Back in 1986, when I was a student at the LSE, I didn't read The Guardian. Flash forward 30 years and I know read it.  Take a look at this piece from Australia.   It wants to tell a PT Barnum "sucker theory" that potential home owners are unaware of the risks that climate change imposes on a specific piece of real estate.  The article hints at an information cover up.

QUOTE:

 "The report says there is untapped and unshared data held by regulators, state and local governments, insurers and banks on the level of risk, but that most homebuyers and developers are not told about the data and do not have access to it."

END of QUOTE

If buyers "know that they don't know" what risks a property features and if they are risk averse, they will demand to see the truth.  They also have the option of contracting with a 3rd party information vendor.  Take a look at Albert Slap's company.  

"Coastal Risk helps clients assess their vulnerability to flooding and take steps to reduce their personal and economic risks. Our proprietary scientific and technological methodology identifies the location and duration of flooding of individual business, government, and residential properties."

Why won't a similar company open up in Australia?   Only those who "don't know that they don't know" will not demand these services.

Australian environmentalists can act as a type of "social worker" by making appointments with potential home buyers to educate them about property risks.  Asymmetric information is an interesting theory for worrying about climate change adaptation challenges but I don't think it is a first order problem due to the logic I have sketched above.
Coastal Risk helps clients assess their vulnerability to flooding and take steps to reduce their personal and economic risks. Our proprietary scientific and technological methodology identifies the location and duration of flooding of individual business, government, and residential properties.

At a Cincinnati Zoo, a young child was at risk of being attacked by a gorilla.  To reduce this risk, the zoo killed the gorilla.  What do we learn about tradeoffs in this case?  Suppose the value of a statistical life is $6 million and the probability that the gorilla would have killed the kid was p.  Let the value of a living gorilla be G.   A rational risk neutral zoo will kill the gorilla if p*6 million > G.  So, if the zoo thought there was a 1% chance the gorilla would kill the kid, then the upper bound on the value of the gorilla is $60,000.

Now an existence value issue arises.  The zoo can charge admission to see the gorilla but if there are people who value the existence of the gorilla but never visit the zoo then the zoo would have no ability or incentive to take this aggregate benefit margin into account.

The Economist Magazine has published a long special piece on Europe and war refugees.   Unless I missed it, this "politics" focused piece didn't investigate market approaches to handling the crisis.  Suppose that different potential refugee destinations differ with respect to how "costly" it is to absorb more refugees.  For example, a nation with an old population may welcome young migrants and thus have a low marginal cost of accepting migrants.  From econ 101, we know that there are efficiency gains of introducing a "permit market" when economic agents differ with respect to their marginal cost.  This logic is used to explain why pollution permit market approaches are more efficient (i.e cheaper in terms of lower cost) than command and control systems that order individual polluters to reduce their emissions by some set amount.

So, how could a "cap and trade" market work here?   A set of nations would volunteer to be "destinations".  They could state some criteria for what types of migrants they most prefer. Heterogeneous migrants would announce their preferences of where they want to go.   The Nobel Laureate Al Roth has offered some thoughts on how he would design this mechanism.

My key point is that all developed nations would contribute to a migration fund and a larger $ of the  revenue from this fund would be distributed to those nations who "import" more refugees.   This mechanism would reward "importing" nations who accept more refugees and it would create a mechanism such that they reveal their private information (their marginal cost inclusive of all economic and social costs of welcoming more migrants). Now, questions arise concerning how these migrants would be treated.   Those nations with a bad record on human rights might receive a pre-specified reduction in the incentive pay (or be forced to post a bond that they will lose if refugee mistreatment is observed). This would incentivize them to raise their game and "be nice" to the new immigrants.   This approach has been suggested in the case of carbon sequestration such that nations with a reputation for cheating receive less credit per ton of carbon sequestered because the rest of the world doesn't believe that they have done what they have claimed they have done.  See page 18 of this paper.

Here Paul Romer's charter cities idea could be implemented.  Brandon Fuller and I discuss some of these points in this 2012 piece.  

The one issue I foresee here is time consistency. In the pollution case, there is a set goal.  We will reduce aggregate pollution by 100 tons but in the refugee case will there be a set goal?  If the refugee aggregate cap is set at 15 million is "that that"?   Or after the 15 million settle and thrive, will another 30 million then seek to move?   What does the "supply curve" of refugees look like as a function of their quality of life in destination nations?  Will the supply of refugees increase if an efficient mechanism is introduced?  This is a horrible way of asking the converse.  If more refugee boats capsize trying to get to Italy, will the flow of refugees slow down?

So, the interesting economic question remains; what is the optimal allocation of people across nations?   If the U.S had open borders, would 4 billion people live here?

Before the Smart Phone, imagine the following situation.  A restaurant on one side of town has 500 tomatoes delivered and due to unexpectedly low salad demand it only needs 80. In the past, the cost minimizing option was to dump the remaining 420 tomatoes in the garbage.  But, such "trash is gold" if an entity with a comparative advantage in transportation can swoop in and grab the tomatoes and bring them to a demander.  The NY Times reports on such "Uber Style" food delivery trucks.  Uber connects a trip demander with trip sellers who are nearby.  The food moving companies balance supply and demand across space.  Food re-sellers must receive something in return for giving the produce to the mobile trucks.  In the past, transaction costs prohibited such mutually beneficial trades but now the App writers have figured out how to achieve this arbitrage of perishable goods.    From an ecological perspective, it will be interesting if landfills feature less compost material as less aggregate waste is generated.

Back in 2010, I published my Climatopolis book arguing that the economics of climate adaptation becomes the key issue as global GHG emissions will continue to rise because of the global free rider problem and rising fossil fuel consumption.  This is why I started to work on the micro economics of climate change adaptation and the role that cities play in helping us to adapt to climate change. In a nutshell, I have argued that the world is urbanizing and the cities have an edge in adapting to climate change.  We just need a more flexible capital stock with options built in so we can re-optimize as we learn about location specific risks we will face. We also need more trade across spatially spread out markets in order to diversification location specific climate shocks.  This column in the Christian Science Monitor convinces me that the challenge of climate politics persists.

Here are my recent papers on climate change adaptation and climate politics;

1. Matthew E. Kahn, 2016. "The Climate Change Adaptation Literature," Review of Environmental Economics and Policy, Association of Environmental and Resource Economists, vol. 10(1), pages 166-178.
2.  Kahn, Matthew E., 2015. "Climate Change Adaptation: Lessons from Urban Economics," Strategic Behavior and the Environment, now publishers, vol. 5(1), pages 1-30, June
3.  Kahn Matthew E., 2015. "Climate Change Adaptation Will Offer a Sharp Test of the Claims of Behavioral Economics," The Economists' Voice, De Gruyter, vol. 12(1), pages 25-30, August.
4.  Matthew J. Holian & Matthew E. Kahn, 2015. "Household Demand for Low Carbon Policies: Evidence from California," Journal of the Association of Environmental and Resource Economists, University of Chicago Press, vol. 2(2), pages 205 - 234.
5. Matthew E. Kahn, 2015. "A Review of The Age of Sustainable Development by Jeffrey Sachs," Journal of Economic Literature, American Economic Association, vol. 53(3), pages 654-66, September.
6. Michael I. Cragg & Yuyu Zhou & Kevin Gurney & Matthew E. Kahn, 2013. "Carbon Geography: The Political Economy Of Congressional Support For Legislation Intended To Mitigate Greenhouse Gas Production," Economic Inquiry, Western Economic Association International, vol. 51(2), pages 1640-1650, 04.

Early work in environmental and urban economics treated a city's non-market characteristics as fixed and exogenous. So, think of San Francisco's beautiful climate and topography and views.  New work in this field acknowledges that there are also "endogenous amenities" that arise due to the types of industries and people who cluster in a city and the ways they live their lives (i.e smoking propensities).  For example, San Francisco now has great restaurants (due to the wealth and sophistication of the Twitter crew and the people who seek out and can afford the SF lifestyle) and a serious homeless problem.

Given these points, we can now discuss the anticipated rise in NYC public urination.  The NY Post reports;

"Scofflaws of New York, rejoice — the City Council has cleared the way for you to litter, loiter and pee in the street to your heart’s content.
New legislation dubbed the “Criminal Justice Reform Act” was passed by lawmakers Wednesday, giving miscreants a get-out-of-jail-free card by eliminating the criminal penalties on a raft of quality-of-life crimes.

The disgusting and disturbing acts that the council voted to decriminalize include drinking alcohol out of a paper bag, lurking in parks after hours, urinating in the street and making enough of a racket to violate the noise code.

Under the legislation, which Mayor Bill de Blasio is expected to sign, offenders will face only civil summonses instead of criminal citations.

The main part of the “reform” act sponsored by Council Speaker Melissa Mark-Viverito deals with reducing the penalty for public urination and other quality-of-life offenses. It passed by a 40-9 vote in the liberal-leaning council.

It aims to keep offenders from getting a permanent criminal record and requires the NYPD to “develop guidance” for cops on when to issue criminal instead of civil summonses.

Opponents of the legislation warned that the changes could lead to a quality-of-life backslide.

“We don’t want people to think it’s OK to urinate in public,” said Councilman Steve Matteo (R-Staten Island). “We want there to be real consequences because there’s a big difference between a criminal fine and a civil fine.”

Councilman Ritchie Torres (D-Bronx), who voted in favor of the bills, urged “hysterical” critics to reconsider how criminal rec­ords picked up over minor offenses could hobble young minorities’ “access to financial aid and higher education.”

“These essential elements of a decent life . . . can be easily blighted by the lingering stigma of a criminal record,” he said."

END of DIRECT QUOTE

SO, there appears to be a tradeoff here.  Progressives in the majority have chosen to give individuals more freedom and face less stringent rules.  There are benefits of this but there will be place based costs.  How large will these costs be?  This will be an interesting natural experiment.  Will the progressives implement nudges to discourage public urination?  Will these treatments be effective?

In a letter to the WSJ today, Thomas Gibson argues that relying on lower cost imports is not always in the importer's best interest. Do we teach our students this point in Econ 101?

"The Wall Street Journal seems to find the American steel industry inconvenient. It is inconvenient that our industry has restructured to become the most competitive steel industry in the world, when it would be more economically efficient to let China keep cheating and sell its steel here at unfair prices until the last American steel mill closes and our supply chains are destroyed. Once that last mill closes, what happens when the Navy needs 65,000 tons of steel to build an aircraft carrier that might one day patrol the South China Sea? Now that will really be inconvenient.


Thomas J. Gibson

President and CEO

American Iron and Steel Institute

Washington"

So, Mr. Gibson has a "fancy model" in mind charging China with predation and warning the U.S that there are future scenarios when we will need steel (to build military hardware that ironically will help us to protect ourselves from one of our leading trade partners).  So, Mr. Gibson believes in "self sufficiency".  This creates U.S jobs and U.S pollution and raises costs for U.S consumers of steel. It does provide a type of insurance policy against cases in which our foreign policy places the U.S in disagreement with major trading partners.

While his argument is self-serving, it does raise an interesting question. In a world where trade and foreign policy are interlinked, what is the optimal degree of market integration between the U.S and China?  In the case of steel, if we produce no more steel and if we can't import steel from China; what other nation could export steel to us? Is there enough competition in this market at the world level? Take a look at page 8 of this regarding national steel production. Zipf's law doesn't hold. China (the #1 producer) produces more than twice as much as the #2 producer and much more than 3 times the #3 producer etc.

I will be teaching Econ 101 at USC this fall. There will be at least 150 students in my class.   There are several Principles textbooks I could use that charge different prices.  Greg Mankiw's book is priced at $219.  Joe Stiglitz's book is priced at $176.  Paul Krugman and Robin Wells' book is priced at $142.  In this "oligopoly", the sellers appear to have some market power.  It appears that they can raise price without losing market share.  How will a "victim" such as myself respond?  I will use Tim Taylor's free textbook.     Do you notice my point here?  Even economists who talk about "market power" and who are very famous don't have market power.   I bet that Taylor's book's existence was caused by the high prices of the incumbent texts.

My USC students will learn that there are almost always substitutes and often close substitutes.  Yes, I understand that if you have a rare disease and that if there is a monopolist who makes the drug that you have few choices but consider other less dramatic examples such as airlines.   If United is "price gouging" on a route, then you can hub by flying to Atlanta and taking a second Delta flight from there to your destination. Young people may respond by renting a car.

With this preamble, let's take a look at a recent piece by the Clark Medalist and Nobel Laureate Joe Stiglitz that was published 2 weeks ago.

DIRECT QUOTE

"For the nineteenth-century liberals and their latter-day acolytes, because markets are competitive, individuals’ returns are related to their social contributions – their “marginal product,” in the language of economists. Capitalists are rewarded for saving rather than consuming – for their abstinence, in the words of Nassau Senior, one of my predecessors in the Drummond Professorship of Political Economy at Oxford. Differences in income were then related to their ownership of “assets” – human and financial capital. Scholars of inequality thus focused on the determinants of the distribution of assets, including how they are passed on across generations.

The second school of thought takes as its starting point “power,” including the ability to exercise monopoly control or, in labor markets, to assert authority over workers. Scholars in this area have focused on what gives rise to power, how it is maintained and strengthened, and other features that may prevent markets from being competitive. Work on exploitation arising from asymmetries of information is an important example.

...

In today’s economy, many sectors – telecoms, cable TV, digital branches from social media to Internet search, health insurance, pharmaceuticals, agro-business, and many more – cannot be understood through the lens of competition. In these sectors, what competition exists is oligopolistic, not the “pure” competition depicted in textbooks. A few sectors can be defined as “price taking”; firms are so small that they have no effect on market price. Agriculture is the clearest example, but government intervention in the sector is massive, and prices are not set primarily by market forces.

Some of the increase in market power is the result of changes in technology and economic structure: consider network economies and the growth of locally provided service-sector industries. Some is because firms – Microsoft and drug companies are good examples – have learned better how to erect and maintain entry barriers, often assisted by conservative political forces that justify lax anti-trust enforcement and the failure to limit market power on the grounds that markets are “naturally” competitive. And some of it reflects the naked abuse and leveraging of market power through the political process: Large banks, for example, lobbied the US Congress to amend or repeal legislation separating commercial banking from other areas of finance.


Joseph Schumpeter, one of the great economists of the twentieth century, argued that one shouldn’t be worried by monopoly power: monopolies would only be temporary. There would be fierce competition for the market and this would replace competition in the market and ensure that prices remained competitive. My own theoretical work long ago showed the flaws in Schumpeter’s analysis, and now empirical results provide strong confirmation. Today’s markets are characterized by the persistence of high monopoly profits."

END of STIGLITZ quotes;

I find this last paragraph to be fascinating but vague.  Doesn't the Tim Taylor free textbook example that I mentioned in the first paragraph represent a direct contradiction of Professor Stiglitz's point?  What about the pricing of Microsoft Windows in a world where Google popped up in the late 1990s and gave you all of the services for free that you now take for granted.

Now, if Professor Stiglitz is saying that profitable companies use the political process and finance it in order for government to pass rules and regulations that act as barriers to entry --- then that interests me.  In this case, Professor Stiglitz and Milton Friedman would agree that the state's regulatory oversight should be decreased.

An active research topic in macro focuses on "productivity wedges".  Many scholars are building on Hsieh and Klenow's work to measure how large are the differences in the marginal productivity of firms with respect to their use of capital and land.  Intuitively, a benevolent planner would allocate capital across firms until she has equated the marginal product across them.  But, in nations such as China -- the leadership may play favorites and allocate "too much" capital to favored firms. In such a case, the favored firms would have a lower marginal product of capital than the "non favored" firms who could could gain greatly from accessing more capital. Such distortions in the input markets have aggregate implications for overall productivity and economic growth because key inputs have been misallocated.

Now let's turn to New York City and Mayor De Blasio.   Hospitals are a major employer in Manhattan and they take up a lot of scarce land.  Due to technological innovation in the medical sector (such as less invasive surgeries), patients who used to stay for weeks after surgery are now released in hours or just a day. This means that the aggregate demand for hospital stays has fallen sharply.  This means that hospitals are now too big and it is efficient for them to slim down and sell their excess land to developers such as Don Trump.   Hospitals look like hotels but the demand for this "hotel" is now quite low.  How quickly will capitalism reallocate the scarce land to its new highest and best use?

For a specific case read this about  Mt. Sinai Beth Israel Hospital in lower Manhattan.   The interesting part is that the NYC Mayor seeks to block such downsizing. He says that he is worried about medical care access but I believe that his real reason for supporting the inefficient status quo use of this scarce resource is that he wants the union jobs provided by hospitals to persist. If hospitals shrink down in physical size, they need fewer custodians and nurses.   So this is an interesting case in which capital will only be slowly allocated to its highest and best use because a mayor recognizes that misallocation of capital (the land) creates more jobs for the 99%.   Will Hsieh and Klenow write a paper studying whether the progressive agenda slows down economic growth in the U.S by increasing misallocation?

On the front page of the WSJ today, there is an article about the Congress passing bipartisan legislation intended to reduce consumer exposure to dangerous chemicals.  The tone of the article is optimistic that this new regulation is better than the old TSCA regulation. The interesting part of the piece is the absence of interest group competition. Both product sellers and product buyers appear to support these changes in the rules. This interests me because I was involved in evaluating the California Green Chemistry rules that foreshadowed these federal rules.  Here is the economic report I wrote four years ago.

To see the funny stuff that interest group economic consultants generate when they use computable general equilibrium models, read this attack report.  Here is their report's crazy abstract:


Report: Consumer Impact of California's Green Chemistry Initiative

By CMTA Staff


A new economic impact analysis of the California Safer Consumer Products regulation (green chemistry regulation) by the California Foundation for Commerce and Education (CFCE), an affiliate of the California Chamber of Commerce, has revealed significant negative implications from the regulation and major flaws in the Department of Toxic Substances Control’s (DTSC) efforts to conduct an economic analysis per the requirements of the Administrative Procedures Act (APA).    According to the report, DTSC failed to provide and perform the required fiscal and economic analysis needed to assess the regulations impact on state consumers, economic growth, job performance and overall competitiveness.  Major report findings include that business costs may skyrocket to $150 billion over the next 25 years and result in the loss of an estimated 100,000 jobs; benefits of the program, according to the report, would not materialize until ten to twenty-five years in to implementation.

I wonder if this consulting firm is surprised by the headlines in today's WSJ.  Are they now predicting trillion dollar losses?

The interesting aspect of the product chemicals legislation is the following.  There are existing firms who rigidly produce products such as baby bottles and some toxics are embedded in these bottles.  Such incumbent firms will face costs to adapt to the new regulatory rules BUT there are other companies that don't exist yet who will be born and thrive because they will know how to adapt to the new rules.  Consulting firms paid by incumbents do not have strong incentives to acknowledge this point.  Free market capitalism constantly experiences  firms entering and exiting markets. IO economists should study this issue of how new regulations shift the composition of what new firms enter a market. For example as California has beefed up its AB32 anti-GHG regulations, more electric vehicle makers have entered the market.  Same idea.