In the first case, only the people who live near the production site and the workers who work there will be affected. In the second case, then consumers of strawberries (such as my family) will also be affected. We have the right to a product label --- information about the consequences of exposure would increase the demand for "organic strawberries". (I'm assuing that organic strawberries are grown without this stuff), consumers would face higher prices for this higher quality fruit as the organic farmers would lose some of their produce output to the bugs.

Environmentalists need to figure out an easy to understand "grading scheme" for how they inform consumers about the consequences of consuming a given product. I realize the world is complex but we need a simple trusted "report card" scheme of "A, B, C, D" and then let consumers vote with their wallets. Environmental certification will continue to be a major middleman in helping us mitigate potentially serious health externalities such as this case.