An "intellectual" can write a review without having read the book or seen the movie.  While I am not an intellectual, I have read this review of Matt Damon's Promised Land and I have a few thoughts to share.  Now, I'm not a big city lawyer but I can tell that this Hollywood star believes that domestic drilling has significant localized environmental costs that those who are leasing their land to energy companies are ignoring.

So, let's sketch a simple rural social cost story and see if the Coase Theorem applies.   Matt and Mike own adjacent properties.  Matt grows cows while Mike doesn't do much with his land.  A gas company offers Mike serious $ per acre for the right to drill for gas.  Mike accepts.  An unintended consequence of drilling for gas on Mike's property is that there is extra water pollution on Matt's land and Matt's cows get sick from this water pollution.  

There is a basic property rights question here.  If Matt has the property rights to healthy cattle and if it is low cost to establish that any cattle disease is traceable to Mike, then Mike will compensate Matt for any damage done to his cattle.   If transaction costs and issues of accountability (perhaps there are several fracking sites within the area) make it cloudy and difficult to establish who caused Matt's cows to suffer, then Matt may be a victim of fracking.  Does this mean that fracking should be banned in this town?  An economist would ask;

1.  what is the value of the land per year when used for fracking  , call this $A
2.  What is the value of the land per year when it is used for its next best alternative,  call this $B
3.  what is the total environmental damage caused per year to the town, call this $C

A Coasian would say that if  A - B - C >  0 , then fracking should continue and Matt Damon has made a silly movie.

If A <  B +  C  then fracking should not have been allowed in this town.    If the land in the town were owned by one big "corporation" then no fracking would occur because the big capitalist would internalize the social costs caused by fracking.

The irony here is that the division of land into many smaller plots makes each small land owner have little incentive to internalize the externality.  So, Matt Damon is implicitly a friend of the 1%!     If there had been a single land owner and A < B+C, the frackers would never have been invited in and there would be no issue.  UPDATE ---- To see this point, consider an owner of a suburban shopping mall.  If Mr. Taubman believes that a new entrant (such as a dirty book store) will cause damage to the sales of other mall tenants then he won't let the entrant enter even if that book store would be profitable.  The residual claimant, Mr. Taubman, internalizes the total profit effect of the entry.

Now, the dispersed small land owners could still reach the efficient allocation of resources if transaction costs are low and they can bargain with each other.    If the dispersed land owners joined an association where they had to make group decisions, then this would nudge them toward the Coasian solution (i.e only invite fracking if A-B-C > 0).  If they are decentralized folks who do not speak to each other, then the town's individually rational choices (i.e Mike leasing to the frackers) may lower the entire community's well being.

 My office is 3 miles from Hollywood. I would be happy to meet with folks to go over the econ 101 of their plot lines before they make an irreversible investment of $25 million or more in a movie.  My fee would only be 3 free tickets to a Westwood Village premier.

UPDATE:  My mom has emailed me two comments about this blog post. She noted that the impact of fracking on neighbor's health and cows may be uncertain and take time to manifest itself.  In this case, the "C" mentioned above becomes an expected present discounted value of social costs.  If the land owners "know that they do not know" how to estimate this (because they have no previous experience with fracking) then a rational decision maker would run a field experiment and set aside perhaps 10% of the total land area and lease this to the frackers to see if fracking causes significant social damage.   If the land owners do not know that they do not know the consequences of inviting the gas companies to frack, then this is the start of benevolent paternalism as we don't allow adults to make their own choices.  Once we start down that path where do we stop?

Now, in this second case there is a role for well meaning, well trained environmental consultants to step in.   If well meaning people foresee that the rural land owners "don't know that they don't know" the potential negative consequences of fracking then the consultants can play a positive social role as "free consultants" educating the people about the unintended health consequences before the land owners make their choices over inviting in the gas companies.

The NY Times reports about extremely highly levels of ambient air pollution in the growing city of New Delhi, India.   What is to be done?  My co-authored ADB paper, "Green Urbanization in Asia" offers some suggestions.   Here I want to list a set of possible feasible policy solutions.

1.  Is transportation growth to blame for New Delhi's pollution troubles?  Where are the coal fired power plants located?  If they are close by, have these coal fired power plants invested in scrubbers?

2.  What standards for oil refining has New Delhi introduced?

3. What share of vehicles have diesel engines?  They create more particulates.

4.  What is the age distribution of the vehicle fleet in New Delhi?  Could there be a vehicle registration fee that is higher for older vehicles?

5.  Could vehicle drivers face a different insurance cost depending on how many miles they drive each year? Those who drive less would pay less for insurance.

6.  What is the gasoline tax in New Delhi?

7.  How are parking prices downtown set?  Could they go up?

8.  How are commercial trucks regulated?  In Los Angeles, they produce a lot of the particulate matter.

9.  The Times article claims that much of New Delhi's pollution blows in from nearby unregulated areas.  This is similar to the Hong Kong "imports" complaint.  In New Delhi, is this true?  Why is the Coase Theorem failing? Given the per-capita income and the total population of New Delhi, why doesn't this city pay for pollution control equipment in the "exporting nearby" cities?

Once New Delhi makes some pollution progress, I will be happy to come visit and lecture about the joys of pollution progress.  If you are looking for a serious paper about environmental regulation in India, then read Greenstone and Hanna's paper.  

According to Google Trends, 007 defeats the man from Princeton (at least measured in Google Units).



In a competition between Dr. Krugman and Larry Summers and Jeff Sachs,  Paul Krugman wins.



What does this all mean?  I have no idea.

As more New Yorkers move to California, this shifts who is the "median consumer" and provides incentives for stores and restaurants to raise their game in terms of variety and quality. If you don't believe me, then read this case study of bagels in Berkeley.  Joel Waldfogel wrote an important paper about the median consumer and this should be required reading for everyone who cares about cities.    The future of cities is as "consumer cities" as places where people want to live and have a high quality of life. Access to a variety of products is a large piece of quality of life and Amazon can't ship you fresh bagels (even on Amazon Prime!).

This "cute" bagel example highlights a deeper point.   In this age of same day delivery, what parts of Manhattan's quality of life can't be cloned and transplanted elsewhere?   If it all can be cloned and transplanted then will the real estate price premium in Manhattan vanish as you can now enjoy similar amenities in other cities with warmer winters?  What is the scarce input that makes Manhattan great?

Las Vegas has shown that you can clone the Status of Liberty!  Tacky?  Maybe but does the marginal resident care?

The NY Times reports that  innovative chicken raisers such as Scott Sechler are experimenting with mixing oregano oil into chicken feed in order to grow healthy chickens.  This "organic" substitute for antibiotics may reduce bacterial disease in the chickens.  Is this "treatment" effective?   This is why we have clinical trials to test this hypothesis.  While I am not trained as a Vet, I can imagine that when chickens live in extremely high population density that infectious disease is rampant.  Treating chickens with antibiotics helps to reduce this infectious disease risk but introduces other risks for the final consumers.

Take a look at this picture. It looks like a Freshman dorm.  The fascinating thing about "density" is that we are like Goldilocks.  We want high density because it conserves on transportation costs and wasted resources but we worry about the congestion and infection cost of density.   Vertical cities such as Singapore have shown that quality of life can be high in a dense city.  Extremely high real estate prices in Manhattan reveal that the rich are willing to live like chickens if the coop is nice.



The case or Mr. Sechler highlights an optimistic view of evolutionary capitalism.  His firm is aware that consumers are increasingly sophisticated about what chemicals are used to grow their food.  In a type of product differentiation, he has identified a new way to make an old product (the chicken) that minimizes the use of the antibiotics.  If organic chickens are labeled and if "organic chickens" sell for a price premium, then he will be rewarded for his efforts.  As the Chicken consumers become more educated about the consequences of consuming foods without antibiotics, there may be a growth in such demand and the entire industry's overall sustainability may become greener because of a demand side push.  This is a testable hypothesis.  The same logic holds in the case of California's Green Chemistry Initiative.   Competition and experimentation lowers the costs of achieving environmental objectives.  This is what I meant in my quote in the NY Times yesterday regarding AB32.  

In this post, I will pose some questions that I know that I don't know the answers to.  If you can answer these questions, then you will become an important environmental economist.  I want more nerds to devote their scarce time to studying the micro economics of climate change adaptation so permit me to point you in some productive directions.    This is my holiday gift for all of my friends and readers and you can't regift it on Ebay!

This NY Fed piece provides several case studies of employment dynamics in areas that experienced significant natural disaster shocks (h/t to Mark Thoma).  Based on these cases, the economists are optimistic about the NY Region's post-Sandy employment dynamics.  The event studies they present resemble the Blanchard and Katz state/year employment dynamics in their seminal Regional Evolutions work.   Within a system of cities, we have many choices over where we live our lives and invest. This menu of choices provides us with implicit insurance against shocks and incentivizes geographical areas such as coastal cities to think about investing in resiliency so that brain drain through out migration does not take place.  This is "small ball adaptation" through competitive markets rather than through a federal government Manhattan Project.   In my ongoing migration work with Boustan and Rhode, we are exploring how migrants respond to disaster shocks.

Switching subjects, I was working at Stanford Univ. yesterday.  It is paradise.

In today's WSJ,  Matt Ridley has an optimistic climate change piece.  Unlike my work on climate change adaptation, he ignores how capitalist cities, individuals and firms respond to an anticipated challenge.  Instead, Ripley focuses on what we know about the function mapping aggregate global concentrations of CO2 increases into average temperature increases.  Here is a quote:

As an undergraduate at Hamilton and during my first two years of graduate school, I was quite interested in the "consumption function".  I dreamed of the permanent income hypothesis, the life cycle hypothesis and contrasted these models with the simple Keynesian marginal propensity to consume (which I would call the "Monkey Model" when I taught at Columbia) out of current income.   If you hand a Monkey a banana, the Monkey eats the banana so if we fit the consumption model   C =  a + b*Banana  + U for a large sample of Monkeys then a=0 and b=1 and we are done with consumption theory.

Today's WSJ has an opinion piece by a prominent University of Chicago graduate.  Cliff Asness argues that taxes affect investment behavior.  As Washington prepares to make large changes to the tax code, Cliff argues that we need to anticipate the consequences of these tax changes.  Many Keynesians implicitly assume that there is no behavioral response to changes in tax incentives and Dr. Asness disagrees.  Here is a quote: