The magic of markets

Great post today by Econ blogger Mark Thoma, explaining how the "magic of markets" is limited- we can get the miracle of socially optimal production and consumption only when a variety of prerequisites are met. Along the way, it also explains how the government loan program that led to the Solyndra debacle is even now, after Solyndra's collapse, still not much of a risk to taxpayers, and in fact the program has also done some good along the way by effecting hiring during poor economic times. Take a look!

Shifting demand

Right on the heels of my post about the FDA comes the most lethal bout of food poisoning in some time: the cantaloupes of Rocky Ford. 13 deaths and at least 72 illnesses are truly a tragedy. I haven't seen any reporting about the source of the contamination, but hopefully someone is looking into that. A sad time for consumers and a sadder time for Colorado, where the pain is sure to linger as their good name is tarnished. For Marion Nestle, the issue this raises is why we don't have one central food safety organization: the second link above is to the CDC web page, and of course the FDA and even the USDA are involved with agricultural products. Many of my colleagues would see this as a good reason to cut back wasteful government spending: I agree, but I think this also points out the need for effective, not absent, government.

Energy green as cash

Nice post on Marginal Revolution today by Alex Tabarrok on the crazy subsidies for green energy. Recognizing the externalities, it makes good sense to support wind farms and other green sources of energy, but it's entirely possible to go too far, as Spain did a few years ago. The current programs supporting energy make it possible for someone to build a wind farm by putting up only about 10% of the costs, since the government will fund the rest to the tune of billions of dollars. That just can't be the best use of government money! How about some feed-in tariffs like we heard about earlier? It's one thing to be supporting green energy, but it's another to be building wind farms for people and giving them the profits from operating the farms. This process needs to be improved. I'll see if I can talk to a friend who works down at the DOE to see if she or a colleague can come talk to us about it.

No Winter Crabs

One of our class presenters asked how we'd feel if crabbing in the Bay was banned for awhile to restore crab populations. In fact, that's already the policy and it has been for a few years- during the winter. Virginia has voted to continue the ban on winter crabbing and Maryland will likely follow suit. With all the damage that the Bay sustained this year, including the aftereffects of Irene dumping huge amounts of sediment, this seems inevitable. While the resurgence in the population observed in the spring was good news, there is still a long way to go before we can look at our crabs with as much comfort and confidence as we look at our rockfish population.

When waste is efficient

It's "efficient" from the perspective of oil producers to burn off natural gas coming from their oil wells because it would cost more to set up the infrastructure to use the gas than they expect to get from producing and selling the gas. Some believe it can be economic to capture the gas and are setting up facilities, but for now, burning it is the way to go. If the true costs of this were imposed on the producers, no doubt they'd change their tune, but until the externalities get internalized, it's efficient to be wasteful.

Maathai, Nobel Laureate, dies

Her life's work was economic in nature: she taught women to plant trees in part to provide for their own future, as environmental stability helps the watershed, saving women from the difficult task of walking long distances to bring water for their families. Also, trees provide wood, used in fires that provide heat and the opportunity to cook. Non-market benefits, to be sure, but very real nonetheless.

“When our resources become scarce, we fight over them,” she told a Norwegian television station near the time of her award. “In managing our resources and in sustainable development, we plant the seeds of peace.”

Amen!

This is the first post of material for Quiz #3.

Cutting back on energy in Japan

For obvious reasons the Japanese didn't have as much access to power this summer as they usually do, so they did what they do best: work together to overcome difficulty. In February earthquake and tsunami survivors were orderly in the chaos, and now too the country banded together to turn off the AC's and even lights, working under unpleasant conditions. And let me add that summers can be pretty unpleasant: for most of Japan, June means the rainy season, and August is an inferno. I'll never forget the day I arrived in Japan for the first time: for some reason our jet stopped a short distance from the terminal and we walked down a stairway onto buses to get inside, and when the door to the aircraft opened up, a cloud of hot humidity swallowed me, leaving me feeling like I was swaddled in blankets. Bottom line: I tip my cap to the Japanese for making the tough choice to push through a sweltering summer with limited power.

Hybrids: the good, the fat, and the ugly

The first thing that comes up to people’s mind when they think of hybrid cars is a Toyota Prius. It is because Prius is considered one of the best hybrid cars in the market. However I find it a bit ugly. It looks like a four door Lamborghini that eats McDonalds everyday. Hybrids work in a very simple way. They all have one or more batteries that are bigger than the ones that we use in our cars. When you apply the brakes, Kinetic Energy Recovery System (KERS) takes the energy and charges the battery. These cars have 70% lower emissions, meaning that they are 70% cleaner than gasoline powered cars. In addition, they emit fewer greenhouse gases that contribute to global warming and reduce our dependence on foreign oil. The government has been trying to increase the demand for these vehicles by offering tax incentives. For example, the government is willing to give a rebate for those who buy new hybrids. Also they are willing to pay for a home charging unit and install it as well. For people who convert from regular gasoline powered cars to hybrids the government is willing to give a rebate of 10% of the car’s value. I think that is a pretty good deal. You save 10% on the new car you are buying, and the car has good mpg and is better for the environment. Plus, people from the government are going to come to your house to install that “free” home charging unit. However there are a few disadvantages. These cars are expensive because it is all new technology. They are also very ugly in my opinion. If I were to buy a hybrid, I would get a Tesla, which I am assuming is very expensive.

--Osman Darcan

Using Taxes to 'Green' Buildings

The Ygrene Energy Fund of Santa Rosa, California is investing $650 million into commercial building retrofits to reduce energy consumption and cut utility costs. The consortium aims to implement a new system that would allow businesses to avoid startup costs and pay-off retrofits over five to twenty years. Total savings from renovations are greater than the surcharges added on to property-tax bills, and estimates show the investment will pay for itself within five years. These retrofits, which will cut consumption and costs by one third, include replacing building structures such as doors and windows and installing more efficient mechanical systems. James D. Martin of the Environmental Defense Fund claims that if this approach is proven successful, the country would be able to shut down one third of its coal plants. The Empire State Building has reduced energy consumption by almost 40% through sustainable renovations.
In comparison to the CAP’s proposal that the government should finance retrofits, Ygrene Energy Fund’s tax plan seems pretty great. It has the potential to decrease commercial footprints without relying on the federal government. With Barclays’ financial support and Lockheed Martin’s technical support, companies can increase efficiency and profit in the long-term without bottoming out with start-up costs. However, companies similar to Ygrene Energy Fund have experienced issues with financing qualified businesses. If Barclays Bank fails to supply sufficient funds for the amount of loans demanded, the program could face the same fate. Another potential drawback to the program is that contractors may aim to capitalize on retrofits through exaggerated upgrades and fabricated improvements. The chairman of Ygrene Energy Fund, Dennis Hunter, stated that, “Contractors are cowboys.” However, Hunter claimed that hired partners would be thoroughly inspected.
--Gia Parmer

How can governments promote renewables?

This article brought up questions that I tried to understand more fully with information gathered from other articles. From what I could gather from a quick bit of research, Germany has had in place for more than a decade an economic system of “feed-in tariffs” which over time help to subsidize the costs of implementing new renewable energy production over time. The feed in tariffs are contracts made with energy utilities that guarantee a fixed rate of compensation to start-up renewable energy companies over a 15-25 year time period. These feed-in tariffs are made possible with loans from the state run bank and paid for by the consumer with a small hike to their energy bill. What I found most interesting about these articles was the conclusions that could be drawn from the statistics presented. While Germany has a renewable energy sector that has grown to produce over 20% of total energy consumption in Germany, the U.S. has only 8% of its energy needs fulfilled by renewable sources. Another interesting point was that a poll taken in 2008 stated that Germans were even more reluctant to pay more for renewable energy than U.S. Citizens, 50% and 40% respectively were unwilling to pay more. It is interesting that now 79% of Germans polled that they were willing to pay the increased prices. This question was posed to the class. My other question was, what is keeping the U.S. from taking measures to implement similar policies, thus subsidizing the startup costs of renewable energies and, in the long run, making our national energy production cleaner and cheaper? Is there something special about the German system that makes this type of policy more easily implemented? The conclusive statement made here, “until people are forced to do so, or the price for renewable energy comes down considerably, people will not make the choice to go with renewables” resonated with me on this topic. This is a prime example of what we have been learning so far in class, mainly that the market dictates consumer spending and consumers are also vulnerable to the hidden nature of externalities in market cost. In this case we see that even though the German consumers were originally unwilling to accept the burden of increased costs, they had no choice: the government decided that it was best to subsidize renewable energies because of hidden costs involved in continuing use of, what has become increasingly apparent as of late, potentially dangerous nuclear power generation.

--Sean Doherty

Subsidies for Twinkies

Ever wonder how people came to invent the Twinkie? I can't say I know for sure, but I can say that there's a lot more incentive to create them when 14 of the 37 ingredients listed on the bag are government-subsidized. The paper overall comes across as having been written with the conclusion firmly in mind before they began looking at data, but some of the information accumulated is nonetheless interesting.

h/t Marion Nestle

Red Tide Impacts California Abalone Supply

John Upton’s article, “Abalone and a Rite Fall Victim to Red Tide,” describes a recent virulent red tide along the Sonoma Coast in California. Red tides are blooms of plankton, which feed on nutrients and material dumped into the ocean. The plankton release natural toxins as well as deplete the oxygen supply, so they kill slow-moving oceanic wildlife by poison or suffocation. They occur annually, but the California Department of Fish and Game had to close abalone fishing ten weeks early this year because it was especially harmful. Abalone are considered a luxury item, so their demand is elastic. A ban on them will increase the cost suppliers pay to obtain them and how much consumers must pay for them. Demand will decrease because of a rise in price and people will switch to alternative food choices. What I am trying to picture though, is the overall effect a shortage will have on the local economy as a whole. The article describes abalone fishing as “a way of life on the north coast”. If this way of life is in jeopardy, how will it overall affect the economy? Especially with a dangerous red tide such as this one, other sources of food from the ocean will be affected as well. Seafood restaurants will be lacking a menu, people will not want to eat there- nor swim or walk along a coast scattered with abalone remains- and the summer season will not bring nearly as much revenue to the area. Even though abalone are a luxury item, they are connected to the overall well-being of the economy and can be used to predict the big changes that will occur when natural resources are damaged.
--Sara Chetelat

Those Dam Externalities

A California river, dammed since 1909, is slated to be opened sometime in the next 10 years. Studies are now reporting on what effects that should have, and the responses are up in the hundreds of millions of dollars, not counting the existence values. While dams help cities and agricultural areas get water, they also provide recreational opportunities as they create lakes. If and when the series of dams is taken down, people who bought lakefront property are going to be left with something much less desirable. Economists need environmental scientists to figure out all the ramifications of damming up rivers so that we can assess all the costs and benefits: as the science has progressed, so have the economics, and the accounting at this point doesn't look good for the dams.

Externalities: sex noise edition

People making too much noise during sex is a problem that people altogether would pay at least $1 billion to get rid of. Quite an externality! This guy goes through quite an analysis, which would be more convincing with a better sample but is pretty neat as is.

Hooray for taxes

Almost all economists are in favor of a tax on carbon to correct the massive externality that is climate change. Why? Hopefully it's clear from class, but if not, here's how The Economist puts it: "We expect normal economic activity to maximise social good because each individual balances costs and benefits when making economic decisions. Carbon emissions represent a negative externality. When an individual takes an economic action with some fossil-fuel energy content—whether running a petrol-powered lawnmower, turning on a light, or buying bunch of grapes—that person balances their personal benefits against the costs of the action. The cost to them of the climate change resulting from the carbon content of that decisions, however, is effectively zero and is rationally ignored. The decision to ignore carbon content, when aggregated over the whole of humanity, generates huge carbon dioxide emissions and rising global temperatures." If we tax carbon, the cost to them goes up, and when they weigh the costs and benefits of doing something, they'll choose the right thing. Too bad politics makes this essentially infeasible.

Kids ride free!

Great economic discussion in the SF Chronicle today about whether to let kids ride the local bus & train system for free. The pro's include educate kids about using the system, get them used to mass transit, get cars off the streets, help kids get jobs outside of their home neighborhoods.... The cons are also considerable, including loss of the $6-7 million that kids now pay in fares every year and the additional cost of around 11,000 extra daily riders who would hop on if rides were free. Total bill: around $13 billion. Are you willing to pay that much to cut back air pollution and congestion by some unclear amount? That's a high price tag. What else could you do with $13 billion?

Blue Carbon

Coastal marine habitats such as mangroves, salt marshes and sea grasses are best known for their natural aesthetics, filtering pollution, and housing many plants and marine life. Mangroves are especially important because they protect coastal lands from tsunamis and hurricanes. However, many people are not aware that these coastal habitats are one of the most important carbon sinks in the world. According to environmental writer Robynne Boyd, these carbon sinks absorb five times as much carbon as tropical rainforests, which absorb only 18% of carbon dioxide released by carbon fuels. This absorbed carbon is called blue carbon and represents the 55% of green carbon that is absorbed by marine life; the other 45% is stored in terrestrial ecosystems.

Just like any other natural habitat, coastal wetlands are subject to harmful manipulation by man. Over 100 years ago 1800 square kilometers of wetlands of the San Joaquin River Delta were drained causing two gigatons of CO₂ to be released into the atmosphere. As a result, up to 15 million tons of carbon dioxide continues to be emitted yearly. Due to the large amounts of carbon held by these coastal habitats it is vital that they are kept protected from human encroachment in order to prevent further CO₂ emissions and climate change. Since coastal ecosystems are the preferred foundations for rice paddies and shrimp farms, many farmers and land developers see mangroves as a great financial opportunity. However, with carbon credits costing between $15- $20 per ton of carbon dioxide emitted, an assessed tax might cause many farmers to opt for cheaper alternatives. These economic incentives can persuade communities to save their local marshes and mangroves in order to manage their countries’ greenhouse gas emissions. While blue carbon might decrease jobs in aquaculture in the future, it can create jobs in mitigating climate change and conservation of these coastal habitats.

--Skyla Steele

FDA: crucial or redundant?

One of our biggest natural resources is agriculture: our capacity to produce food. In today's world, in which we combine "hundreds of thousands of ingredients from over 200 countries," food safety has increasingly become a concern. However, even as the complexity of the food industry has sharply increased, the government's response to it (on the food safety front) has not kept pace. Laws enacted to improve the FDA have been rendered moot by Congress's lack of interest in adequately funding the organization.

Here's a look at one recent failure: the Peanut Corporation of America's production of contaminated peanut butter. That led to 714 illnesses, 166 hospitalizations, and 9 deaths. How much would it have cost to prevent that? The charge Nocera cites as having been approved by Congress in 2009, right after the incident, was $500 per food facility, totaling $300 million nationwide. Fortunately we haven't had any incidents that major since then (that I'm aware of, anyway) so maybe now's not a bad time to be underfunding those agencies. Still, my personal preference would be for adequate monitoring....

Green Jobs

Nancy Folbre, an Economics Professor at University of Massachusetts Amherst, is one of the many people talking about the green jobs market. There has been a great deal of discourse lately as to whether or not Green Jobs really have potential, are affordable, or if the benefits even compensate for the costs. The Obama administration has tried to facilitate the creation of green jobs, and it seemed at times they presented it as a panacea to solve all of our unemployment and energy problems. While there have been recent, obvious failures, there are other programs in this direction expected to create a significant number of jobs. Renewable energies are still rapidly growing sectors of the green/clean economy. Though clean energies and technologies currently represent only a small slice of the economy, this industry is largely immature because companies can’t market to the consumers that would benefit most. The people who are going to have the real need for cleaner, and more efficient energy are the generations to come.

Nancy suggests that public policies could be a potential solution, such as taxing carbon emissions and adopting clean-energy standards. These policies would be used to better account for the hidden social costs of fossil fuel use and increase the demand for cleaner production, providing more incentive for private investors. While both of these proposals are good, neither of these ideas are novel, as similar policies have been successful in Germany. Others have suggested that the economy is suffering because businesses aren’t spending, and that regulations requiring businesses to invest in cleaner production would help the economy. However, to be realistic, Republicans in congress could hardly be more resistant to any proposal entailing stricter environmental regulations. The Republicans have been quick to say that these regulations would only kill jobs by increasing costs of production, but can we afford to keep sacrificing our natural heritage and public health for the sake of job creation? There’s no easy answer because while jobs have monetary value, the true value of the environment, cannot so easily be appraised. Likewise, nor do we yet understand the full ramifications of our environmental procrastination.
--Garrett Sisson