Tuesday, November 27, 2012

Climate Change Adaptation and Shipping Goods on Receding Rivers

The NY Times reports that the great drought is causing the Mississippi River to retreat and this means that big boats can't use it to ship goods because they will hit the ground on the bottom of the river.  As the self appointed world's leading optimist about how capitalism evolves to help us cope with climate change's consequences, permit me to offer a few thoughts.

First, let's not forget increasing returns to scale.  The shippers of fertilizer and other products are attracted to shipping products to final consumers using this river because the transport cost per $ of sales is low.  If the option of shipping by boat vanishes, and no rail road tracks are around, how will fertilizer sellers adjust?  Truckers and smaller boats will fill the void and the profits of fertilizer sellers will fall and the price per pound of fertilizer will rise.  Who bears the incidence of this shock depends on the elasticity of these supply and demand curves.

Let me point out a silver lining from this climate change induced effect. I predict that farmers will use less fertilizer in the Midwest as the price rises and the nitrogen cycle problems and the Dead Zone in the Gulf of Mexico will be partially mitigated.  Farmers will figure out how to grow output with less fertilizer.    For environmentalists who haven't studied general equilibrium theory, this is an obvious prediction from standard supply and demand models.

History doesn't have to repeat itself. Just because farmers are used to buying their fertilizer from some guy who shipped it on this River doesn't mean that in the future this pattern must persist. Perhaps this shock will give a boost to organic farmers who don't use synthetic fertilizers. 

For you environmental economists, note that I'm making a Porter Hypothesis style point. In the Porter Hypothesis, regulation nudges profit maximizers to take a fresh look at their business choices and some of them discover new approaches that lower their cost of production.  In a similar spirit, I'm arguing here that climate shocks shake up the status quo and force firms within the farming industry to re-optimize.  In a diverse world, some will be more nimble than others but I don't care about such distributional effects.  The winner of this adaptation competition will have good produce for us and we will eat it.