Chapter Five of my new Fundamentals book  is titled; "Where Do People Choose to Live Across and Within Cities?".  The chapter begins by introducing the key concept of revealed preference.  Intuitively, economists learn about your desires and priorities from the costly choices that you make.

The joint decision over what city and neighborhood to live in plays a key role in determining your household’s exposure to a variety of environmental indicators ranging from climate, to access to the coast, to water and air pollution.  Unfortunately, there is no "free lunch". If you seek to live in a city that scores high on all set of "green city" criteria such as clean air, clean water and access to green space, you are going to pay high rents (think of San Francisco).  

The chapter then turns to locational choice within a specific city.  So consider San Francisco.  Within San Francisco, which neighborhood do you choose to live in?  The typical person will know her budget constraint and where she will be working.  This information allows her to calculate her commute time from each possible neighborhood to her job.  This person will recognize that each community has strengths and weaknesses and she will seek out that community that is both affordable and best meets her priorities.  

Based on this logic, I discuss how differential pollution levels across different communities within the same city affects who chooses to live there.  By the "no free lunch" argument, rents will be lower in the areas where pollution is worse.  In the simple economy I present,  there are two types of people who seek apartments. One type is called "Superman".  Superman suffers no health problems when exposed to pollution.  The other type of people are called "Average Joes".    The Joes do suffer when they are exposed to pollution and they know this.  I show that in this case, the Supermen will choose to live in the cheap polluted part of the city. Why?   The rent is low and they like that and the pollution doesn't bug them (they are superman!).  The Average Joes will choose to live in a clean and expensive community.  

Now the interesting point here is that a public health researcher who ignores this residential sorting based on one's type (this essential heterogeneity) would conclude that exposure to air pollution is good for you!  Why?  The supermen never get sick and live in the high pollution area while the Joes do get sick and live in the low pollution area.  A statistical researcher who naively calculates the correlation of pollution and sick days would find a negative correlation and jump to the causal claim that pollution is good for you!  The mistake here is that we never observe the counter-factual of how much sicker the Average Joes would have been had they lived in the high pollution area.  This example highlights how my book teaches readers about environmental economics and econometrics at the same time!

The Chapter goes on to teach readers the famous Tiebout Sorting of how a diverse population self segregates into more homogeneous communities.  

I then teach the readers about how to conduct an environmental justice analysis and the use of GIS data.  I base this on my 2001 paper. 

The chapter ends by discussing in this age of the 1% and the 99% the differential in access to excellent urban environmental amenities between the rich and the poor. This issue arises in California where the rich own the homes near the beach and they try to privatize the beach sand as an extension of their property while this land is supposed to be in the public domain.

A major theme of my book is the exploration of economic incidence.  As America's cities grow "greener", does everyone benefit from this quality of life progress or do the rich disproportionately gain because they own more of the land that is more valuable because the objective quality of life has improved?

"And what of Miami? It contributed $263 billion to gross domestic product in 2010, according to the Bureau of Economic Advisors. Caught between rising seas to the east and the Everglades to the west, the city is doomed to drown.
Abandoning Miami means not only moving or abandoning the businesses who create its gross domestic product, but walking away from its pricey real estate, its roads, hospitals, schools and infrastructure. The cost of relocating its people needs to be calculated both in dollars and in heartbreak. But if you ask people to estimate the cost of abandoning Miami, you get blank stares. It’s as if the language to ask the question hasn’t been invented yet.
“It is not difficult to envision much larger costs, [i.e. $60 trillion] given the potential larger and more abrupt warming [the more abrupt the warming, the more costly it is to try to adapt] that the authors calculate,” says Mann. And it’s not difficult to imagine that there are costs we haven’t even begun to imagine. And when you multiply those costs, city after city after city, suddenly $60 trillion becomes a very realistic and frightening number." 

A recent "big think" paper in Science posited that when the Arctic Icecap melt that this will cost us at least $60 trillion in damage.   To make this salient, climate activists such as Mann are saying that we will lose Miami and this will have horrible impacts on our economy.   This makes no sense.  The economic activity that currently locates in Miami will move to higher ground.  Nobody claims that Miami is an inherently productive place so that the $263 billion dollars in economic activity could only be generated there.  Miami will reform in another piece of the U.S.

You don't have to be Acemoglu to ask the following questions;

1.  what is the probability that Miami vanishes within the next 75 years?  The smaller this number is the lower is the expected PDV of damage.
2.  How many years into the future is this event likely to take place?  We discount future benefits and costs using the real market rate of interest.  The further in the future this damage is likely to take place then the lower are the costs.
3.  Isn't all urban capital infrastructure depreciating over time?  Our buildings, roads, hospitals --- -everything in cities doesn't last forever.  The usual life of a building is 60 years. If we anticipate that Miami is going to flood in the year 2060, then in the year 2025 we stop maintaining Miami buildings and we don't build new buildings and other placed based infrastructure.  Instead, we build new infrastructure on higher ground and the firms and people in Miami engage in an organized retreat.  This rebuilding activity stimulates the economy (think of Europe rebuilding after World War II).
4.  Who loses from the retreat from Miami?  The land owners who owned the land just as the "new news" that Miami will be doomed in the year 2060 was announced and digested.  These land owners "overpaid" for the Miami land because the price when they paid reflected the present discounted value of the rental stream they would earn out into the infinite future but if Miami will be flooded after the year 2060 then there is no such rental stream and home prices today will reflect this expectation and will drop as the new news is incorporated into current asset prices (this is the efficient market hypothesis under rational expectations).  As home prices drop, poor people would move in.  Note that the poor who move in gain from access to cheap short run land.  

Assets such as the Miami Dolphins will move to another city.  The University of Miami will let its campus go and find a new place in Florida to do business.  This is adaptation.  Those geographic areas that have a competitive advantage in the face of climate change (i.e they are on higher ground) will command a price premium and land prices and economic activity will rise there as a new Miami will take root.

So, the doom and gloomers would only be correct if the capital stock lives forever. In this case, valuable assets that will always be valuable would have been built in the wrong place (Miami) and cannot be dragged to higher ground. In the real world, all assets fall apart over time (look at the senior faculty at many econ departments for evidence!).  As Miami's assets depreciate, rational investors will not invest in improving them because they will recognize the short investment horizon.

With all of this said, is Miami doomed in the face of climate change?  I would say no.  The engineers and urban planners and land owners in the city need to take a sober look at identifying which parts of their city are the most likely to be resilient in the face of climate shocks.  The city should encourage densification there.  The insurance industry should price future premium to encourage economic activity to relocate there.  If the people of Miami choose not to retreat, then the housing stock and electricity grid and storm sewers will need to be upgraded to make it more resilient in the face of shocks.

Whether the price of my book is $0 or $2 tomorrow, you will still gain some consumer surplus if you buy my new "classic" Fundamentals of Environmental Economics.   In this post, I will talk about the book's chapter four titled; "Where Do Dirty Factories Locate"?

Erin Mansur and I recently published a paper on this topic in the Journal of Public Economics.  

My starting point is that many urban pollution externalities exist because dirty industrial activity takes place in a geographic location filled with people.   Why are the people living there? Why did the firm choose this location and why does it continue to produce there?   Unlike many undergraduate texts, I introduce the reader to a discrete choice problem namely does a polluting firm locate in Boston, San Francisco or Dallas?  This cost minimizing firm recognizes that these three possible locations differ with respect to local wages, local real estate prices, distance to final consumers and they differ with respect to their pollution regulation.  A firm will know its production needs. For example, a firm that needs a lot of land to produce may choose to avoid the place where land is expensive.  Alternatively, a firm that pollutes a lot may avoid the high regulation area.  I teach the reader how to calculate the total cost of production for a given firm in each possible location and we spot the cost minimizing choice.

I then walk the reader through  the "reverse engineering" problem of "given that a firm has chosen a specific location to produce, what must be its priorities for how it tradeoff various attributes of a city (i.e how important are low wages versus low  energy prices in determining whether the factory moves to a given city).  Why does this model matter? In this day and age when everyone is asking why Detroit is dying, why don't firms moves there?  A good model of firm locational choice is relevant for predicting which cities will grow and which cities will experience an influx of pollution from pollution intensive industries.  In joint work with my co-authors in China right now, we are using these same models to explore the migration of industrial activity from coastal cities to poorer western cities.

Returning to chapter 4 of my book, once I finish the domestic locational choice example --- I then turn to the threat of offshoring.  If the U.S EPA introduces stringent environmental regulation, what types of firms can credibly threaten to move abroad to a "pollution haven"?     So, U.S regulation can reduce U.S pollution by reducing pollution per unit of industrial activity (a technique effect) or by unintentionally displacing production to other nations.  The "Goldilocks" goal is to make regulation tight enough to achieve the former goal while not making too tight so that "we lose jobs".   How the U.S regulators navigate this potential mine field requires an ability to engage in fine tuning and to assess which jobs are the most "footloose".

At the end of the Chapter, I return to one of my favorite themes.  Deindustrialization in the U.S Rust Belt, in Eastern Europe and now in China's major coastal cities has dramatically improved local environmental quality.

The Chapter ends with a small model that Gary Becker would like.  It builds on his work with Ehrlich on Self Protection.

Industrial Environmental Negligence and Endogenous Effort by Firms

Consider an oil company that can take costly precautions that will reduce the probability of an oil spill. Such oil spills (when they occur) cause significant environmental damage.  I study how the expectation of a large monetary fine for an oil spill incentivizes the for profit company to take more ex-ante precaution (i.e invest more to minimize the probability of a spill).  So, credible punishment leads to good behavior!  All parents know this and I show how in a simple calculus example to solve for the optimal effort by the firm and how this effort is an increasing function of the ex-post expected fine that the company would have to pay if there is a spill.  

So, this chapter highlights several ways to reduce industrial pollution externalities using an economics approach.  Again, while this book is a textbook it also isn't a textbook --- anyone can read it and it will make you think! If you disagree, I will give you your $2 back!

Take a look at this article about the demand for safe baby food by Chinese parents.  The NY Times wants to tell a "limits to growth" story about the general equilibrium effects of how China's growing urban middle class' demand for safe high quality products raises their demand for European imports of milk and this drives up the price of this product.  Yes, supply and demand matter.  I thought that the NY Times seeks for the world's producers to be stimulated to produce more so that more people get jobs?  Shouldn't we all move to Europe so that we can milk cows and send the baby food to China?  Would that end the recession?

Let me stop cracking jokes and make my point.  Siqi Zheng and I are finishing a book about Chinese urbanites' demand for higher quality of life and the implications of this trend for their cities, families and for the world.  When the University of Chicago press publishes this book, I will be making the case for why you should read it!  To listen to me speak about China, watch this video of a talk I gave last year at USC.

The law of demand will be tested today.  You can get my Fundamentals of Environmental Economics for a price of $0 today at Amazon.  This offer ends very soon!

In this post, I preview chapter 3 of my new $2 Amazon book; Fundamentals of Environmental Economics.   Chapter 3 takes a sober look at the role that government plays in determining urban quality of life and mitigating urban environmental externalities.

The chapter begins by discussing the television show The West Wing.  "The West Wing staring Martin Sheen as the avuncular President of the United States.   He was an ideal figure who knew right from wrong.  He even had a Ph.D in Economics and had won the Nobel Prize in this esteemed field!   In a typical episode, he would always do “the right thing” as he acted as a benevolent leader selflessly pursuing the public’s interest.  But, what is the “right thing”?"

I ask the reader to think about what the words "good environmental policy" mean in a diverse society in which any policy will create some winners and losers. I use this rhetorical device to introduce the Hicksian criteria for judging social welfare (can the winners from the policy compensate the losers?).    

I then ask a question of whether regulators who are not elected and serve and have much discretion over their enaction of policies have the right incentives to follow through with the broad vague mandates that Congress trusts them to implement (i.e deliver clean air and clear water).

I then assume that I'm being too cynical and I solve for the optimal pollution tax to introduce on a polluting steel factory so that it internalizes the damage imposed by its pollution.  I argue that a double dividend is possible of taxing pollution and lowering other distortionary taxes.  In this sense, my book touches on public finance issues and balanced budget conditions that many other environmental texts ignore.   

The chapter then turns to what factors stimulate the demand for environmental regulation at the Federal level.  Festering quality of life challenges and recent salient disasters are both discussed as catalysts of regulation.  

I then turn to the role of state and local regulation in mitigating urban externalities. 

The chapter then does a little bit of algebra as a pollution permit market is introduced as one economic mechanism for incentivizing pollution reduction.  

While an intent of pollution per markets is to reduce pollution externalities, it is often the case that environmental regulation has unintended consequences.  In Chapter 3, I offer several examples from the U.S history over the last 35 years.    

I then turn to a more recent trend of relying on information regulation where government is a trusted source of information and it spreads this information in an attempt to change household behavior.  For example, Smog Alerts educate the public that the next day will be smoggy. If households respond by spending less time outside on polluted days then this information can break the link between outdoor pollution and individual sickness because people have engaged in self protection.  

The chapter then investigates how government policy by keeping water and electricity prices too low can actually cause environmental damage.  Government faces a series of tradeoffs and in its concern to protect the purchasing power of the poor and middle class it can send the wrong scarcity signals.  

In addition to discussing all of these topics, Chapter 3 goes on to discuss government's role in providing public goods such as subways and in the case of China Bullet Trains.   I end the chapter by presenting an algebra example of the classic free rider problem in public goods provision of "bald eagles" in the case when there is no government.   You must admit that this is a fair bit of content for one chapter in a $2 book!

This blog post sketches the contents of Chapter Two of my new book; Fundamentals of Environmental Economics.  This $2 e-book can be read as a "popular book" about free market environmentalism or as a textbook.  At the end of 2013, I will be posting power point notes, exams and homeworks based on this book.  I will be using this book as my main textbook at UCLA in my Fall 2013 undergraduate class.

Chapter Two introduces the classic local pollution externality as a profit maximizing steel factory unintentionally causes local pollution.   In gruesome detail, the chapter covers;

• What private costs the firm incurs in producing steel.
• Why it produces pollution as it produces steel and under what circumstances would this "technique effect" (i.e pollution per unit of output) be low. 
• property rights --- who owns the air the firm is polluting and thus we introduce the tragedy of the commons
• how does pollution exposure affect the health of the population who lives near the factory?
• How can data be used to quantified the causal impact of pollution on health --- and what experiments and natural experiments can researchers run versus what experiments we can't run (such as randomly blasting people with pollution to see how their health is impacted) because of ethical concerns
• The chapter has a long section on "health production functions" and the role that pollution plays as an input in causing sickness.
• how much are people willing to pay to not be sick?
• how many "victims" were exposed to the pollution?
• All of these ingredients are combined into an externality equation to quantify the social cost of steel production
• A Green Accounting introduction is then provided to teach the reader about how to deduct pollution damage from the steel factory's profit to calculate its true "value added" to society
• A benevolent planner's problem is set up to show how a benevolent planner would recognize the benefits and costs of steel production and the chapter ends by solving for the socially efficient (i.e pareto optimal) amount of steel production

Now that I've sold 31 copies of my $2 Amazon book Fundamentals of Environmental Economics,  I'm going to try a little bit harder to market this book.  I've set the price extremely low in order to attract some readers and to set a precedent in disrupting the expensive textbook market.

In this post, I discuss chapter one.    The chapter starts with a brief history of my teaching environmental and urban economics. I keep this section short because I realize that readers won't care.  Similar to other micro books, I state that my goal is to use economics to explain and predict behavior.

BUT, I then ask an innocent question; "When do policy makers benefit from economic analysis?"    I offer some thoughts about whether our thinking leads or lags policy making.  Do blue chip economists influence the policy debate?  Or do we simply rubber stamp wild stuff that politicians want to do but need political cover to implement?  

I then answer the question;  "What is environmental economics?"  

I then introduce "economic thinking" to the uninitiated.   I find that economists speak to other economists too often.  Here is  quote from the book;  "

"Given that my primary academic appointment is at the UCLA Institute of the Environment,   I always have students enrolled in my classes who have never taken an economics course before.  This subset of students tends to be environmental science majors.   They are sometimes offended by the economist's worldview that we (the economists) appear to view all people as selfish and egotistical.   This is not true. We celebrate diversity.  People differ.  Some are selfish and they will narrowly pursue their own goals of wealth, fame and happiness while others will have a more socially responsible goal (to find a cure for cancer or to be a leader in the community).

The environment enters this calculus along several dimensions.   Nature offers us direct pleasure in terms of its beauty, and it offers potential resources that feed and protect us and it offers us a store of assets (such as oil and wood) that we can use to create wealth and new opportunities.  Clean air and clean water increase the likelihood that we are happy and productive and enhance daily leisure.  In this sense, environmental protection offers benefits to our quality of life.  Note the economist’s perspective; we use nature to achieve our goals.  If one of our goals is “beauty” then we may choose not to use nature but again, this is our choice."  

I then discuss how nature views us when I reproduce a letter from the New York Times focused on how birds who live near San Diego have been impacted by human activity.

In my next blog post, I will finish up discussing the other topics I cover in my Chapter One.  As you can see, the book is a pinch philosophical as I try to be honest about how economists think.  The book also challenges non-economists to acknowledge that in a world where time and resource budget constraints bind we must prioritize and think hard about what are the "best" choices we can make and what investments we can make to augment our scarce resources.    The "no free lunch" logic makes students sad but at some point they have to confront this fact because if they don't the lunch will only become more expensive!

I made my first trip to Singapore last July and at the end of August I will return as I will be spending some time visiting NUS.  I look forward to seeing my old friends and talking to more people about what's new in Singapore.   For folks looking for me, you will be able to find me here in late August.

In the NY Times, Yale's Nicholas Christakis presents some new ideas for shaking up the social sciences at leading universities.  He writes;

"It is time to create new social science departments that reflect the breadth and complexity of the problems we face as well as the novelty of 21st-century science. These would include departments of biosocial science, network science, neuroeconomics, behavioral genetics and computational social science. Eventually, these departments would themselves be dismantled or transmuted as science continues to advance."

Given that he runs an interdisciplinary research center, such a move by his Deans would strengthen his empire!  But, let's leave self interest behind and evaluate his conjecture.  Some universities such as USC appear to agree with him as many of their top economists are not in their economics department but instead are scattered across other schools and centers across campus.  Cross-university competition will allow us to test his core hypothesis.  In contrast, other Universities such as MIT  and Princeton  keep almost all of their economists in the econ department.   This variation allows for a test of where does excellent social science emerge and when are synergies across fields especially valuable.

Dr. Christakis is making one enormous assumption.  Can experts in one field judge what is excellent work in another field?   In his ideal "big tent", who is the director of the institute?  Does this worldly intellectual have the capability of identifying excellent work in fields far from her own field of expertise?   It is my humble opinion that such "renaissance men" do not exist.  

My UCLA Institute of the Environment  is an interdisciplinary center.  As a tenured member of this Institute, I face an ongoing challenge of evaluating researchers whose work is far from what I know.  I certainly enjoy working in an interdisciplinary environment but I can see how many economists would find this frustrating.  In a diverse university setting, some people will self select and want to sit with people just like them while others will benefit from working in a more diverse intellectual environment.   The author of this piece simply assumes that "intellectual diversity" is always good for idea production.  This ignores the benefits of specialization.

Dr. Christakis also ignores the implications of his suggestion for Ph.D. training.  While students love such interdisciplinary programs will they actually get a good job when they graduate?  The key what-if asks, "what job would the same student have received had she gotten a Ph.D. in the core department rather than going to the interdisciplinary degree program?".  

So, I think that some high endowment relatively low ranked schools will try to rise in the rankings by embracing his strategy. Such field experiments will offer a test of whether he is right or not.

If Deans at good places are ambitious, they could figure out how to configure some space on campus to be a short term Hoover Institute where on campus faculty working on similar issues would sit together for a year and over coffee and lunch would  make progress through informal discussions and working groups.   This would allow for the win-win of facilitating the social connects that the author alludes to while keeping the best parts of the traditional department system.  Such a system would allow  create a within university tournament encouraging teamwork across departments.