Energy subsidies

Solar and wind power are relatively new technologies, and the costs per kilowatt hour of power produced are still high. Since they are easier on the environment than fossil fuels like coal or oil, the government offers a variety of economic incentives to increase their use. While some groups wish the government would stop supporting them, it seems to me that there is at least a good case for this help.

However, it turns out that most types of energy actually get some kind of help from the government. Should government help the coal industry find ways to pipe its emissions underground? That way they shouldn't contribute to global warming; of course, then we end up making a "dirty" industry have an even stronger cost advantage than it already has. (It remains "dirty" in that it still produces CO2 and toxic ash, even if some of its outputs go underground.) Should we support nuclear power, since it too doesn't contribute to global warming, and since historical incidents prevent insurers from being willing to cover the development of nuclear facilities? How about corn-based ethanol? It's not economic, meaning the costs outweigh the benefits, and its impact on climate change is debatable, but it's not coal or oil.

So where should the government draw the line? Tough question, and a very real one for policymakers. These issues are taking shape as a battleground for the next budget: it'll be interesting to see which proposal wins out.

Class begins

If you're in Econ 376, articles posted earlier than this post aren't your responsibility- you won't be asked about them on the reading exams.

Is more information better?

Local food advocates aren't the only ones calling for more information about where their food comes from: with the many food recalls we've heard about over the past few years, the regulations calling for increased food traceability seem like a no-brainer. As a customer (and as a former Californian recently moved to the East Coast), I'm somewhat interested to know where my food comes from. Smart phone apps are increasingly able to tell me, and more information is a good thing, right?

Well, yes and no. As this article in today's Washington Post makes clear, more information should shine a light on all parts of the (often ignored) food distribution system. If that light helps clear up problems with food quality that sicken 48 million Americans per year, killing 3000 and costing $152 billion per year in damages (including almost $3 billion per year in Maryland alone!), that has to be a good thing.

Another potential benefit is avoiding lost income from recalls. The 2009 peanut recall adversely affected an industry worth over $1.2 billion per year. When that goes down, producers, harvesters, processors, distributors, and retailers all lose, costing jobs.

However, shining that light is expensive, and consumers will foot the bill. I worked with some agricultural economists at UC Davis who wrote a few papers arguing against labeling foods with origin information. This short paper argues that compliance will cost the industry over $1.3 billion / year. In addition, the food safety bill that finally passed Congress late last year had governmental costs pegged at about $300 million per year, according to detractors.

It's tough to pay for policies that don't have immediate, obvious beneficiaries, but I have to say that this seems like money well spent. In fact, some are calling for funding to be further expanded. If you have any other information, I'm interested to hear it....

Food and Energy

Two big resource economics topics are in the NYT over the past few days. First, Michelle Obama has apparently talked Walmart into subsidizing the consumption of fruits and vegetables, getting them to lower prices in hopes of increasing consumption. They hope that decreased prices will increase the quantity consumed, which seems likely, and that increased quantities consumed will lead to increased health, which seems less likely. This study by Dong and Lin disseminated two years ago shows that vegetable consumption is quite inelastic, responding little to changes in price. (Likewise the consumption of snacks is relatively unresponsive to changes in price, as discussed here.) I like the First Lady's economic thinking, but I'm guessing she'll need to be a bit more creative if she wants to make much of a difference here. The more interesting story is that Walmart is to some extent acknowledging its role as an influence on public health rather than as just a money-making corporation.

The second topic that has come up a few times lately is solar power. Although our food consumption patterns won't change much in the short term due to prices, there is more hope for changing energy consumption patterns, particularly when a longer term horizon is being considered. That's why concerns about barriers to the adoption of solar power here and China's increasing competitive advantage in the field are of some concern. On the one hand, China's production of cheap solar panels benefits those who want to see solar power increasingly adopted, but on the other, decreasing access in the US may dry up this country's investment in the area. Inexpensive loans and guaranteed demand boost businesses operating in China and hurt US investors, as solar power industry stocks lost an average of 26% last year. Here's to hoping the industry thrives somewhere, and that the newly available production capacity in the US is put to good use and soon.

Expensive new EPA plan pushes for clean Chesapeake

A Washington Post article today describes a new EPA initiative designed to clean up the Chesapeake. While Marylanders stand to benefit if the Bay gets cleaned up, this article points out that most of the costs, which look to be well upward of $2 billion, lie with the headwater states.

Political ramifications: Maryland Governor Martin O'Malley predictably released a supportive statement, but I'm a little more surprised to see Virginia's Gov. McDonnell doing the same thing. I guess it's easier to play nice up front than to come out against the plan when it has been clear for awhile that this is where things were going.

Technical concerns: I'll have to read the report to get more details, but apparently cuts of 20-25% are called for each of nitrogen, phosphorus, and sediment. I'm not sure how they're going to monitor that, but at least the plan identifies some very specific areas such as sewage treatment in West Virginia and in Virginia as well as agricultural pollution in Maryland.

Bringing together all the stakeholders and achieving the lowest cost reductions is a huge challenge when each faces different incentives. This looks like another huge test of the command and control model of pollution control: hopefully it can succeed in spite of the high costs.

Adjusting the demand curve

New data on the amount of emissions has pushed the Air Resources Board in Los Angeles to lower emissions standards. Usually shifts in this direction come from the business community asking for help, but this time seems different (though the cries for help are also there, which is no surprise given the economy). Environmentalists oppose the move, saying that externalities are still larger than is being acknowledged. It's always tough to find an equilibrium when the market's not there to help.

Externalities are irrelevant

William Baumol has a cute comment in a recent review of his life's work:

I remember once asking Hayek whether, in the real world, externalities could justify some government intervention in the marketplace. He replied that this was true in theory but so rare and insignificant in practice that it hardly merited attention.