Archive for April, 2009

Economics of the Endangered Species Act

April 30, 2009

I’m reading the article by Gardner M. Brown Jr. and Jason F. Shogren (Journal of Economic Perspectives, Vol 12, No 3). Here is some of what I highlighted:

The Endangered Species Act of 1973 addresses the market failure associated with the unpriced social benefits of such species. […] Although the benefits of protecting endangered species accrue to the entire nation, a significant fraction of the costs imposed by the Act are borne by private landowners [p. 3].

Many natural scientists and ecologists view the methods and mindset of economists with grave suspicion. […] [E]conomists can help to raise the chances that when society imposes and bears costs for protecting endangered species, it is more likely to succeed [p. 4].

The intention of the Endangered Species Act is to save all species. There is no explicit recognition of relative costs and benefits in the 1973 Act. […] Recovery plans are typically designed with little regard for total or marginal economic benefits relative to costs, nor with much regard for ecological-economic interactions, including the relative value of information that allows policymakers to discriminate among alternative recovery plans [p. 6].

Since owning land which is hospitable to an endangered species can dramatically circumscribe any development plans for that land, owners have an incentive to destroy the habitat before listing occurs, sometimes known as the “shoot, shovel and shut-up” strategy. [p. 7].

Preferences are not an ingredient of science [p. 8].

[O]nly one with modest expectations would give the Endangered Species Act a high performance rating. Since the inception of the Act in 1973, 11 species of more than 1,000 listed [as threatened or endangered] have recovered and have been removed from the list […] [L]ess than 10 percent of the listed species have exhibited an improved status and the status of four times that amount is declining. […] The ratio of declining species to improving species is 1.5 to 1 on federal lands, and 9 to 1 on private lands [p. 10].

Most of the services provided by the endangered species, including their corresponding levels of biological diversity, are not priced by the market. […] Essentially, the approach of the Act that prohibits any activity that harms a listed species puts a very large or infinite value on avoiding extinction. This view places endangered species beyond the reach of economic tradeoffs, and the economist is relegated to helping find the least cost solution to achieve a biological-based standard [p. 10].

A recent survey found that over 70 percent of Scottish citizens were completely unfamiliar with the meaning of biodiversity [see article for reference], and there is little reason to expect substantially more knowledge in the United States [reference, see article; pp. 12-13].

The opportunity costs of the Endangered Species Act include the foregone opportunities due to restrictions on the use of property due to listings, designation of critical habitat, and recovery plans.  Opportunity costs also include the reduced economic rents from restricted or altered development projects, agriculture production, timber harvesting, minerals extraction, recreation activities, wages lost by displaced workers who remain unemployed or who are re-employed at lower wages, lower consumer surplus due to higher prices, and lower captial asset value [p. 13].

[E]conomists can frame the endangered species debate in benefit-cost terms. Such calculations are bound to be uncomfortable and controversial, especially since the overwhelming fraction of benefits from the preservation of endangered species are likey to be in the nature of public goods whose benefits are received in the future. […] Economists naturally seek criteria and conduct analysis which permit a discrimination among species in recognition of the existence of budget constraints. Of course, anyone who offers analysis which leads to increased risk of a species becoming extinct will suffer attacks, but the present system is assuredly allowing many such actions, without the meliorating grace of admitting or examining them openly [pp. 15-16].

[W]heather and which species are or soon will be endangered are not purely ecological questions, but are in part economic questions too. After all, economic variables influences the likelihood of extinction  and even evolution [see article for reference; p.16].

At present, the Endangered Species Act sets a lofty rhetorical goal of saving every species, while making no distinctions among species except those governed by “science,” a term left largely undefined. It is driven by the belief that risk of extinction is a question best left to the natural sciences; if economics is allowed in the door at all, it is relegated to task of managing the risk levels determined by others [see article for reference]. The Act largely ignores the importance of the incentives facing private landowners. These are shortcoming that economists are well-suited to address [pp.17-18].

Related post:


Quote of the Day

April 28, 2009

The most important factor in completing a PhD is sticking with it until it is finished (Anonymous).

What’s the Best Use of Green Money?

April 27, 2009

A friend of mine considers to buy a new car. I suggested he buy a car for the future. A hybrid, for example. He was not convinced; they may be too pricey. Maybe the money could be better spent; maybe he somehow could get more environment (less carbon) for the same amount of money. That’s a very good question, actually. What is the best use of green money? I rarely see that kind of questions discussed.

A Ph.D. student I met in the US, however, had the idea that Americans should, instead of buying hybrids, donate their money to environmental programs in other parts of the world, where the potential to save carbon was much higher. Not that gas-milage on American cars is much to write home about, but think rain forest protection and third world energy systems.

Now, determining what projects gets the best effect on the environment for the least amount of money is not an easy task. The natural way to do that would be through a market mechanism, but no such market exist as far as I know. The Americans has started to trade in carbon, and that is a start, but it’s about emissions, and doesn’t really give incentives to structural changes. (Or maybe it does; I have to think. I don’t think big changes will happen very fast, anyway, because of cap-and-trade programs.)

Back to the hybrid. There are many good reasons for not owning a hybrid. They are expensive, they don’t go very far, and noone really knows (me, that is) the economy in them. A crucial thing, of course, is how to generate the power to run them. If it is generated from coal, for example, it doesn’t really help. Shai Agassi on has solutions to some of the problems with today’s hybrids (he’s vague on the power generation issue, though):

Hat-tip: Env-Econ

Sustainable Fisheries

April 17, 2009

In Nature (volume 455, no. 23)  Geoffrey Heal and Wolfram Schlenker discusses individual transferable quotas (ITQs) and their potential to improve the health of both fish stocks and fisheries. They show empirically how ITQs have increased catches in 121 fisheries around the world. From their final discussion:

If ITQs work, why haven’t they been more widely used? Undoubtedly, this is partly because, until [recent research], we have not had unambiguous evidence that they do work. This study should give ITQ implementation a boost. But there are also some political, ideological and regulatory issues in the way. Some environmental groups are opposed to anything based on market principles. Others feel that ocean fisheries are common property that everyone should be free to use them, and that it is wrong to establish ownership rights in the sea. It is to be hoped that clear evidence of the effectiveness of ITQs will lead their opponents to think again. Finally, ITQs work best when a fish species resides exclusively within the waters of a particular country. Fish species in international waters, or migratory species, would require international agreements, with the complication that individual might have an incentive to cheat.

Another problematic issue with ITQs that Messrs. Heal and Schlenker don’t discuss is how they change the distribution of income from a fishery. In a functioning market (which ITQs require to work properly), implementation of ITQs transfer all future income from a fishery to the quota holders at the time of implementation. Some people suggest that when ITQs were implemented on Iceland, a lot of fishermen got a lot of money they did not know what to spend on and that at least some of that money went into building the Icelandic financial adventure that eventually collapsed.

Fisheries Economics, a Useless Science?

April 14, 2009

I came across this paper out there on the world wide web; it’s written by Wim Davidse. Here’s the abstract:

The paper questions the usefulness of fisheries economics, following some statements that express the uselessness of business economics in a leading Dutch journal on this discipline. These statements are:

The contribution to practice is very limited. Solutions are implemented in practice without consulting theories;

Theoretical assumptions use to be far from practice. Expressing utilities in monetary values will only partly explain the behaviour of entrepreneurs.

Theoretical outcomes are self-evident or only explain in retrospect rationality of business decisions.

Theories only need to satisfy our need for knowledge and are as such a kind of ‘l’art pour l’art’.

The paper applies these four observations to fisheries economics and gives some examples in this discipline. In a more positive way the specific contribution of fisheries economics to fisheries management and to business practice is investigated. Finally, some recommendations are formulated.

Jumping to the conclusions:

[F]isheries economics is nota as useless as business economics […] since there have been clear contributions to the practice of fisheries management. […] Answering the question in the title of this contribution I will say that fisheries economics is a useful science in combination with other sciences and with practical knowledge.


Wikipedia vs. Public Restrooms, and Social Knowledge

April 12, 2009

The user who visits Wikipedia to learn about some subject, to confirm some matter of fact, is rather in the position of a visitor to a public restroom. It may be obviously dirty, so that he knows to exercise great care, or it may seem fairly clean, so that he may be lulled into a false sense of security. What he certainly does not know is who has used the facilities before him.

The words belong to Robert McHenry, a former editor in chief of the Encyclopædia Britannica. I found the quote in David Weinberger’s book ‘Everything is Miscellaneous’ (p. 132). The quote is taken from an article McHenry wrote on back in 2004. I’m sure it makes interesting reading. 2004 is five (5!) years ago, however, and a lot has happened since then.

Another skeptic towards Wikipedia is (or, was) Stephen J. Dubner of Freakonomics; he discovered himself on a list of well-known economists. That was 2005, however, and Dubner’s skepticism has faded (if my memory serves me right, that is; I’m sure he mentioned his newly won trust in Wikipedia somewhere, but I wasn’t able to find it; I need a backward-link seeking tool to find entries linking to the post I link to above, because it was when he mentioned his new view of Wikipedia he linked to the old post with his Wikipedia skepticism I found that; confusing I know, but it’s not important, so just forget about it).

Wikipedia may be great, but it also may be wrong from time to time. To know, you need to find out whether an entry is disputed or not. If it is, I’m sure the relevant discussion page suffices to make sure what is trustworthy and what is not, and eventually what side of the dispute you want to sympathize with. However, if the subject is a bit odd, Wikipedia may be wrong and still not disputed because so few people ever looks up the entry.

So, can Wikipedia be trusted on the big, important entries, but not the small ones? When is an entry big; when is it small? My conclusion is that Wikipedia may be a good starting point, but usually I rely on Wikipedia to take me somewhere else, to ‘real’ sources. Wikipedia doesn’t feel real to me, but it collects threads to a lot of real stuff.

The old rule of not relying on only one source remains. Paradoxically, Wikipedia, which is generated from innumerable sources, needs to be checked towards different sources before one can rely on it.

Weinberger concludes his section containing the McHenry quote with the following sentence:

Knowledge – its content and its organization – is becoming a social act [p.133].

I twisted when I read that. When was knowledge, its content and organization, not social? I’m certain dear Deirdre wrote somewhere (probably in ‘The Rhetoric of Economics’) that research is social; research is supposed to produce science, and if we’re strict about knowledge, it comes from science. Not all kinds of knowledge, for sure, but certainly the kind Weinberger is talking about. Research IS social. It’s not objective; it’s colored by the subjects involved and the social environment they do their research in. What Weinberger tries to tell us, I think, is that more people may take part in the process he calls knowledge (the social act). No initial requirements to participate are necessary, or rather, requirements (I’m thinking education; position; image) doesn’t matter, or matter less. Whether that is a good thing or not, I haven’t yet decided.

Related post:

More on the Population & Greenhouse Gas Cap Paper

April 8, 2009

In a previous post, I discussed a paper by Henning Bohn and Charles Stuart. After some second thoughts, I’ve come to some further conclusions.

First of all, it can be argued that the paradox I discussed in my previous post is simply a result of a paradoxical model. It’s paradoxical that productivity growth rates would stay constant for ever with dramatic shifts in both the population level and the environmental quality (which is presumed in the model where emissions are capped; alternatively substitute environmental quality with production technology).

Second, the model presumes that people not participating in the production fase don’t receive any income and thus cannot exist. In a world with a high productivity of labor, a relatively small work force could sustain a large population; through a tax scheme, for example.

Related post:

Four Characteristics of Knowledge

April 8, 2009

I’m reading ‘Everything is Miscellaneous’ by David Weinberger, and in it I found the following passage.

Knowledge, we’ve thought, has four characteristics, two of them modeled on properties of reality and two on properties of political regimes.
As we’ve seen, the first characteristic of traditional knowledge is that just as there is one reality, there is one knowledge, the same for all. If two people have contradictory ideas about something factual, we think they can’t both be right. This is because we’ve assumed knowledge is an accurate representation of reality, and the real world cannot be self-contradictory. We treat ideas that dispute this view of knowledge with disdain. We label them “relativism” and imagine them to be the devil’s work, we sneer at them as “postmodern” and assume that it’s just a bunch of French pseudointellectual gibberish, or we say “whatever” as a license to stop thinking.
Second, we’ve assumed that just as reality is not ambiguous, neither is knowledge. If something isn’t clear to us, then we haven’t understood it. We may not be 100 percent certain about whether the Nile or the Amazon is the longest river, but we’re confident one is. Conversely, if there’s no possibility of certainty -“Which tastes better, beets or radishes?” – we say it isn’t a matter of knowledge at all.
Third, because knowledge is as big as reality, no one person can comprehend it. So we need people who will act as filters, using their education, experience, and clear thinking. We call them experts and we give them clipboards. They keep bad information away from us and provide us with the very best information.
Fourth, experts achieve their position by working their way up through social institutions. The people in these institutions are doing their best to be honest and helpful, but until humans achieve divinity, our organizations will inevitably be subject to corrupting influences. Which groups get funded can determine what a society believes, and funding is often granted by people who know less than the experts: The fate of a DNA reserach center may rest with congresspeople who can’t tell a ribosome from a trombone.
The way we’ve organized knowledge has been largely determined by these four properties of knowledge. We’ve tried to settle on a single, comprehensive framework for knowledge, with categories so clear and comprehensive that experts can put each thing in its proper place. Institutions grew to maintain the knowledge framework. Their ability to certify experts and to vouch for knowledge made them powerful and, sometimes, rich. So when the miscellaneous shakes our certainty in the nature of knowledge, more than the future of the [library] card catalog is at stake. Because a [new miscellaneous order] is digital, not physical, we no longer have to agree on a single framework. Things have their places, not a single place. We get to create our own categories, ones that suit our way of thinking. Experts can be helpful, but in the age of the miscellaneous they and their institutions are no longer in charge of our ideas.
These are big changes, but perhaps the most urgent one is this: Over the course of the millennia, we’ve developed sophisticated methods and processes for developing, communicating, and preserving knowledge. We have major institutions – serious contributors  to our culture and our economy – devoted to those tasks. We’re good at it. Now we have to invent new ways appropriate to the new shape of knowledge [pp. 100-102].

How about that? I plan to write more about Weinberger’s book in a later post.

Population under a Cap on Greenhouse Gas Emissions

April 2, 2009

I just attended a seminar on the effect a cap on greenhouse gas emissions would have on population dynamics. Here’s the abstract:

Imposition of a cap on greenhouse gas emissions changes the economy’s growth path and causes total emissions to become a fixed common-property resource. Because total emissions equal population times emissions per person, a marginal birth under a cap reduces emissions per person, in turn reducing living standards. The implied negative population externality causes the optimal population to be less than the population that would arise naturally. The population externality is substantial in some simulations.

The paper is written by Henning Bohn and Charles Stuart, both at the Department of Economics, University of California at Santa Barbara; Charles Stuart was the presenter.

One very interesting finding in the paper is that, given that productivity of both labor and emissions may grow,* the population declines in the steady state whenever the growth rate of labor productivity is higher than that of emission productivity. That is, emissions cannot grow, and while labor productivity grows faster than emission productivity, fewer and fewer people are required to participate in the production process. The result may seem absurd or paradoxical: The presumed motivation for capping emission is to save the environment and have a livable climate, but the cap implies a population decline. A declining human population would in the long run mean that humans go extinct. In other words, we have a choice when it comes to greenhouse gas emissions: Keep emitting, destroy the environment, and go extinct fast on a dry, hot, and hostile planet; taking the global eco-system, as we know it, with us. Or, cap emissions, save the environment, and go extinct slowly in a gradually improving and more and more friendly and fertile environment. (For the record, Stuart did not put any emphasis on this aspect of his results.)

We had a short discussion about the apparent paradoxical result, and thinking about the discussion afterward, I came up with an alternative interpretation. The alternative interpretation is that we know we need to cap emissions, but at the same time we need to improve on the productivity growth of emissions to accomodate a seemingly inevitable increase in the population. Personally, I think the second interpretation is more valuable than the first. (The model of Bohn and Stuart imposes an optimal tax to control the population according to the limitation an emission cap introduces. In the model, it wouldn’t be necessary to worry about an increasing population when the cap is enforced, but in the real world, we  know things aren’t quite like that. The point is, even if it did, we still would need to improve the productivity of emissions, and even more so in an imperfect world.)

* The model is quite simple and stylistic and abstracts from a lot of stuff (the harmful effect of emissions, for example): The production function only incorporates labor and emissions; exchange emissions for capital and you got the simplest standard production function. Whether it makes sense to put emissions into the production function like that, I’m not sure.

Mr Vertigo

April 1, 2009

Today, I finished ‘Mr Vertigo’; a novel by Paul Auster. I’m not going to discuss it at length (or at all), but the opening line is worth a whole post by itself:

I was twelve years old the first time I walked on water.

That’s a cracker. The opening line must be the hardest one. It’s like ligthening from a clear, blue sky. It must hook the reader, make him curious about what’s to follow. According to McCloskey’s ‘Economical Writing’, the opening statement should not be boring, but take the reader from his current standpoint to the issue at hand.

The rest of ‘Mr Vertigo’ is also great, by the way; go read it!

The Cost of Standby Computers

April 1, 2009

On Freakonomics, Daniel Hamermesh rebuff a claim that standby computers in the U.S. waste $2.8 billion on energy.

It ignores the cost of turning computers off — and having to turn them on again the next morning. Let’s say that process takes five minutes per day, and one does it 250 days per year. That’s 1,250 minutes, or more than 20 hours per person per year.

Assume the average computer user’s wage is $21 per hour, and take the old estimate that time is valued at one-third of the wage. So each person’s time per year turning his/her computer off and on is worth 20 x $7 = $140. I’m being conservative and assuming only 50 million U.S. computer users. That gives a cost of turning computers off/on of 50,000,000 x $140 = $7 billion, which is 2.5 times the alleged savings from turning computers off. Even if people’s time were valued at only $3 per hour (less than half the minimum wage), leaving computers on would still make sense.

This story is yet another example of environmental savings uber alles — that saving $1 in environmental damage is worth much greater costs incurred along other dimensions. These stories assume explicitly — or, more usually, implicitly — that people’s time has no value.

I read through some of the first comments, and every comment had problems with Hamermesh’s argument. Mostly, people claim they do other things while their computer starts up or closes down. Myself, I tend to do unecessary things while the computer starts up and would prefer to just start working.

The story also reminded me of an old post on Environmental Economics on an energy saving plan at the Appalachian State University, linking it to carbon release. Ol’ mighty John Whitehead mixes up the numbers, however (see the comments).