Posts Tagged ‘Tim Haab’

Valuing Environment and Natural Resources

February 27, 2013

ValuingEnvironmentAndNaturalResourcesThe two-volume tome Valuing Environment and Natural Resources, edited by Kenneth G. Willis and Guy Garrod, was published last year. It is interesting of at least two reasons. In the interest of backwardness, the least important reason is that it is titled almost identically to the book Valuing Environmental and Natural Resources (look again) by Timothy C. Haab (of env-econ.net) and Kenneth E. McConnell. As if the similarity in the title was not enough, they are both published on Edward Elgar.

The other, more important, reason for taking an interest in Valuing Environment and Natural Resources is buried deep in volume two. In chapter 32 of volume two, to be exact. Chapter 32, the first chapter in Part X (Marine), is namely a reprint of my very first published article. The article appeared initially in the journal Marine Resource Economics, volume 23, number 2, and was titled ‘The Premium of Marine Protected Areas: A Simple Valuation Model.’ The abstract goes as follows:

MRE

The article addresses the induced cost, the premium, from establishing a marine protected area in a deterministic model of a fishery. Outside the protected area, the fishery is managed optimally through total allowable catch quotas. The premium is found to be increasing and convex along the protection parameter. Biological measures are introduced to increase the understanding of the mechanisms in the bioeconomic system. Time-series solutions show that the net return per unit of fish increases after the protected area is established.

In fact, I discovered that the article was reprinted by mere accident (if to google yourself could be regarded a ‘mere’ accident). While I know the journal holds certain rights, I was surprised I was not even informed about the reprint. Oh well. Other authors who’s work are reprinted include big guns like Ian Bateman, Nick Hanley, John List, V. Kerry Smith, Jason Shogren, and a number of others and it is rather pleasant to be reprinted in the same book as them. The publisher describes the book as follows:

Over-exploitation of environment and natural resources is becoming increasingly widespread in the modern world. To combat this, environmental economists have attempted to value such resources in order to ensure that they are given due recognition in any ex ante appraisal, or ex post evaluation of projects or policies; and also to ensure that optimal levels of consumption are determined for the resource. This authoritative collection, along with an original introduction by the editors, brings together seminal papers published in the last three decades which demonstrate the application of a number of techniques employed to value a range of environmental and natural resources. It will be of immense value to students, scholars and practitioners with an interest in environmental affairs and natural resources. [Yes, italics are mine…]

 

Coase

August 6, 2009

The Coase theorem is a famous theorem in environmental economics. Many economists are, however, confused about it, it seems. (See for example Economics Is Hard) Tim Haab at Environmental Economics has tried to clear things up:

The Coase-Theorem: The free-market version
As long as both [the polluter and the polluted] are free to bargain, the final amount of pollution will be independent of the initial allocation of property rights.

That is, when bargaining is free and transaction costs are zero. Are they ever?

But, there are a lot of assumptions embedded in [the] simple version of the Coase Theorem.  So many that Coase himself wrote a piece in 1988 to debunk the simple version.  In effect he wrote ‘That’s not what I meant.’

Now we’re talking. Let’s get down to business.

The Coase Theorem:  The fair market version
In the presence of transactions costs, the final amount of pollution depends on the initial allocation of property rights.

Why the ‘fair’ market version? What’s fair with it? It’s more realistic? And, the final amount of pollution will depend on the size of the transaction costs relative to the size of the externality (the damage of the pollution).

The Coase Theorem:  The wealth effects version
The two versions of the Coase Theorem presented above ignore the possibility that the bargaining outcome creates wealth for the owner of the property right.  If I have the right to clean air, any income I receive from selling that right might increase my demand for clean air.  Just like getting a raise at work increases my demand for eating out, getting more money from selling my right to clean air might increase my demand for clean air.  Likewise, increased profits to the polluter from selling pollution rights might increase the demand for emissions.  Similar to the transactions cost case, the final outcome depends on the initial allocation of property rights.

Is this the Kuznets stuff again? Get rich and care more? No, I don’t think that is what Haab means. But if the polluted demands more clean air, he is less willing to sell the right to pollute; we get less pollution than without the wealth effect, right?

The Coase Theorem:  The free entry version
Further, the increase in profits from selling the property right might lead others to want to take advantage.  If firms are free to enter the market, the assignment of property rights to the firms and the resulting profits from the sale of those rights might cause other polluting firms to enter the market.  Similarly, assigning property rights to the victim, and creating wealth through bargaining might entice new victims to enter the market–for example, more people might move into a polluted neighborhood as a result of the increased wealth from the sale of property rights.  The simple versions of the Coase theorem assumes away entry–by both new firms and new victims.

Is assuming away the same as not considering?

In a follow up post, guest blogger Jim Roumasset discusses yet another version of the Coase theorem; The Grand Equivalence Version of the Coase Theorem, apparently a version that ‘fits Coase’s agenda’:

[A] version of the Coase theorem is that absent transaction costs, alternative institutions such as markets and contracts are equivalent.

[…] When Coase famously presented the ideas behind, “The Problem of Social Cost” at a 1959 Chicago seminar, and pursuant dinner at the home of Aaron Director, he revealed that he had in mind situations of a priori competitive bargaining […]. If bargaining is costless, then the farmer can be viewed as selecting among several ranchers to bargain with; likewise the rancher.

After some further digression, the Equivalence Version can be stated as:

[T]ransaction costs aside, if property rights are commensurate and competition prevails, then any bilateral externality will be equivalently internalized by markets, contracts, and Pigouvian taxes. The Pigouvian tax solution is equivalent to a competitive market in pollution rights where polluters must buy rights from victims. And the core of a competitive contracting economy shrinks to the same market solution — ergo all three institutions are equivalent.

I think the core of an economy is the set of potential bargaining solutions which bargaining parties can agree on, that is, where noone is worse off (or something like that).

The equivalency result also underlies Coase’s (1937) proposition that the boundaries of the firm are chosen to minimize transaction costs. Aside from the “marketing costs” of using outside suppliers and the agency costs of central direction inside the firm, whether to put Fisher Body inside or outside of General Motors would have been a matter of indifference.

Is it valuable to know that if it weren’t for marketing costs or agency costs, a decision would be superfluous? Is it interesting to assume away something that’s always there? I don’t see it, I don’t get it. (Oh, I get it, it’s about philosophical interest; I care because other care; when other works on a problem, it justifies spending time on the problem; you might save others time if you figure it out faster than them, and we might all be better off.)

Anyway, I’m not so sure this is what Coase had in mind. Coase was interested in the real world. If you go back to Haab’s initial post and look at the comments, a Dan Cole (the last comment) has valuable insights:

This post [Haab’s post, that is] participates in many common mistakes about the “Coase Theorem,” and creates one or two new ones. […] Coase was absolutely clear in that article that his example of a zero-transaction cost world was (1) purely hypothetical; (2) intended to highlight problems with standard assumptions of neoclassical theory; and (3) without relevance in the real world, in which transaction costs are always positive and often quite high.

The fundamental purpose of “The Problem of Social Cost” [Coase’s article] was absolutely not to highlight how all social cost problems would be avoided or resolved by costly contracting in a world of zero transaction costs. In such a world, after all, the legal rules (including property rules) would be thoroughly unimportant. Rather, Coase’s goal in the article was to stress the importance of legal allocations of entitlement for resolving social-cost disputes in the real world of costly transacting.

Related post:

More Voodoo

February 25, 2009

I half-promised myself that I would quite ‘reporting’ on the voodoo-debate. I cannot help it, however; it reaches new levels all the time. The latest attack posted on Gristmill, an environmental blog, generated so hatefull comments that John Whitehead of Env-Econ didn’t want to post his own comment there:

I’m sorry to say I don’t have skin thick enough to comment over at Grist given the hate your post brewed up.

I understand John; here are some samples from the comment section on Gristmill:

economists are arrogant whores

Economics, a science? Don’t make me laugh. […] [E]conomics is about as much science as astrology. Listen to an economist sometime. They always pepper their comments with some kind of jingoistic pro-American boilerplate, usually to cover up the fact that they haven’t a clue about what they just said

Voodoo economics (it’s all a quack religion) and actual science do not mix.  They don’t even seem to understand math principles like exponential change.  Could they be turned into Walmart greeters?  Would Walmart want economists?  Doubtful.

Tim Haab, also of Env-Econ, took the time to sit down and write a brilliant reply to the attack from Gristmill. Some of the anger from the Greens is rooted in economists suggesting that combining green jobs and the stimulus package to the American economy is not necessarily a good idea. Tim:

 It seems odd that Roberts would accept suboptimal stimulus and suboptimal green jobs policy when economists are arguing for good stimulus and good green jobs policy.  As John has said many times–stimulus is short term, green jobs is long term.  Why put bad green jobs policy and bad stimulus in place when we could have both with a little patience and thought and dare I say economics.

And from the comment section (still Tim):

I think there are two different time dimensions. There is immediacy on stimulus and less urgency for green jobs. It’s this difference in time that leads me to urge patience on green jobs.

I can hear the argument 5 yeears from now:

Environmentalist: “OK, now that the recession in over, we can really tackle renewable energy.”

DC: “What do you mean? We threw $XX billion at it back in 2009 in the stimulus package(s). You got your piece.”

Environmentalist: “Yeah, but that wasn’t the right policy, it was just a band-aid.”

DC: “Shouldn’t you have thought about that then?”

Economist: “We did.”

I do, as the commenter Patrick Walsh, find comfort in that economists seem to act most like adults in the debate:

I am comforted by the fact that the response to the attack on [Environmental Economics] has been economists trying to paint the full picture and fill in the details. I have not yet seen a counterattack, where economists bash enviros. This optimistic observation provides hope that there is significant room for collaboration, in the spirit of Tim Haab’s original post.

Related posts:

Replication in Economics

February 23, 2009

Despite the voodoo noise, a different and lot more interesting debate about replication in economics has started on Environmental Economics. The debate on Env-Econ is a response to a post on Market Movers, which opens like this:

Falsifiability and replicability are key cornerstones of any academic research. If you’re running an empirical study, and your results aren’t replicable, your study is largely worthless.

First of all, the claim that falsifiability is a key cornerstone of academic research is simply not true, or at least not agreed upon. I understand falsifiability in the Popperian sense:

For Popper, a theory is scientific only if it is refutable by a conceivable event. Every genuine test of a scientific theory, then, is logically an attempt to refute or to falsify it, and one genuine counter-instance falsifies the whole theory.

(Read more about Popper and his ideas at the Stanford Encyclopedia of Philosophy.) Popper’s philosophy of science has been subject to extended debates. Thomas Kuhn, for example, claims that science consist of problem solving within a paradigm, and that paradigms change through scientific revolutions. In particular, Kuhn did not think that a statement had to be falsifiable to be scientific, as Popper did.

I am more willing to agree on the importance of replication. In the hard sciences like physics and chemistry, replication was truly important and researchers (ideally) remained sceptic towards new results until they had been replicated independently from the initial study. Since most research in physics and chemistry are conducted in laboratories, controlled experiments could fairly easily be replicated and results compared.

In economics, however, only recently have researchers started to conduct controlled experiments in laboratories. Tim Haab writes (On replicability in economics and the validation of models)

With economics models, at least until recently, we don’t have labs.  We are working with real observations from highly complex systems.  As such, we are forced to rely on modeling by assumption and measurement through statistical force rather than isolated direct observation.  This makes external validation of economic models extremely difficult.

This is changing over the past decade or so with the advent of experimental economics research in which researchers are testing fundamental economic results in a controlled setting.  Unfortunately, these experiments often suffer from over control which makes generalizability and practical applicability of laboratory results difficult at best. […]

To me, lack of replicability is not a condemnation of economics as a field, rather a challenge to the field to continue the unending pursuit of defensibility.

As Tim also points out, the post on Market Movers is primarily concerned with duplication of results (instead of independent replication), which requires the same data set and statistical tools. Such research is quite rare in economics, and it has different reasons (see Tim’s post). What is more common in economics, however, is that researchers collect their own data and see if they can find the same kind of conclusions as those available in the literature. John Whitehead puts it like this:

Why bother with replication with someone else’s data when you can publish your own study with your own data? The only time you ask for someone else’s data is if you really think they’ve made a horrible mistake or if you have an ax to grind.

However, I do agree with Market Movers that in general, replication and duplication is more important than what it seems to be in academia today.

Hat-tip: Env-Econ

Wow

December 12, 2008

Life suddenly became busy, and I haven’t been able to post for a couple of weeks. In the meantime, the U.S. recession is official (and Jim is not surprised, of course), I’ve organized the department Christmas Party (which took a lot more time than I’d hoped and planned for), I’ve presented some of my work at the Third Joint PhD Workshop in Economics (joint workshop between the economics departments at the University of Bergen and the Norwegian School of Economics & BA), I wasn’t able to avoid disaster, unfortunately (I was not prepared well enough), I’ve seen Lord Kelvin live at Landmark (which was really great, by the way), and Tim Haab at the Environmental Economics blog has dug up some very strange research (I wonder if this guy has heard of spurious regressions; I hope so).

Other than that, I’ve finished the first volume on a biography of the Norwegian hero Thor Heyerdal and started reading Hot, Flat, and Crowded, a book by Thomas L. Friedman. It’s an interesting book, I plan to post some of my thoughts on it later.

I also hope I’ll be able to sustain a more steady posting rate in the future compared to the last weeks. The Christmas season is just around the corner, however, so it might be quiet around here for a while still. I’ve also realized that I need to seriously speed up my work with my doctoral thesis if I want to submit it before my funds run out; I might have to spend less time blogging (I think I’ve cut it to the bone when it comes to sleep, social activities, and physical excercise already).