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February 18 2014


February 10 2014


A Dubious (or Curious) Response?

In response to the letter I sent to my two in-state Senators from the Great State of Ohio, regarding the use of contingent valuation by the National Park Service and Senator Vitter's letter use of Hausman's 'Dubious' critique to argue against,in which I wrote:

I have recently read Senator Vitter's letter to the National Park Service dismissive of the use of survey methods (the contingent valuation method in particular) in benefit-cost analysis.  In dismissing the method, Senator Vitter cites an article by economics Professor Jerry Hausman published in the Journal of Economic Perspectives in 2012.   In choosing to selectively use Professor Hausman's critique of the contingent valuation method, Senator Vitter fails to mention that Professor Hausman's critique is one of three articles in a symposium in that issue of the journal, of which the other two articles provide much more positive assessments of the method.


The selective use of a single publication from a vast peer-reviewed literature to defend a stance critical of the use of a method flies in the face of responsible use of academic research and will ultimately lead to bad public policy.

I received the following reply this morning:

Dear Tim,

Thank you for contacting me regarding your concerns about funding for national parks. I understand your concerns with this matter and share your love of the outdoors.  Ohio's lakes, rivers and wildlife are truly a treasure and protecting and preserving them is a top priority for me.  During my tenure as the Director of the Office of Management and Budget, I launched the National Parks Centennial Initiative in an effort to preserve our national parks. 

Unfortunately, as American families have tightened their belts over the past couple of years and businesses have had to do more with less, the federal government has taken the opposite path, spending more, growing bigger, and becoming more involved in our economy and our lives.  Getting our deficit and debt under control is the single most important step we can take to get our economy going, create the jobs we need so badly, and have federal funding available for priorities like national parks. 

I am committed to working in a bipartisan manner to meet our economic and fiscal challenges by putting in place pro-growth measures and spending restraint. We need to promote new tax policies that take away the uncertainty and encourage innovation and investment and make us more competitive in a global economy. We must revisit health care reform to truly reduce costs, allowing working families and small businesses to afford access to care. We need sensible regulatory reform that reverses the growing burdens on employers that drive jobs overseas. Finally, we have to develop a national energy strategy that uses our own resources to stop our dangerous dependence on foreign oil.  

Once again, thank you for taking the time to write.  I am honored to represent you and the great state of Ohio in the United States Senate.  For more information, please visit my website at portman.senate.gov.  Please keep in touch.


Rob Portman
U.S. Senator

Call me skeptical, but I don't get the feeling he really wants me to keep in touch...or really read my letter for that matter. 

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January 30 2014


Crossing a line I've never crossed before

I've never chosen to write to a Senator, or Congressperson...until this morning.  Here is my letter (highly paraphrasing John's letter--of course, my letter is wordier) to the Senate Environment and Public Works Committee.

I have recently read Senator Vitter's letter to the National Park Service dismissive of the use of survey methods (the contingent valuation method in particular) in benefit-cost analysis.  In dismissing the method, Senator Vitter cites an article by economics Professor Jerry Hausman published in the Journal of Economic Perspectives in 2012.   In choosing to selectively use Professor Hausman's critique of the contingent valuation method, Senator Vitter fails to mention that Professor Hausman's critique is one of three articles in a symposium in that issue of the journal, of which the other two articles provide much more positive assessments of the method.

The symposium in the Journal of Economic Perspectives from which Professor Hausman's critique was cherry-picked by Senator Vitter was commissioned as a twenty-year retrospective on the development of the contingent valuation method.  In 1992, in the aftermath of the Exxon-Valdez oil spill, the National Oceanic and Atmospheric Administration commissioned a blue-ribbon panel of economists, including two Nobel prize winning economists, to assess the potential of the contingent valuation method  to provide meaningful values for environmental goods and services.  Beyond being generally supportive of the method, the NOAA panel outlined a set of best practices for the method to address many of the concerns Professor Hausman raised at the time and has raised again twenty years later.  

In a published 2012 'Comprehensive Bibliography and History of the Contingent Valuation Method,' Professor Richard Carson of UC San Diego documents over 7500 academic papers and applied case studies from over 130 countries that use or discuss the contingent valuation, the vast majority of which have been published in the last 20 years.    Professor Hausman's critique ignores most of this literature.  

In a recent paper, published in the journal Applied Economics Policy and Perspectives (2013), Professors John Whitehead, Matt Interis, Dan Petrolia and myself conclude, "Hausman “selectively” reviewed the contingent valuation method (CVM) literature in 2012 and failed to find progress in the method during the 18 years since Diamond and Hausman argued that unquantified benefits and costs are preferred to those quantified by CVM. In this manuscript, we provide counter-arguments to Hausman's claims, not with the intent to convince the reader that the debate over CVM is settled in favor of the method, but rather to argue that the intellectual debate over CVM is ongoing, that dismissing CVM is unwarranted, and that plenty of work remains to be done for the truly curious researcher."  I would be glad to provide a copy of this paper to any truly curious elected officials.

The selective use of a single publication from a vast peer-reviewed literature to defend a stance critical of the use of a method flies in the face of responsible use of academic research and will ultimately lead to bad public policy.


Tim Haab
Professor and Chair
Department of Agricultural, Environmental and Development Economics
The Ohio State University

PS: For what its worth, I am a registered Republican.

I also sent a version of my letter to the House Committee on Science, Space and Technology (Subcommittee on Environment) which has jurisdiction over "all matters relating to environmental research..."

January 29 2014


Apparently the new Farm Bill was written by Scrooge

After a long and sometimes heated debate, a new U.S. Farm Bill was passed this week (being in a College of Ag, I'm required to know this for continued employment).  Inside the bill is a little provision that is sure to spoil almost no one's holidays next year:

Tucked inside the massive new farm bill, which House Republican leaders are speeding to the floor, is a controversial 15-cent fee the government will collect on every Christmas tree cut in or imported into the U.S.

Dubbed the “Christmas tree tax” by opponents — a term to which industry backers vehemently object — it is an idea that’s been kicking around the Capitol for years, but finally got enough support to land inside the 959-page farm bill.

via www.washingtontimes.com

Here are my and John's take on the Tannenbaum Tax, or Christmas Tree Fee, or Scrooge Screw, or Grinch Pinch, or Pagan Price, or Yule Tithe, or whatever you want to call it, from 2011.

January 28 2014


My guess is that enterprise zones are the greatest idea

I've spent 35 years reading newspaper articles with ideas about helping coal mining regions (and I even had the romantic notion about that being my destiny out of grad school). Here is the latest:

As Mr. Obama prepares to deliver his annual speech to Congress, he can point to a steadily improving economy. But many Americans say they have seen little benefit from the recovery and complain that the economic deck is stacked against them.

Nobody doubts that this hilly and remote stretch of Appalachia could use the help. The local unemployment rate is 12.8 percent. Drug abuse is rampant. The poverty rate is nearly 26 percent.

But experts are broadly skeptical that any federal initiative would be enough to combat either the immediate economic upheaval caused by the loss of coal jobs or the long-term economic torpor that is a product of remoteness, poor infrastructure and an undereducated work force. ...

Despite their modest track record, enterprise zones continue to attract supporters from across the political spectrum. In Kentucky, Mr. Obama’s program has the backing of the Democratic governor, Steve Beshear, and even the assent of one of the country’s most conservative senators, the Republican Rand Paul.

But local workers and officials — even while welcoming any help that towns like Hazard could get — voiced skepticism that there was much the government could do to fundamentally turn around the economy.

via www.nytimes.com

Back when Tim and I were at ECU the notion of a "global transpark" was being pushed for Kinston, NC. I was talking about this with a professor from another department who was arguing that it was a great idea that would help the economy of a relatively low-income region. I argued that the net benefits were probably negative, it would only regionally reallocate jobs and it would be cheaper for people to move to where the jobs were (and the economics of migration show how those who move and stay are both better off as a result). The other professor disagreed and said we have to do something, anything, to help low-income areas out (I think, conceding that a global transpark wasn't the greatest idea). I disagree that we have to do something, anything. 

You would think that a guy with "Appalachian" in his affiliation (and lots of friends from coal) would have a better answer. 

January 09 2014


Daily Demand and Supply: Another Price Gouging Rant

Time to once again address a topic I like to rant about: price gouging.  Two days ago, New York Attorney General  Eric Schneiderman posted the following letter/warning to businesses in New York. 

January 7, 2014

This open letter is addressed to anyone selling necessary consumer goods and providing essential services to the Western New York region during today’s severe winter weather event.

New Yorkers will rely upon you for the items needed to prepare for, weather, and recover from these extreme conditions, as we all stock up on water, food – including staples such as bread and milk – batteries, de-icers, sand, generators, fuel and other essentials.  Perhaps even more, we will rely on you to assist us in clearing our streets and recovering from the damage left to our trees and homes.  It can be a thankless responsibility, and we all owe you our gratitude.

While most understand that customers are also neighbors and would never think of taking advantage of others during such disruptive times, these circumstances always require an extra sense of vigilance and preparation.

This notification should serve as a reminder to vendors and their consumers that state law prohibits price gouging at times when nature demonstrates its disruptive fury. The New York General Business Law forbids those who sell essential consumer goods and services from charging excessive prices during what is clearly an abnormal disruption of the market. Those who do so will ultimately see a reduction in their profits and will be faced with penalties, fines and directives to set up reimbursement funds.

As Attorney General, it is my responsibility to enforce the price- gouging law, and while it is my hope that I will not need to do so, my office is certainly prepared. We will review pricing data and take such complaints filed with my office seriously, as we do with any matter.

New Yorkers have always been at their best when facing adversity, and I am confident that we will live up to that standard throughout this storm recovery.

Eric T. Schneiderman
New York State Attorney General

via www.ag.ny.gov

Now I am slightly sympathetic to AG Schneiderman's position.  After all, he doesn't write the laws, he just enforces them.  So in his defense, the following is addressed to NY State Legislators and legislators in any other state, municipality, country...: Price gouging laws are not good policy. 

First let's examine why price gouging laws are perceived to be necessary in the first place.  In times of significant events such as natural disasters, snow storms, arctic hurricanes, polar vortices, attacke by Death Star, demand for essential goods and services will increase.  And we all know that when demand increases, prices rise. 

Couple with that the likelihood that in such instances demand will be highly inelastic in the shortrun because of disruptions to supply chains and delivery of essential goods and services, the sudden demand increase will result in dramatically higher price increases.

This isn't an opinion, it's not a consequence of an unfair system, it's a fact.  Prices of essential goods and services can, will and should rise in times of natural disaster.  Does that mean some people will be forced out the market?  Yes.  Does that mean some people who need certain goods and services will be unable to get them? Yes.  Is that uncomfortable, unfortunate, unfair, unwhatever?  Yes, yes, yes, and yes. 

But, what is the alternative?  Controlling prices thorugh price capping (gouging) laws?  When we cap prices in a market, the result is mopre people wanting the good at that price than are able to get it.  We call that a shortage.  Does that mean some people will be forced out the market?  Yes.  Does that mean some people who need certain goods and services will be unable to get them? Yes.  Is that uncomfortable, unfortunate, unfair, unwhatever?  Yes, yes, yes, and yes. 

You see, price adjustments ration goods.  Rather than a government deciding who gets what, the interaction between demanders and suppliers lead to price adjustments which ration goods.  While the outcome is uncomfortable, unfortunate, unfair, unwhatever, the outcome is efficient. 

I know we like to try to count on human kindness in times of distress, and I too get angry when I have to pay mopre in in time of distress, but really, who is to blame when prices rise?  Is it the evil business owner who is simply charging what people are apparently willing and able to pay?  Or is it the legion of demanders who suddenly find themselves in sudden need of goods and services in short supply thus being willing to pay more?

While the answer is uneasy to take.  It's how markets work to ration goods and services in a way that makes the most of scarce resources.

Over time, supply routes will be restored, delivery will resume, demand will decrease back to 'normal' levels and prices will once again drop.  Until then, we might have to deal with higher prices.





January 07 2014


I will be sitting by the phone anxiously awaiting Governor Kasich's call

Scott Nally has resigned as director of Ohio Environmental Protection Agency after three years as head of state agency that, by design, became more business friendly.

via www.dispatch.com

Hmmmm..I think an environmental economist with management experience and penchant for explaining the role economics can play in environmental decisions would make an ideal candidate.

Just sayin'

January 06 2014


Daily Demand and Supply: Rocky Mountain High

A few days into the experiment, the new world of legal-recreational-marijuana sales in Colorado appears to be a big success — so much so that pot shops are finding it impossible to keep up with demand.

According to the Denver Post, at least 37 stores in Colorado were licensed to sell recreational pot to anyone 21 or over as of New Year’s Day. The Associated Press and others reported long lines outside Denver pot shops, with some eager customers forced to wait three to five hours before getting a chance to go inside, step up to the counter and make a purchase.

Prices have been steep — in some cases, stores were charging $50 or even $70 for one-eighth of an ounce of pot that cost medical marijuana users just $25 the day before — and taxes add on an extra 20% or so. Even so, sales have been brisk.


Prices in legal pot shops have already risen to upwards of $400 an ounce. Once you factor in taxes, as well as the fact that it looks like shops may periodically be sold out for a while, and some are saying the situation is one that could push pot enthusiasts back to buying marijuana on the black market. “People will get real tired of paying the taxes real fast,” one street dealer in Pueblo named Tracy told the Chieftain. “When you can buy an ounce from me for $225 to $300, the state adds as much as $90 just for the tax.”

via business.time.com

Point 1: Demand increases cause higher prices.

Point 2: One of the arguments for legalization of marijuana is that buyers are willing to pay a premium to avoid the risk of fine/arrest by buying from non-licensed dealers (aka the black market).  One of the itneresting questions that will play out in Colorado is just how large the difference between the legal price and the black market price will be.

December 30 2013


Stock versus Flow: Flow wins

I'm on vacation this week.  At best my posts are going to be reposts (shocking, I know).

At the behest of Ohio regulators in 2011, [American Electric Power] agreed to split its Ohio operations into two companies: one that delivers power and handles billing, and one that owns and operates power plants.

The separation means that AEP’s power plants will no longer directly serve the utility’s customers in the state. Instead, the plants will sell electricity on the open market, while the delivery business will purchase electricity on the market for its customers. AEP’s power plants probably will serve a portion of the company’s customers, but only through a competitive-bidding process in which other companies have the opportunity to offer a lower price.

AEP, which was reluctant to split its Ohio operations, has responded by focusing on the delivery business.

Meanwhile, the Ohio power plants are a shrinking asset. Because of environmental rules and the age of some of the plants, the company has announced a series of shutdowns that will occur over the next few years.

Also, AEP is in the process of transferring two plants away from Ohio regulation. The plants, both of which are in West Virginia near the Ohio line, will be regulated in nearby states that allow a utility to sell electricity directly to consumers.

Once the moves are complete, AEP will have 8,668 megawatts of power-plant capacity in the new Ohio power-plant subsidiary, which will be down from 11,652 megawatts today.

Akins says the company is responding to an economic climate in which there is little reason to build power plants in Ohio. The state’s electricity demand has been flat, and the regulatory structure provides no clear way to pay for plant construction.

via www.dispatch.com

December 02 2013


"The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future" is a good bet

I know you have all missed me for the last week, but I'm glad John was able to maintain the professional standards we have set for Env-Econ in my absence.  As for me, I was able to spend five days of observational field research on coastal erosion in eastern Mexico.  A few things I learned:

  1. My three years of high school spanish surprisingly made for servicable conversation (Cerveza? Bano? Como se dice "Could you please repeat that in English"?)
  2. It was really hard to watch what could possibly have been the greatest day of College Football ever, when the locals kept trying to turn the channel to some other game they called football. 
  3. The closest major U.S. city to Cancun is Miami, Fl.  Who knew?
  4. Cancun caters to U.S. tourists.  Who knew?  OK, I knew that one going in.
  5. When I have a full day to sit and read, I can read a whole book.  Which is what I did with "The Bet: Paul Ehrlich, Julian Simon, and Our Gamble over Earth’s Future."  So here's my highly objective (i.e. biased) review.

The Bet is Yale University historian Paul Sabin's (no relation to Nick) telling of the story and political culture surrounding Paul Ehrlich and Julian Simon's 1980-1990 $1,000 bet over the Hotelling rule.  OK, it wasn't really over the Hotelling rule, but it was about Hotelling-like predictions of changes in depletable resource prices.  In particular, the bet focused on the change in prices of five metals (Copper, tin, chromium, nickel and tungsten--I think they made that last one up) over a 10 year period.  Whack-job dooms-day ecologist Paul Ehrlich--OK, that's unfair to Ehrlich, he is a butterfly biologist, not an ecologist (is that biased?)--famously predicted throughout the late 1960's and 1970's the coming cataclysmic collapse of the Earth's environmental/ecological systems due to natural limits and exponential population growth.

In short, Ehrlich believed that humans are but one part of the broad ecosystem, and subject to all of the natural laws and limits that come with being part of that system--including species collapse due to exceeding the system's natural carrying capacity.  Ehrlich was the loudest voice of the early zero-economic growth movement (and a contemporary of the Club of Rome and Limits to Growth).  One observable indicator of Ehrlich's and his colleagues' dire predictions would be the Hotelling-like rise in depletable resource prices over time.  As resources become more scarce (reach their natural limits), prices would have to rise.  This is a somewhat ironic prediction from Ehrlich given the lack of price rationing in the Limits to Growth-type models of world collapse, but I digress.

Julian Simon, a mild-manned Chicago-trained University of Illinois professor of marketing (who eventually ended up in the University of Maryland School of Business), disagreed with Ehrlich's basic premise that population growth necessarily strained the natural limits of the ecosystem and instead argued that scarcity creates increasing opportunity costs and opportunities for investment, exploration, discovery, innovation and development of subsitute forms of capital.  In short, Simon the economist argued that the simple form of Hotelling (prices rise in response to increasing scarcity) was correct, but the extension needs to be accounted for--increasing prices create incentives for the generation/investment/invention of alternative resources.  Simon believes that increased in population actually increased general well being, increased the stock of human capital and would ultimately result in the creation of substitute pools of resources (whether natural or man-made).  Simon believed that man-made capital would remain substitutable for depleted natural capital and resource prices would fall.

In the end, Simon won the bet and Ehrlich paid off without much fanfare.  But in Sabin's view, the bet highlighted a growing set of divides: The academic divide between ecoologists and economists on matters of the environment, the philosophical divide between growthers and zero-growthers, and the political divide between the left and the right over matters of economic management.  Sabin does an intriguing job of couching the bet within the heated political environment of the 1970's and 80's tracing the environmental movement through the national political scene from the environmental conservatism of Nixon, to the limited growth/strict conservation advocacy of Carter (not much mention of Ford), to the deregulated free-marketism of Reagan.  In the end Sabin draws lessons from both Ehrlich and Simon to make a strong and lucid case for a middle ground between the coercive population reduction arguments of Ehrlich and the free-market environmentalism of Simon. 

On a personal note, I found the book particularly useful at providing a different perspective on my own training in environmental economics.  Beginning my graduate training in 1991, the year after the bet ended, the foundations of market-based environmental interventions had already been accepted by most economists  and much of the mainstream public (to varying degrees of course).  "The Bet" provides an interesting, easy-to-read introduction to the muddy politics and social setting that served as a backdrop for the development and relevance of the field of environmental economics.  The political and public context provided by "The Bet" has helped to provide me with a much better understanding of how I ended up thinking like I do about environmental issues. 

But that's just me.


November 13 2013


Q: What do you get when you cross environmentalists with Tea Partiers?*

A: Common ground on the bad environmental economics of the ethanol mandate.

The summary:

This week, the EPA is expected to announce changes to the ethanol mandate, a 2007 law that requires energy companies to mix billions of gallons of ethanol into gasoline and diesel fuels. After six years in the mix, corn-based ethanol has lost its popularity, and a diverse group of critics is calling for the law's repeal.

Why are environmentalists in favor of a rollback/repeal?

Though ethanol fuel releases less carbon dioxide than other kinds of gas, many question if the side effects of production are worth it...Growing corn requires fertilizer, which requires natural gas to make. Fertilizer also has contaminated rivers and drinking water, says the report. And ethanol factories usually burn coal or gas, which dumps carbon dioxide into the atmosphere.

Why are Tea Partiers in favor of a rollback/repeal?

Other opponents complain the mandate — like any energy subsidy — is free market poison, claiming it "distorts fuel markets and will raise gasoline prices, especially as the increased blending requirements collide with declining demand for gasoline," reports Politico.

Strange bedfellows indeed.

And who is in favor of keeping the mandate?

Meanwhile, the ethanol industry is asking the AP to retract the story. “At best, the AP article is lazy journalism, but at worst, it appears purposefully designed to damage the ethanol industry,” American Coalition for Ethanol Executive Vice President Brian Jennings said in a statement to the press. “There was an incredibly reckless disregard for the truth in the handiwork of this hit-piece.”

And who is the American Coalition for Ethanol?

ACE is a non-profit, membership-based organization with about 1,500 members including:

  • ethanol producers
  • farmers
  • investors
  • the agriculture community
  • industry suppliers
  • rural electric cooperatives
  • others supportive of ethanol.


*Partial credit if you answered 'Tim'

November 06 2013


Daily Demand and Supply: Sin Tax vs Income Tax

A Colorado measure to impose sales and excise taxes of 25 percent on newly legalized recreational marijuana and earmark the first $40 million in revenue for public schools was approved by voters on Tuesday, Governor John Hickenlooper said.

The move showed a willingness on the part of Colorado voters to tax marijuana for the public benefit even as they roundly defeated a broader tax measure that would have increased state income taxes to raise $1 billion for schools.

via ca.news.yahoo.com

Taxing goods with demand that is relatively insenstive to price changes--we call that inelastic demand--as we might expect the demand for marijuana among marijuana users will raise revenue and create a disincentive to smoke marijuana for some (although that disincentive might be small). Taxing income will raise revenue and create a disincentive to work (although that disincentive might be small as well).

October 31 2013


Cash for Clunkers: An Evaluation of the Car Allowance Rebate System | Brookings Institution

Ted Gayer and Emily Parker (emphasis added):

The Car Allowance Rebate System (CARS) or “cash for clunkers” program, launched during the height of the recession with the intention of stimulating the economy, creating jobs, and reducing emissions, was actually far more expensive per job created than alternative fiscal stimulus programs. Ted Gayer and Emily Parker have performed a wide-spread evaluation of the various aspects of the program, from numbers of vehicles traded-in to impact on GDP, cost per job, environmental impact and the types of consumers who took advantage of the program. Among other conclusions, they found that:

  • The $2.85 billion program provided a short-term boost in vehicle sales, but the small increase in employment came at a far higher implied cost per job created ($1.4 million) than other fiscal stimulus programs, such as increasing unemployment aid, reducing employers’ and employees' payroll taxes, or allowing the expensing of investment costs.
  • Total emissions reduction was not substantial because only about half a percent of all vehicles in the United States were the new, more energy-efficient CARS vehicles.
  • The program resulted in a small gasoline reduction equivalent only to about 2 to 8 days’ worth of current usage.
  • In terms of distributional effects, compared to households that purchased a new or used vehicle in 2009 without a voucher, CARS program participants had a higher before-tax income, were older, more likely to be white, more likely to own a home, and more likely to have a high-school and a college degree.

via www.brookings.edu

The most striking thing is that Ted Gayer and Emily Parker refer to themselves in the third person. I'm told that they do this around Brookings all the time. 

October 28 2013


There REALLY is an easier way to tax miles driven...

As America's road planners struggle to find the cash to mend a crumbling highway system, many are beginning to see a solution in a little black box that fits neatly by the dashboard of your car.

The devices, which track every mile a motorist drives and transmit that information to bureaucrats, are at the center of a controversial attempt in Washington and state planning offices to overhaul the outdated system for funding America's major roads.

The usually dull arena of highway planning has suddenly spawned intense debate and colorful alliances. Libertarians have joined environmental groups in lobbying to allow government to use the little boxes to keep track of the miles you drive, and possibly where you drive them — then use the information to draw up a tax bill.

via www.latimes.com

Why, oh why do I have to keep reposting this (originally posted May 8, 2007)?

And please, oh please, read all the way to the end before dismissing my plan as too complicated.  The ending is ironic (I highlighted that part below in case you want to skip to the interesting parts).

Mr. President, please call me if you would like to discuss.

I hesitate to bring this up with gas prices being what they are now, but I think what I'm about to say is relevant.

I seem to be getting a lot of comments lately that much of the gas consumption/ high gas price problem could be solved if the greedy sumsabitches who drive big honkin' SUVs were forced to pay a gas guzzler tax. So I have a proposal--I'll call it a fuel efficiency payment.  Here's how it works:  All cars are subject to an annual fee based on miles driven.  The fee will be per mile driven and will be inversely proportional to the EPA calculated city fuel efficiency figure.  Keep reading for details...

Here's how it would work.  Each year, drivers will be required to have their mileage checked at an authorized service facility.  Based on the EPA certified city fuel efficiency rating provided by the EPA for the specific type of car, the car owner will pay a fee (call it F) per mile driven. The fee will be equal to the inverse of the EPA fuel efficiency figure. 

So consider two car types: a gas guzzler (GG) and a fuel efficient car (FE).  Suppose the gas guzzler has an EPA MPG rating of 15 mpg city and the FE car has a rating of 35 mpg city.  The per mile fuel efficiency payment for the gas guzzler will be $0.067 per mile drive (1/15) and the per mile fuel efficiency payment for the fuel efficient car will be $0.029 per mile driven.  If a driver of each type of car drives 12,000 miles a year, the GG driver will pay an annual fee of $804, and the FE driver will pay an annual fee of $348. 

The Fuel Efficiency Payment has a couple of nice features:

1) It places a higher burden on those driving less fuel efficient vehicles--that should satisfy those blaming the SUV drivers for all of the problems*.

2) It places a higher burden on those driving more.  By increasing the marginal cost per mile driven, total miles driven should decrease.

3) Assuming fuel efficiency and income are negatively correlated--that is, the rich tend to drive larger, more expensive, less fuel efficient cars--the Fuel Efficiency Payment places a higher burden on higher incomes.

4) It provides an incentive for drivers to switch to more fuel efficient vehicles.

Now that I've hopefully convinced you that a fuel efficiency payment will act as a type of gas guzzler tax that would be less of a burden on lower income drivers, would provide incentives for decreasing miles driven and would encourage a switch to more fuel efficient vehicles, I'd like to point out that the fuel efficiency payment is algebraically identical to a $1/gallon GAS TAX** that many economics including John and me think would go a long way toward solving many of the transportation related externalities.   

*In the interest of full disclosure, I am a gas guzzling SUV driving suburban commuter.  In short, I am the problem.  Why you may ask, would I stoop to such low moral standards?  Easy, I have 3 kids and a lot of sports equipment.  Try fitting 3 kids and a team's softball equipment in the trunk of a Prius.  Oh, and the SUV was a great deal.

**Multiplying the FEE=$(1/(miles/gallon)) by miles driven gives $Fee*miles=$1/gallon.



October 22 2013


An cautionary example of why policies (good or bad) are difficult to remove once implemented

The new flood insurance rules, which went into effect on Oct. 1, are intended to make the deeply indebted NFIP solvent by no longer charging government-subsidized rates on homes in flood-prone areas. The hikes will affect about 20 percent of the 5.5 million people who have NFIP policies around the country, as well as thousands more who live in areas that didn’t used to be considered flood-prone but who now must buy insurance under the new FEMA map.

The NFIP subsidized rates have allowed people for years to build in flood-prone areas that, in some cases, probably never should have been built on in the first place. But the feds’ solution to this — hiking up rates over four years until they reach market price — could leave millions of homeowners unable to afford the steep new prices. If these homeowners try to sell their houses, they’ll most likely find it tough to find a buyer, who would inherit the new insurance rates. (People with mortgages are required to purchase the insurance — those who’ve paid off their homes can skip it.)

via news.yahoo.com

For years, the federal government has subsidized flood insurance premiums for people whose homes are built in flood-prone areas.  One can speculate as to the motivation (real or otherwise) for the subsidization--those with low income can't afford to build elsewhere, private insurance markets overprice insurance in flood prone areas,...--but one thing is certain: flood insurance priced below the efficient market price will lead to too much construction in flood prone areas.  Perhaps worse, if the insurance rates are too low--as was the case with the National Flood Insurance Program--there is an incentive to rebuild in areas likely to flood again. 

It seems the federal government learned some lessons after Hurricane Katrina and has decided to raise the price of flood insurance by removing subsidies for rebuilt homes in the wake of Super-duper Storm Sandy.  While well-intended, and the right move from an economic efficiency point of view, the removal of an inefficient policy is going to create short-term hardships for a significant number of people. 

Don't get me wrong.  I applaud the move toward actuarily efficient pricing of flood insurance.

I just feel bad for those who made decisions based on bad policy only to see it changed midstream.


We economists do have feelings.



I'm only a week late...but still something to watch in the coming months/years/decades...

The Supreme Court on Tuesday agreed to hear a major case challenging Environmental Protection Agency regulations of greenhouse gas emissions from stationary sources like power plants. The justices declined to hear a variety of related attacks on the agency’s authority to address climate change.

via www.nytimes.com

October 11 2013


People prefer higher costs

Thank goodness for this new report from the OECD. Without it, we would have never known that economic incentive-based environmental policy can save money!

A new report finds that the most cost-effective climate change policies are the ones with the least political traction in the United States.

Imposing an explicit cost on carbon pollution is the best way to put countries on a path toward steep emissions cuts, according to new research by the multilateral Organization for Economic Cooperation and Development (OECD).

“Explicit carbon pricing mechanisms, such as carbon taxes and emissions trading systems, are generally more cost-effective than most alternative policy options in creating the incentive for economies to transition towards zero carbon trajectories,” the group said in a new report.

“The use of these mechanisms is expanding in developed, emerging and developing economies, but there is considerable scope for further uptake by governments,” adds the report that compares policies across a number of nations.

In the U.S., carbon tax proposals have very little political traction on Capitol Hill, while cap-and-trade legislation collapsed in Congress in 2010.

The OECD report examines the cost of reducing carbon through emissions trading compared to other national programs that provide tax incentives, regulations and subsidies aimed to boosting renewable power production.

via thehill.com

Actually, this result has been around for a long time. 1970s maybe?

After all this time I can only conclude that, since U.S. politicians:

  1. tend to consistently reject economic incentive-based environmental policy and 
  2. represent the people (am I right?), then 
People in the U.S. prefer higher costs. Q. E. D.

October 01 2013


Well now what am i supposed to do all day?

The government shutdown will hit the Environmental Protection Agency hard, delaying the agency’s efforts to revise its requirements for renewable fuel standards for next year, a Reuters story said.

A budget impasse has led to the first government shutdown in 17 years. U.S. lawmakers failed to reach an agreement on spending by midnight Monday and parts of the government began to shut down on Tuesday.

The EPA was expected to operate with less than 7% of its employees, and the clock would stop for its much-awaited proposal on renewable fuel volume standards for 2014.

via blogs.marketwatch.com

September 26 2013


Fighting Lazy Hausman Cites

As John has pointed out (for example see here and here), despite plenty of evidence to the contrary, researchers have taken to lazily citing economist Jerry Hausman's ill-founded, and wrong, repeat attack on contingent valuation* as face value evidence that stated preference surveys are worthless in the public policy arena.  In fact, a quick Google Scholar search on 'Hopeless Hausman' finds that no less than 30 researchers have already cited Hausman's 'Dubious' work, despite the compelling, fair and balanced counter claims provided by Kling, Phaneuf and Zhao and Richard Carson in the same issue of the Journal of Economic Persepctive in which Hausman's opinion was published.  

Because of the coincidental nature of the three paper symposium in the JEP, the opportunity for direct discussion of Hausman's poorly researched criticism was not afforded.  Fortunately, the journal Applied Economics and Policy Perspectives has afforded me, Matt Interis, Dan Petrolia and John the opportunity to publish our reaction to Hausman's 'Hopeless' attack. 

From the inbox:

I am pleased to inform you that I have decided to accept your submission...entitled "From Hopeless to Curious? Thoughts on Hausman’s “Dubious to Hopeless” Critique of Contingent Valuation" for publication in AEPP. Next, we have to move your article to production with the publisher for content editing and typesetting.

Here's the abstract:

Hausman (2012) “selectively” reviews the contingent valuation method (CVM) literature and fails to find progress over the 18 years since Diamond and Hausman (1994) argued that unquantified benefits and costs are preferred to those quantified by CVM. In this reflection, we provide counter-arguments to Hausman’s claims, not with the intent to convince the reader that the debate over CVM is settled in favor of the method, but to argue that the intellectual debate over CVM is ongoing, that dismissal of CVM is unwarranted, and that plenty of work remains to be done for the truly curious researcher.

Oh, SNAP. It's on like Donkey Kong.

Our paper has been moved into the production process and is scheduled to appear in the January, 2014 issue of AEPP (online prior to that).  We will let you know when it's available, but for those who can't wait, and really want something to cite (and really this should be cited every time Hausman's work is cited--even if you read neither) here's a link to an earlier working paper version of the paper.

But you should note that we've saved some new surprises for the full version to appear in AEPP.

As they say, always leave them wanting more.

Hausman, Jerry. "Contingent valuation: from dubious to hopeless." The Journal of Economic Perspectives 26.4 (2012): 43-56.

September 13 2013


"Learning and Forgetting the Wisdom of Coase"

Severin Borenstein:

Coase demonstrated, the parties can trade the right so that whichever entity values it most ends up owning it.  Efficient trading of the right to pollute moves society towards the optimal amount and allocation of the pollution.  The idea is central to the cap and trade approach to reducing greenhouse gases and other pollutants.

In its editorial remembering Coase, the cap-and-trade-hating Wall Street Journal stated the principle of the Coase Theorem reasonably well, but then its conclusion echoed much of the right-wing press on Coase’s passing: “The too frequent assumption of modern government is that it can play the role of teacher, even when its taxes or regulation raise costs or otherwise make things worse. The Pigovians have had a political renaissance since the 2008 financial crisis, touting the virtues of regulation. But as we see the results, the Coasians are due for a comeback.”

Whoa!  Coase was clearly skeptical of government regulation, but he recognized – indeed advocated — that government must establish and enforce property rights for efficient trade to take place.   The costs it imposes on the polluters isn’t part of the calculation, just recognition that the total costs to society can be mitigated by facilitating such trade.

It is ironic and disappointing to hear some commentators laud Coase while at the same time saying that cap-and-trade would be too costly to the U.S. economy.  The WSJ editorial page, and many others of similar inclination, have argued instead that “the market” will solve pollution problems without government intervention.  That’s not Prof. Coase; that’s Prof. Ostrich, the one with his head in the sand.

via energyathaas.wordpress.com

Hat tip: Professor Stavins

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