Saturday, August 31, 2013

Some Pictures of Singapore

Here are some mildly interesting photos.

The first photo shows the view from a friend of mine's apartment. Note the large swimming pool at the base of the complex.  The photo to the upper right shows my NUS apartment building.  The lower photo presents a view from the 25th floor of the building. You see a bunch of smaller buildings and in the distance you see part of the Port of Singapore.

Free Speech

Yesterday, I gave a free market environmentalism presentation at NUS in Singapore to a group of environmental policy students.  While I have had a great time here, I quickly realized (based on this select set of  students' questions) that I was in the midst of audience who is highly skeptical of capitalism and free markets.  While in the past I have played nice, at that moment I made a decision to go on the offensive.   I would suggest at this dangerous time in the world's economy that economists who have a free markets leaning to step up their game and defend their ideas in the public arena.     When I return to UCLA, I plan to be much more assertive with my colleagues.  I will no longer smile at some of the wacky things people routinely say to me about market capitalism.  

Weather and Violence Revisited: Introducing the "Kahn Critique"

My Berkeley friends have written a nice OP-ED available here  discussing the ample past set of studies documenting a correlation between climate conditions and violence.  The serious paper is posted here.  Does the past predict our future?  Is this a law of physics?   As I have argued again and again, urbanization and improved access to cooled buildings will nullify this result.  The authors are likely to counter that one Harvard Ph.D thesis documents similar effects in the United States.   Matthew Ranson's study is available here.  Since you don't have time to read it, let me help you.

He creates a county/year/month panel data set covering the years 1960 to 2009 and studies whether there is a climate/violence relationship by using within county month by month variation in climate conditions.  According to his results reported in Table 3,  violent crime rises when it is over 90 degrees F and declines when the temperature is less than 10 degrees.  This suggests that climate change will raise violence in the U.S.

According to the Census, there were 23,000 homicide victims in the United States in 1980 and even though the U.S population grew between 1980 and 2008 --- by 2008, there were 16,200 homicide victims.   So, the homicide rate fell from 10.2 per 100,000 to 5.4 per 100,000 people.  That's progress!

By way of contrast, 51,000 people died in car crashes in the 1980 in the U.S while 37,000 died in car crashes in the U.S in 2008.  (source)   So,  homicide rates are declining faster than car crash deaths.

My point is that Ranson's correlation could be a causal effect but the secular trend swamps his blips.

A richer nation with better information technology and active police force can activate efforts on hotter days to disperse population and keep the peace.  An implicit Lucas Critique lurks in this work.  As Lucas taught us back in 1976, when government changes the rules of the game --- people re-optimize.  A variant of the Lucas Critique is the "Kahn Critique" that states that when mother nature changes the rules of the game, that local government reoptimizes and this effects the reduced form correlation between violence and climate conditions.

Local government will take action because it anticipates the Ranson effect so that his prediction vastly over-states the increased death risk.  The key issue here is what is the marginal cost of extra policing effort on hot days? These guys could work extra hard on those days and kick back and take it easy on off days. So, these reduced form researchers need to explore what is the marginal productivity of the police and how this varies on hot and colder days. Without such structural estimates, it is impossible to know whether local governments can completely offset the effects that the "historical correlation" scholars have uncovered.  A richer nation will have the resources to deploy the extra cops even if the marginal cost of effort is high.  This is another example of how income shields us from climate change.

Friday, August 30, 2013

A Sensible Historian

Ken Jackson makes the case that NYC should "go vertical".  Without an economic model, he can't predict how such increases in density will affect; market housing prices, the income distribution for those who live in Manhattan, and city public revenue.  Without such information, I'm not sure how you judge whether "going vertical" is good but that is besides the point.  

Thursday, August 29, 2013

How Does Singapore Cope with the Heat and Humidity?

This is my second trip to Singapore and I've been here for a week.  Each day it is over 90 degrees and quite humid.  Has violence and low productivity broken out?  Fascinating Berkeley research suggests that it should  but Singapore is peaceful and quite rich.  How has this nation achieved this?  The answer is urbanization.   As I argued in my Climatopolis book, city growth will protect us from climate change allowing us to continue to thrive in our hotter future.  Permit me to offer some lessons from Singapore.    

1.  I am the only person walking around the streets during the day time.  All sane people take buses everywhere and minimize their time outside in the strong sun.

2. Buildings are naturally ventilated with shade and wind blows leading to cool outdoor spots.

3. Juice vendors are everywhere selling tasty juices such as strawberry-banana juice at $1.2 USA a glass.

4. The city really comes to life at night when the sun has set.

5.   The air conditioning is cranked up.  But note that this World Bank data shows that Singapore consumes much less electricity than the U.S on a per-capita basis.

Urbanization breaks the link between climate exposure and the economy.  My NUS is a very productive place on hot days and on cooler days.

If climate change poses a new challenge for Singapore such as sea level rise, then the city will need to engage in figuring out where to build on "higher ground".  There is a lot of room here to build taller buildings. I'm in a great building (Kent Vale 2) that is 25 stories tall and there is plenty of land nearby to build vertical.   For some specifics about Singapore and its plans to adapt to climate change read this.  Are we doomed?    Yes Singapore is wealthy but this highlights the growth imperative.   

FEMA Revisited

Read this reasonable piece about FEMA and natural disasters but ponder a simple question;  why do areas affected by natural disasters receive any transfers at all from other regions?  National defense is a public good but how is natural disaster insurance a public good?  You can convince me that the state that is impacted can provide disaster relief to the affected community but why are federal funds used for this cause?  When I buy dinner, I use my own funds to pay for the dinner.   Why don't I ask other tax payers to buy me dinner?   Yes, it is true that dinner is a nightly anticipated event but why don't states at greater risk for disasters keep their own "rainy day" fund?  If they don't keep such a fund, why should other states "bail them out"?  If no private insurance company will provide market insurance for those taking risks, why should the government implicitly provide that insurance through ex-post payoffs?  What risks do we subsidize and what risk taking do we tax? 

Tuesday, August 27, 2013

Natural Resources Extraction in Cameroon

Tom Smith has published an excellent OP-ED in the LA Times about his research project on preserving natural capital in Cameroon during a time when China is sharply increasing its investments in "extractive resource technologies".    I am working with him on this project and this stuff fascinates me.

Monday, August 26, 2013

Sentosa Island Singapore

I had a great time on Sentosa Island in Singapore last night.   When the sun sets and the heat fades, the people of Singapore head on out to have fun.  They have figured out how to adapt to their climate conditions. At NUS, most people use air conditioned buses to travel around the campus.  I'm not that wise. I walked several miles yesterday carrying a heavy computer in the 100 degree heat.  Sure, I got hot but you drink a Diet Coke and you cool down.

Free Copies of Fundamentals of Environmental Economics

To celebrate my first day as a Visiting Professor at NUS, I'm giving away my new environmental and urban economics book away for free.  This offer is only good for August 26th 2013.

Watch this video to hear me discuss what is unique about my new book.

Power Couples of the World Rejoice!

Many educated women choose not to "Lean In" and instead engage in some home production with their delightful kids.  Do the kids benefit from this extra investment?  Or, are these moms just engaging in another form of consumption?  A recent paper using data from Denmark concludes that working women should feel no guilt about getting out of the house.

The Effect of Maternal Employment on Children's Academic Performance

Rachel Dunifon, Anne Toft Hansen, Sean Nicholson, Lisbeth Palmhøj Nielsen

NBER Working Paper No. 19364
Issued in August 2013
NBER Program(s):   ED   LS
Using a Danish data set that follows 135,000 Danish children from birth through 9th grade, we examine the effect of maternal employment during a child’s first three and first 15 years on that child’s grade point average in 9th grade. We address the endogeneity of employment by including a rich set of household control variables, instrumenting for employment with the gender- and education-specific local unemployment rate, and by including maternal fixed effects. We find that maternal employment has a positive effect on children’s academic performance in all specifications, particularly when women work part-time. This is in contrast with the larger literature on maternal employment, much of which takes place in other contexts, and which finds no or a small negative effect of maternal employment on children’s cognitive development and academic performance.

Sunday, August 25, 2013

Water Conservation in Texas

How will Texas adapt to drought conditions?  Will suburban homes continue to have lush green lawns?  As I argued in Climatopolis, if water authorities raise the price of water to signal scarcity then suburban households would have an incentive to demand innovative solutions and some entrepreneur would supply them.   Whether the "solution" is to plant AstroTurf or zoysia grass does not concern me and I'm not qualified to guess what new approach will be the winner.   The key point about the economics of climate adaptation is to allow free markets to work their magic.  Prices of energy,water and coastal insurance must be allowed to freely fluctuate to reflect scarcity.  In this sense, we need less government intervention to help us to adapt.  On the other hand, there are many local public goods that local governments can supply that will help us to adapt to climate change.  In late February 2014, I will be giving a speech for a group of California local officials where I will sketch out what I believe they can do to enhance our cities' ability to adapt to climate change.    

Friday, August 23, 2013

Stanford is Heaven

I have just spent two days visiting Stanford University.  If you ever have the opportunity to be an undergraduate, graduate student, full time faculty, visiting faculty or cook at Stanford, accept that offer!  You won't regret it.

Tuesday, August 20, 2013


To celebrate my first day Visiting NUS next week,  I will be giving away free copies of my Fundamentals book on Monday 8/26/13.   The new version now includes a good example of a regression discontinuity design (for testing for whether California's energy efficiency laws have caused the Rosenfeld Curve) and many other ideas that closely link micro environmental economics to basic econometrics.   Since 99.9% of the economics profession has never read an environmental textbook, I figure that there are a lot of possible sales here.

Tomorrow I give 3 hours of lectures about the economics of China's pollution problems at UC Berkeley.  I will post a link to these slides at some point in the future.

Monday, August 19, 2013

Sunday, August 18, 2013

Chapter 12: California Environmentalism

In this age of "Big Data", when are policy makers willing to experiment and tryout a new idea such as school vouchers or road pricing in a small pilot program?  Such field experiments will be embraced by politicians when they recognize that the "business as usual" case isn't working and when they know that they don't know whether specific policies that economists advocate will actually work.  When politicians already "know" the answer or when they fear knowing the answer or the short run costs of learning the answer, then they will block field experiments.  

This is a long winded way of introducing Chapter 12 of my new book that examines California's willingness to be the "green guinea pig" and to try out new ideas.  I discuss California's AB32 and the key point that ideas are public goods.  If California demonstrates that an idea such as carbon cap & trade can achieve the win-win of carbon reduction at a low price to the economy then other moderate states and nations are more likely to adopt these policies.  The word needs "first movers".  Is California a "hero or a sucker" for being willing to take the initiative? I argue that we are a hero as the rest of the world free rides.

My friend Arik Levinson has a new paper arguing that while California is "greener" than other states that state policy does not deserve much of the credit for this fact.   I discuss his paper at the end of the chapter.   Glaeser and I back in 2010 argue that since home prices are higher in coastal California cities that the same household can only afford a smaller house in such places relative to other areas such as Houston. So in Houston, the carbon footprint is larger than in San Francisco both because of different climate conditions and due to the fact that the same household will live in a large house if they live in Houston rather than in San Fran.

Friday, August 16, 2013

A Positive Book Review

My mother didn't like my last book (titled Climatopolis).  She thinks that I'm too enthralled with free markets and she wants me to look and think like Dr. Krugman.  I told her that she could move from New York City to France. Fortunately for my family, my new book has one positive review.      I encourage you to login on Amazon and lower my average.

Most Helpful Customer Reviews
By P. Ritz
Format:Kindle Edition|Amazon Verified Purchase
Kahn does a great job at simply describing environmental economics. Its a must read for every environmentalist out there. And Its a must read for economists too. Now if only they'd turn this into a movie...

Keep in mind that this is a $2 book!   Now that I going to Singapore and Hong Kong, I may not return.  My U.S students can read the book and watch the videos.   

Tuesday, August 13, 2013

My Upcoming Lectures at NUS in Singapore

Soon I'll return to Singapore.  In early September 2013, I will give eight lectures about the green economy at NUS.  All of the details are here.  If everything goes right, I plan to write a short book based on these lectures.   

Monday, August 12, 2013

Free E-Book Today on Environmental Economics

$0 price ==> 0 consumer surplus?  You decide!   Just click here to download Fundamentals of Environmental Economics.  UPDATE:  This offer expired yesterday.  The price has returned to $2!

Sunday, August 11, 2013

The New York Post Endorses Emily Oster's New Book

The Wall Street Journal's Review section ran an excerpt of Emily Oster's new book and today the NY Post endorses it.   From these pieces, I see that Emily will challenge the standard rules of thumb that benevolent paternalist doctors confront pregnant women with.   When she was a pregnant Chicago economist, she sought to be "free to choose" concerning her coffee and alcohol consumption.  While the doctors said; "no, no , no", her read of the "correlations literature" suggested that the marginal benefits of an extra cup of this and that were likely to exceed the long run marginal costs.  

This book will be a big hit for several reasons. First, it will liberate the pregnant ladies in New Jersey and Long Island and other suburbs to feel no guilt as they seek more pleasure during their pregnancies.   Second, it will lead to uproar among know it all doctors.  Such doctors forget that while they focus on maximizing the health outcomes for patients, the patient cares about the lifetime stream of "utility".  Health and "utility" are not the same thing.  The doctors will reply that they are thinking about the needs of the unborn child than the expecting mom.  Could this be right?  For this claim to be right, you must be a strict adherent of behavioral economics.  The exciting part about Emily's book will be that this specific issue raises key points of debate between neo-classical economists and behavioral economists. Issues of hyperbolic discounting will arise.

I'm excited about this debate because the same issues arise in my work on climate change adaptation.  Do people form rational expectations of the future and know what they don't know?  Or, do people form myopic expectations and do not anticipate that the iceberg is near?

Now a reasonable point is that the population is a mixture of two types of people and doctors are risk averse and thus lecture everyone since they can't distinguish Spock (Emily Oster) from Homer Simpson.   While I haven't read Emily's book , I guess that she will argue that the Spocks have the right to "opt out" of the Doctor's orders and to feel no guilt for doing so.

Saturday, August 10, 2013

A Free Book on August 12th 2013

August 12th 2013 is my parents' 51st wedding anniversary.   To celebrate this important day,  Amazon will give away free copies (just on Monday) of my e-book; Fundamentals of Environmental Economics: Solving Urban Pollution Problems.   I will learn what the demand curve for my book looks like. It is selling a few copies at a price of $2 and we will see how many more copies are sold at a price of $0!    Amazon gives authors the option to give away their books on certain days (up to 5 days).  

As I re-read the book, I think it offers good value at a price of $0!  It is full of ideas and provides a pretty good justification for why I chose to devote so much time to environmental and urban economics.  For those of you who have finished college, think back to the textbooks your professors assigned. Were any of them any good?  Yes, I know that Dr. Mankiw's book is good and the new Chicago textbook on intermediate micro is quite good but think of your history texts, biology texts, etc.  Were any of these $100 books good? No.   I have written a very good $2 textbook and I think this is the way the future should play out.   How many college graduates still own their college texts when they are 25 years old, 30 years old?  This is a revealed preference test that these books were just part of jumping through hoops.  What knowledge is retained? What skill did these books deliver on?  The job of the modern University professor is to make our students better problem solvers.   The problems of the future are unpredictable but the core methods will be the same.  Which courses and professors improved your ability to think and solve problems?  Celebrate that small set.  Unlike other texts, my book not only teaches the basics but strongly nudges the reader to think like an empiricist and as a realist about what government can and cannot achieve.  The book teaches readers about how to use basic statistical analysis to test relevant hypotheses.  It even sketches a field experiment for recovering a city's aggregate demand curve for visiting a  cute Hippo at the local zoo!

UPDATE:  I spent four hours today revising the book and I've posted a "Second Edition" of the book.  I've added some new material and removed some typos and fixed some strange sentences that were included in the first edition.  

Friday, August 09, 2013

Chapter Eleven: The Challenge of Reducing Global Greenhouse Gas Production

Chapter 11 focuses on the global externality of greenhouse gas production.  I start by using some World Bank WDI Data to show students some interesting facts about trends in GHG production.  It is important for curious students to learn how to use data to generate new descriptive facts.

The chapter takes a mildly interesting turn when I sketch the challenge of quantifying the "social cost of carbon".  This elusive Holy Grail remains a topic of deep interest to environmental economists who interact with Washington D.C policy makers.   As I discuss in chapter 11, I do not believe that it can be measured but I appreciate the importance of generating some number that is greater than zero.   As I argue in my Climatopolis book, the social marginal cost of releasing an extra ton of carbon declines over time as we make adaptation progress (note that I'm assuming that atmospheric CO2 parts per million is held constant here).   I recognize that over time we both have more adaptation strategies and atmospheric CO2 levels are rising.  My point refers to the counter-factual time trend in the social cost of carbon holding the second factor at a fixed value.

The chapter then takes an exciting turn when the division between Red and Blue States over trying to reduce greenhouse gas emissions.  Why don't Republicans take this serious issue more seriously?

"Could an unintended consequence of Al Gore’s relentless focus on climate change as a moral imperative be that his activism turned this issue away from being a bipartisan national security issue and transformed it into a pet liberal issue.  This might explain why many smart Republicans refuse to even engage on this idea.  Facing this reality of ongoing political partisanship, is there any hope of building a majority coalition?  Some environmentalists view a silver lining of horrible storms such as Hurricane Sandy as a means for catalyzing attention.   Here I discuss another possible way to build a low carbon coalition.  This is both a joke and a serious point!
Do U.S air travelers lose due to bad weather at their origin or destination and how many more hours they might lose in the future if current hub patterns continued and climate change led to a higher frequency of bad weather and if the weather shocks were more severe. If U.S citizens thought through the private costs of allowing climate change to take place that they might be more willing to accept some short run pain (i.e higher gas taxes and carbon taxes) to avoid such future costs.  My research question really has two pieces to it:  For different types of flights across the U.S, how much time on average will delays increase as climate shocks increase?  How much do different people suffer (i.e how much are they willing to pay to avoid a long airport delay?) when a delay takes place?"
The chapter goes on to present some data about how greenhouse gas emissions vary across the United States. Here I use recent Vulcan data from my co-authored 2013 Economic Inquiry paper.

The chapter ends with a good discussion of the microeconomic factors determining whether a nation relies on coal, natural gas or renewables as its power source and focuses on Japan's recent choice to reduce its reliance on nuclear. I do some arithmetic showing how Japan's choice will increase global greenhouse gas emissions and provide an estimate of this global externality.  

As I keep saying, for a $2 16 chapter book, I'm offering some serious consumer surplus!

Wednesday, August 07, 2013

Progress in Environmental Economics

One mark of a  thriving research field is when superstars from other fields start writing on the topic.  Recently, Acemoglu, BarroCochrane and Rossi-Hansberg have all independently, written important stuff related to climate change economics.   This is progress.

Big Think on the Future of California

Next Tuesday, I'll be presenting a "Big Think" talk about the Future of California at the California Air Resources Board's Chair's Lecture.  Here is the link.  Since I know that my mom will like this, I reproduce the glossy info below.

Chair's Lecture Series

This page last reviewed August 1, 2013

Climate Change: Its Impact on California’s Cities and Economy

Matthew E. Kahn, Ph.D., Professor, UCLA, and author of Climatopolis:  How Our Cities Will Thrive in the Hotter Future

Photo of Dr. Matthew E. Kahn
Tuesday, August 13, 2013, 12 Noon PDT
Coastal Hearing Room, 2nd Floor
Cal EPA Headquarters, 1001 "I" Street, Sacramento, CA
icon of a video camera LIVE WEBCAST can be viewed the day of the event
Webcast viewers: Please send your questions during broadcast to:

California's unique urban quality of life entices millions to live and work here.  But how will climate change impact our quality of life -- and how could it impact California's economy?
What new business opportunities do these anticipated challenges create? Could capitalism help us to cope with many of the new problems we have unleashed? How does California's path breaking AB32 carbon mitigation legislation help the state to adapt to changing conditions? Could California's willingness to be the "green guinea pig" help to identify cost-effective policies that can be enacted all around the world?  And will California benefit from being a 'first-mover'?
Additional Reading/Links:

Speaker Biography

Matthew E. Kahn, Ph.D., is a Professor at the UCLA Institute of the Environment, the Department of Economics, the Department of Public Policy, the UCLA Anderson School of Management and the UCLA School of Law.  He is a research associate at the National Bureau of Economic Research and the IZA. Before joining the UCLA faculty in January 2007, he taught at Columbia and the Fletcher School at Tufts University. He has served as a Visiting Professor at Harvard and Stanford University and the National University of Singapore. He is the author of Green Cities: Urban Growth and the Environment (Brookings Institution Press 2006) and the co-author of Heroes and Cowards: The Social Face of War (Princeton University Press 2008). Professor Kahn is the author of Climatopolis: How Our Cities Will Thrive in the Hotter World (Basic Books 2010). His research areas include; environmental, urban, energy and real estate economics.  He holds a Ph.D. in economics from the University of Chicago.

Chapter Ten: The Economics of Green Business

I have read many environmental economics texts and while they drone on about cost/benefit analysis and introduce countless acronyms such as CAA and EPA and BTU, they don't discuss why some capitalist firms sell green varieties such as a Prius.  Chapter Ten of my new book tackles this subject.

The chapter starts by quoting a famous Milton Friedman piece on his views on corporate responsibility and the "double bottom line".  He makes a strong case that firms should focus on their core business and then distribute their profits to their shareholders and allow them to make any green contributions they seek fit.  He argues that the business of business is business.

But, we do see more and more companies engaging in Double Bottom Line activities. Ben and Jerry's isn't alone.  Why do such companies pursue this strategy? Is this product differentiation?  Is this due to the CEOs using other people's money to pursue their own agenda?  Is this to attract and retain righteous talented young workers who want to work for a progressive company?  In Chapter 10, I discuss each of these factors.
Not bad for a $2 book?

The chapter then goes on and discussed the incentives for businesses to "go green" with and without a government's nudge. I present a model of product differentiation with no government involvement to sketch the case of what factors determine whether a for profit firm "goes green".   I then introduce government and the nudges that a liberal/environmentalist government can and will introduce to encourage companies to produce green products. In the absence of a carbon tax, this is the "theory of the second best" at work. I discuss Tesla.

The chapter ends with a discussion about endogenous innovation and how the growth of an upper class environmental cohort (think of Berkeley) can accelerate the introduction of new green varieties of products.
Intuitively, demand creates supply. If I'm the only bald guy in the world, no for profit firm will pay the risk upfront research costs to create a solution to my problem. If there are a billion bald guys, firms will jump in to create the wonder drug.  The same intuition holds for the birth of green products.

Monday, August 05, 2013

Strange China Bashing in the NY Times

It is a rare day when an economist not named Krugman publishes an OP-ED in the NY Times.   Today, an economist named Peter Navarro (not to be mistaken with the guitarist Dave Navarro) has published a strange piece.  While Peter is a Harvard Ph.D.,  he doesn't appear to have taken Greg Mankiw's Ec 10 class.    Here is a quote from Dr. Navarro who has 64 lifetime citations for his work on China.

"The bottom line here is this: Buying “Made in China” — whether steel for our bridges or dolls for our children — entails large costs that most consumers and, sadly, even our leaders don’t consider when making purchases. This is hurting our country — and killing our economy."
Now the author is certainly correct that the U.S should avoid purchasing "lemon products".   If China tries to sell us low quality steel and pass it off as "high quality", how can we dissuade them from selling us such stuff?  In a repeated game, we won't buy products that turn out to be cheap but low quality.  If we know that we don't know what is the quality of China's steel, then we conduct random audits of its quality before we incorporate it into our bridges.  If we anticipate the challenge that worries Dr. Navarro, then we design audits and credible punishments to incentivize China's exporters to sell us high quality stuff.   If you worry that the Chinese company will declare bankruptcy if a U.S bridge collapses, then the U.S steel buyers can require exporters to post a bond that the exporter will lose if a disaster takes place.  Again, this threat of future punishment incentivizes the exporter to take more precautions so that the credible punishment isn't meted out. These are all standard issues in mechanism design and contracts.  Dr. Navarro would need to explain why standard contracting issues can't be addressed in the case of China's exports.   In his piece, he doesn't bother to address these points.

So, why did the NY Times publish this B+ stuff?  The NY Times embraces a Keynesian/Behavioral economics worldview.  A "Buy America" mandate by more local governments would "stimulate" some of our manufacturing sectors.  Dr. Navarro seeks to utilize fear to create some demand for domestic manufacturers. This is clever but ugly.

Sunday, August 04, 2013

Chapter Nine: Endogenous "Green" Preferences

How did Al Gore become "Al Gore"?   When you meet an environmentalist, what role has recent events, peers, early schooling,  macro events,  family and other factors played in shaping this person's priorities?  Much of the environmental movement focuses on influencing young people to "act locally but think globally".   Economists who acknowledge the importance of heterogeneity in tastes and skills have a duty to think about why such diversity exists.

In Chapter Nine of my new Fundamentals of Environmental Economics, I discuss a topic that no other environmental or urban econ book ever bothers to discuss.  Where do "green" preferences come from?  Why is this an important topic?  Recently in a series of papers, Matt Kotchen has emphasized the importance of "voluntary restraint".  Individuals with such preferences lose utility from polluting.  This is like an internal pollution tax.   If there were a large subset of the population who don't need to face pollution taxes, to "do the right thing" then we would face fewer externality challenges when we don't introduce pollution taxes.  

In Chapter 9, I first sketch my work documenting that liberal/environmentalists engage in voluntary restraint.  I then discuss how places such as Berkeley, California that due to migration selection effects (and perhaps some treatment effects) are filled with such liberal/environmentalists can play a key "green guinea pig" role in greening our economy.

I then introduce two formal economies to teach some economic algebra.

1.  In economy #1, I discuss endogenous innovation and sketch the intuition behind Acemoglu and Linn's 2004 QJE paper.    There is a new product called a fuel efficient car.  The product currently does not exist.  There is a large upfront fixed cost $F to design such a car and there may be a positive probability that the research will fail and thus there is no car.    Since there are a group of Berkeley consumers who are willing to pay a price premium for a green car, the car makers may make this first Prius. If there are enough Berkeley people then there is sufficient profit to encourage this new variety to be produced.

2.  In economy #2;  I sketch Jerry Hausman's old puzzle about energy efficient products being expensive to purchase but cheap to operate (because they are more energy efficient).  I discuss new financing arrangements to reduce the upfront expenditure to make these products more attractive to buy to more people.

The chapter ends with some discussion of social preferences.  In the case of solar panels and the Prius that we use these in public and that people who want to signal that they are "good people" may buy these products to impress their friends.  Such a social multiplier offers social benefits if the total carbon externality shrinks as more people buy such products.

So, the chapter is stronger on analyzing the consequences of environmentalism rather on definitively answering what are the main causes of environmentalism.  In my own work, I have argued that education is a key driver of environmentalism.  

Not a bad chapter for a $2 book!!

Friday, August 02, 2013

The Coase Theorem, Bono and Cigar Smoke: A Preview of Chapter Eight of My New Book

Chapter Eight:   Pollution Externalities Associated with Urban Household Activity  is a mildly innovative chapter at the intersection of environmental and urban economics.  I have spent my career working at melding these fields and my new book's chapter 8 conveys some of the excitement. 

The chapter starts by discussing a true Coasian externality taking place between two rock n' roll gods named Bono and Billy Squier.  

"The people who live in the San Remo (145 Central Park West) live in a geographically small area.  As in any multi-family building, they are sharing land.   Rockers such as Billy Squier gain private benefits from using their fireplaces but an unintended consequence of their wood burning is to raise urban air pollution in the apartments above them.  Bono (in the Penthouse) is suffering.   This externality case raises some key issues.  First, who has the property rights?  When Bono bought his unit, did he buy knowing that neighbors had the right to use their fireplaces?  If the answer is yes and this was common knowledge, then the price of the penthouse would have been lower to reflect the pain caused by this disamenity."   

Nice local externality example?  Must government get involved to solve this?   I then present additional Coasian examples in cities including urban noise and urban dog poop.  You must admit that I'm an original thinker. You won't see these topics in my vanilla competitor's texts!    

After all of these examples, I then provide the formal Coase logic through an example of an urban cigar smoker impacting some asthmatic children.  

The chapter then turns to discussing the Pigouvian externalities that are exacerbated by household suburbanization.   Urban planners and people from Berkeley will enjoy this discussion but then I ask the tough question of whether suburbanization causes increased resource consumption versus whether the suburbs simply attract those who like to consume resources (a selection effect).

"In an advanced econometrics course, a question would arise related to the “endogeneity” of where people choose to live.  Do a random set of people choose to live in city center versus the suburbs?  From observing the gallons of gasoline consumed by a suburbanite who chose to live there and the gasoline consumed by a center city resident who chose to live there can we infer how much gasoline each would consume if they swapped homes?   Similar to the military base example given above, a research advance would be to access “instrumental variables” that effectively randomly assign people to the center city versus the suburbs. Such an instrumental variable would alleviate concerns about “selection bias” and would allow the researcher to estimate the average causal treatment of suburbanization on gasoline consumption."

Unlike standard environmental and urban texts, I want to talk about advanced econometric issues that undergraduates are not used to thinking about and for those who saw these topics in their econometrics class they are exposed to a "real world" example.

But, this $2 book (consisting of 16 chapters), then packs in even more ideas in Chapter Eight!

The final sections of the chapter explore;
  •  Suburban Eco-system Destruction
  • Water Consumption

Thursday, August 01, 2013

Sacramento on August 13th

As the rest of the world free rides, California is making progress as it enacts AB32.  The Air Resources Board is in charge of designing and implementing this carbon dioxide mitigation regulation.  I will be speaking at the ARB on August 13th about California's future quality of life.  

Vote for Dora L. Costa for the AEA's Executive Committee!

My modest spouse did not tell me that she is running for office!  To serve on the AEA Executive Committee has always been one of her key life goals.   While Guido and David are old friends of ours,  they must be warned that I'm opening up my Nixon bag of tricks to figure out how I can help my favorite candidate win this crucial election.   Do I remind you of Bobby Kennedy in 1960 or of a certain mayoral Candidate from NYC (no not him)?

Dora's research on retirement, health and life expectancy is well known.  Together, we have published more than 10 papers and one Princeton Press book.  Our 11 year old son finds our subject matter to be boring and trivial (he actually has excellent price theory intuition --- for example he immediately understood Coase's conjecture about durable monopoly in the context of new versions of the Apple iPhones).  He plans to become a physicist.

A Preview of Chapter Seven of My New Book

Chapter Seven of Fundamentals of Environmental Economics focuses on the pollution externality associated with transportation.

"First, let’s do some algebra. Define N = the number of people in a city and P = probability that each person owns a car. Define M as the average number of miles that vehicle owners drive and define E as emissions per mile of driving.  When we discuss climate change below, E can also represent gallons of gasoline per mile mile of driving. With this notation, a city’s total emissions from transport equals N*M*P*E."

Based on this identity, I explore how total transportation emissions are affected by;
  • gasoline taxes
  • urban parking rates
  • Changes in the composition of the vehicle fleet as old high polluting vehicles die off and new vehicles have much lower emissions (thanks to regulation induced emissions controls --- see my 1996 Rand piece on this point)
I offer a brief discussion of Jessica Reyes' work on lead emissions from gasoline and its impact on U.S crime dynamics.   

I then blend some urban economics with environmental economics by teaching how the classic monocentric model of urban economics makes predictions about the production of transportation emissions in a growing city.