A Preview of Chapter Six of my New Book

The good news for you is that my book only has 16 chapters so pretty soon you won't be reading another preview of my Fundamentals of Environmental Economics book.  Chapter Six is a vanilla chapter with a few twists.  Given that the environment represent a set of public non-market goods, many environmental economists spend their lives devising clever ways to figure out how much do people value such goods.  We can only judge the benefits of environmental regulation if we have some idea about how much different individuals value pollution reduction.

Similar to other standard texts, I discuss hedonic real estate examples and contingent valuation.  Unlike other texts, I actually teach the reader some basic econometrics to show how estimates of a home price hedonic provide tight bounds on a household's willingness to pay for non-market public goods.

But, then the chapter gets exciting.  I introduce Harry the Hippo.

"In academic economics, a growing number of empirical papers use what is called a “field experiment” design in order to test hypotheses. In this section, I explain in detail how to conduct such a study and provide a relevant application for young environmental economists.  The point of this example is to teach students how to estimate demand curves and how to learn about people’s willingness to pay for environmental goods. 

            Suppose that there is a zoo in Los Angeles.  The zoo is home to a single creature called Harry the Hippo.  The zoo spends $9000 dollars a year to feed and protect Harry.  The zoo has no sources of revenue and has no benefactors or government support. If the zoo collects less than $9000 each year in tickets to see Harry then the zoo will close.   The zoo hires an economist named Kahn to help them figure out what is the demand curve for visiting Harry.   Kahn tells them that from the Law of Demand he knows that the demand curve slopes down for seeing Harry.  In English, this means that if the Zoo charges more for a ticket to see Harry that fewer people will show up.  Kahn tells the zoo that while he knows the sign of the slope of the demand function (it has a negative slope with respect to price) he does not know the demand curve’s intercept (i.e at what price per ticket would demand be zero) and he doesn’t know the slope of the demand curve.  Kahn’s ignorance annoys the zoo keeper who is about to fire Kahn, when Kahn mentions that while he doesn’t know the shape of the Los Angeles Harry the Hippo demand curve, he has an idea for how collect the data to estimate this demand curve.  The Zoo Keeper tells Kahn to go ahead and run his field experiment.   Permit me now to tell you my experimental design."

I show how to use a randomized zoo ticket price design to estimate an aggregate demand curve and then I use this demand curve to solve for the revenue maximizing ticket price. I calculate the consumer surplus zoo attendees will gain.   So, unlike most books I've seen I integrate consumer theory, environmental economics and field experiments and basic statistics into one 5 page example.    Not bad for a $2 book?

Amazon Fresh and the Rise of the Consumer City

I'm starting to think that Amazon's Pat Bajari (their Chief Economist and my old co-author) spends his days thinking of new ways to lure my household to spend 100% of our disposable income at Amazon.  The lucky people of Seattle and Los Angeles (who live in certain "select zip codes") now have access to Amazon Fresh.   Since we are an Amazon Prime household who lives in Los Angeles, we have been able to purchase some great food products that are delivered to our door in a funky green bag.

"Free same-day and early morning delivery on orders over $35 of more than 500,000 Amazon items, including fresh grocery and local products.

AmazonFresh is now available in the Los Angeles area in select zip codes as a free 90-day trial to Amazon Prime members. After your free 90-day trial, your membership will automatically upgrade from a Prime membership to a Prime Fresh membership and you will be charged $299 for the next year and annually after that. This includes all the benefits of Prime, plus access to AmazonFresh. Your current Prime membership will be refunded on a pro-rated basis when you upgrade to Prime Fresh." 

When Glaeser, Kolko and Saiz wrote their "consumer city" paper, did they anticipate this new product?  Note that an Internet Company (Amazon) is making living in a great city (Los Angeles) even better as its new Amazon Fresh saves us time shopping and now we have a greater access to an increased variety of products such as wild boar.  Whole Foods in Westwood hasn't offered us that!    This case of the Internet making cities even stronger is an old point that Glaeser and Gaspar made years ago.  

A Preview of Chapter Five of Fundamentals of Environmental Economics

Chapter Five of my new Fundamentals book  is titled; "Where Do People Choose to Live Across and Within Cities?".  The chapter begins by introducing the key concept of revealed preference.  Intuitively, economists learn about your desires and priorities from the costly choices that you make.

The joint decision over what city and neighborhood to live in plays a key role in determining your household’s exposure to a variety of environmental indicators ranging from climate, to access to the coast, to water and air pollution.  Unfortunately, there is no "free lunch". If you seek to live in a city that scores high on all set of "green city" criteria such as clean air, clean water and access to green space, you are going to pay high rents (think of San Francisco).  

The chapter then turns to locational choice within a specific city.  So consider San Francisco.  Within San Francisco, which neighborhood do you choose to live in?  The typical person will know her budget constraint and where she will be working.  This information allows her to calculate her commute time from each possible neighborhood to her job.  This person will recognize that each community has strengths and weaknesses and she will seek out that community that is both affordable and best meets her priorities.  

Based on this logic, I discuss how differential pollution levels across different communities within the same city affects who chooses to live there.  By the "no free lunch" argument, rents will be lower in the areas where pollution is worse.  In the simple economy I present,  there are two types of people who seek apartments. One type is called "Superman".  Superman suffers no health problems when exposed to pollution.  The other type of people are called "Average Joes".    The Joes do suffer when they are exposed to pollution and they know this.  I show that in this case, the Supermen will choose to live in the cheap polluted part of the city. Why?   The rent is low and they like that and the pollution doesn't bug them (they are superman!).  The Average Joes will choose to live in a clean and expensive community.  

Now the interesting point here is that a public health researcher who ignores this residential sorting based on one's type (this essential heterogeneity) would conclude that exposure to air pollution is good for you!  Why?  The supermen never get sick and live in the high pollution area while the Joes do get sick and live in the low pollution area.  A statistical researcher who naively calculates the correlation of pollution and sick days would find a negative correlation and jump to the causal claim that pollution is good for you!  The mistake here is that we never observe the counter-factual of how much sicker the Average Joes would have been had they lived in the high pollution area.  This example highlights how my book teaches readers about environmental economics and econometrics at the same time!

The Chapter goes on to teach readers the famous Tiebout Sorting of how a diverse population self segregates into more homogeneous communities.  

I then teach the readers about how to conduct an environmental justice analysis and the use of GIS data.  I base this on my 2001 paper. 

The chapter ends by discussing in this age of the 1% and the 99% the differential in access to excellent urban environmental amenities between the rich and the poor. This issue arises in California where the rich own the homes near the beach and they try to privatize the beach sand as an extension of their property while this land is supposed to be in the public domain.

A major theme of my book is the exploration of economic incidence.  As America's cities grow "greener", does everyone benefit from this quality of life progress or do the rich disproportionately gain because they own more of the land that is more valuable because the objective quality of life has improved?

Some Bad Economics About The Future of Miami

This will be a blog post about durable capital, expected present discounted value calculations and endogenous depreciation and the efficient markets hypothesis.  My point is that only real nerds will want to read this.  But, I will be talking about $60 Trillion Dollars.  This article  offers the following "teachable moment".  Here is a quote:

"And what of Miami? It contributed $263 billion to gross domestic product in 2010, according to the Bureau of Economic Advisors. Caught between rising seas to the east and the Everglades to the west, the city is doomed to drown.
Abandoning Miami means not only moving or abandoning the businesses who create its gross domestic product, but walking away from its pricey real estate, its roads, hospitals, schools and infrastructure. The cost of relocating its people needs to be calculated both in dollars and in heartbreak. But if you ask people to estimate the cost of abandoning Miami, you get blank stares. It’s as if the language to ask the question hasn’t been invented yet.
“It is not difficult to envision much larger costs, [i.e. $60 trillion] given the potential larger and more abrupt warming [the more abrupt the warming, the more costly it is to try to adapt] that the authors calculate,” says Mann. And it’s not difficult to imagine that there are costs we haven’t even begun to imagine. And when you multiply those costs, city after city after city, suddenly $60 trillion becomes a very realistic and frightening number." 

A recent "big think" paper in Science posited that when the Arctic Icecap melt that this will cost us at least $60 trillion in damage.   To make this salient, climate activists such as Mann are saying that we will lose Miami and this will have horrible impacts on our economy.   This makes no sense.  The economic activity that currently locates in Miami will move to higher ground.  Nobody claims that Miami is an inherently productive place so that the $263 billion dollars in economic activity could only be generated there.  Miami will reform in another piece of the U.S.

You don't have to be Acemoglu to ask the following questions;

1.  what is the probability that Miami vanishes within the next 75 years?  The smaller this number is the lower is the expected PDV of damage.
2.  How many years into the future is this event likely to take place?  We discount future benefits and costs using the real market rate of interest.  The further in the future this damage is likely to take place then the lower are the costs.
3.  Isn't all urban capital infrastructure depreciating over time?  Our buildings, roads, hospitals --- -everything in cities doesn't last forever.  The usual life of a building is 60 years. If we anticipate that Miami is going to flood in the year 2060, then in the year 2025 we stop maintaining Miami buildings and we don't build new buildings and other placed based infrastructure.  Instead, we build new infrastructure on higher ground and the firms and people in Miami engage in an organized retreat.  This rebuilding activity stimulates the economy (think of Europe rebuilding after World War II).
4.  Who loses from the retreat from Miami?  The land owners who owned the land just as the "new news" that Miami will be doomed in the year 2060 was announced and digested.  These land owners "overpaid" for the Miami land because the price when they paid reflected the present discounted value of the rental stream they would earn out into the infinite future but if Miami will be flooded after the year 2060 then there is no such rental stream and home prices today will reflect this expectation and will drop as the new news is incorporated into current asset prices (this is the efficient market hypothesis under rational expectations).  As home prices drop, poor people would move in.  Note that the poor who move in gain from access to cheap short run land.  

Assets such as the Miami Dolphins will move to another city.  The University of Miami will let its campus go and find a new place in Florida to do business.  This is adaptation.  Those geographic areas that have a competitive advantage in the face of climate change (i.e they are on higher ground) will command a price premium and land prices and economic activity will rise there as a new Miami will take root.

So, the doom and gloomers would only be correct if the capital stock lives forever. In this case, valuable assets that will always be valuable would have been built in the wrong place (Miami) and cannot be dragged to higher ground. In the real world, all assets fall apart over time (look at the senior faculty at many econ departments for evidence!).  As Miami's assets depreciate, rational investors will not invest in improving them because they will recognize the short investment horizon.

With all of this said, is Miami doomed in the face of climate change?  I would say no.  The engineers and urban planners and land owners in the city need to take a sober look at identifying which parts of their city are the most likely to be resilient in the face of climate shocks.  The city should encourage densification there.  The insurance industry should price future premium to encourage economic activity to relocate there.  If the people of Miami choose not to retreat, then the housing stock and electricity grid and storm sewers will need to be upgraded to make it more resilient in the face of shocks.

A Preview of Chapter Four of My New Amazon Kindle Book

Whether the price of my book is $0 or $2 tomorrow, you will still gain some consumer surplus if you buy my new "classic" Fundamentals of Environmental Economics.   In this post, I will talk about the book's chapter four titled; "Where Do Dirty Factories Locate"?

Erin Mansur and I recently published a paper on this topic in the Journal of Public Economics.  

My starting point is that many urban pollution externalities exist because dirty industrial activity takes place in a geographic location filled with people.   Why are the people living there? Why did the firm choose this location and why does it continue to produce there?   Unlike many undergraduate texts, I introduce the reader to a discrete choice problem namely does a polluting firm locate in Boston, San Francisco or Dallas?  This cost minimizing firm recognizes that these three possible locations differ with respect to local wages, local real estate prices, distance to final consumers and they differ with respect to their pollution regulation.  A firm will know its production needs. For example, a firm that needs a lot of land to produce may choose to avoid the place where land is expensive.  Alternatively, a firm that pollutes a lot may avoid the high regulation area.  I teach the reader how to calculate the total cost of production for a given firm in each possible location and we spot the cost minimizing choice.

I then walk the reader through  the "reverse engineering" problem of "given that a firm has chosen a specific location to produce, what must be its priorities for how it tradeoff various attributes of a city (i.e how important are low wages versus low  energy prices in determining whether the factory moves to a given city).  Why does this model matter? In this day and age when everyone is asking why Detroit is dying, why don't firms moves there?  A good model of firm locational choice is relevant for predicting which cities will grow and which cities will experience an influx of pollution from pollution intensive industries.  In joint work with my co-authors in China right now, we are using these same models to explore the migration of industrial activity from coastal cities to poorer western cities.

Returning to chapter 4 of my book, once I finish the domestic locational choice example --- I then turn to the threat of offshoring.  If the U.S EPA introduces stringent environmental regulation, what types of firms can credibly threaten to move abroad to a "pollution haven"?     So, U.S regulation can reduce U.S pollution by reducing pollution per unit of industrial activity (a technique effect) or by unintentionally displacing production to other nations.  The "Goldilocks" goal is to make regulation tight enough to achieve the former goal while not making too tight so that "we lose jobs".   How the U.S regulators navigate this potential mine field requires an ability to engage in fine tuning and to assess which jobs are the most "footloose".

At the end of the Chapter, I return to one of my favorite themes.  Deindustrialization in the U.S Rust Belt, in Eastern Europe and now in China's major coastal cities has dramatically improved local environmental quality.

The Chapter ends with a small model that Gary Becker would like.  It builds on his work with Ehrlich on Self Protection.

Industrial Environmental Negligence and Endogenous Effort by Firms

Consider an oil company that can take costly precautions that will reduce the probability of an oil spill. Such oil spills (when they occur) cause significant environmental damage.  I study how the expectation of a large monetary fine for an oil spill incentivizes the for profit company to take more ex-ante precaution (i.e invest more to minimize the probability of a spill).  So, credible punishment leads to good behavior!  All parents know this and I show how in a simple calculus example to solve for the optimal effort by the firm and how this effort is an increasing function of the ex-post expected fine that the company would have to pay if there is a spill.  

So, this chapter highlights several ways to reduce industrial pollution externalities using an economics approach.  Again, while this book is a textbook it also isn't a textbook --- anyone can read it and it will make you think! If you disagree, I will give you your $2 back!

China's Consumers Demand for Higher Quality Products and an Improved Quality of Life

Take a look at this article about the demand for safe baby food by Chinese parents.  The NY Times wants to tell a "limits to growth" story about the general equilibrium effects of how China's growing urban middle class' demand for safe high quality products raises their demand for European imports of milk and this drives up the price of this product.  Yes, supply and demand matter.  I thought that the NY Times seeks for the world's producers to be stimulated to produce more so that more people get jobs?  Shouldn't we all move to Europe so that we can milk cows and send the baby food to China?  Would that end the recession?

Let me stop cracking jokes and make my point.  Siqi Zheng and I are finishing a book about Chinese urbanites' demand for higher quality of life and the implications of this trend for their cities, families and for the world.  When the University of Chicago press publishes this book, I will be making the case for why you should read it!  To listen to me speak about China, watch this video of a talk I gave last year at USC.

Amazon is Giving Away My New Book for Free Today

The law of demand will be tested today.  You can get my Fundamentals of Environmental Economics for a price of $0 today at Amazon.  This offer ends very soon!

A Preview of Chapter Three of Fundamentals of Environmental Economics

In this post, I preview chapter 3 of my new $2 Amazon book; Fundamentals of Environmental Economics.   Chapter 3 takes a sober look at the role that government plays in determining urban quality of life and mitigating urban environmental externalities.

The chapter begins by discussing the television show The West Wing.  "The West Wing staring Martin Sheen as the avuncular President of the United States.   He was an ideal figure who knew right from wrong.  He even had a Ph.D in Economics and had won the Nobel Prize in this esteemed field!   In a typical episode, he would always do “the right thing” as he acted as a benevolent leader selflessly pursuing the public’s interest.  But, what is the “right thing”?"

I ask the reader to think about what the words "good environmental policy" mean in a diverse society in which any policy will create some winners and losers. I use this rhetorical device to introduce the Hicksian criteria for judging social welfare (can the winners from the policy compensate the losers?).    

I then ask a question of whether regulators who are not elected and serve and have much discretion over their enaction of policies have the right incentives to follow through with the broad vague mandates that Congress trusts them to implement (i.e deliver clean air and clear water).

I then assume that I'm being too cynical and I solve for the optimal pollution tax to introduce on a polluting steel factory so that it internalizes the damage imposed by its pollution.  I argue that a double dividend is possible of taxing pollution and lowering other distortionary taxes.  In this sense, my book touches on public finance issues and balanced budget conditions that many other environmental texts ignore.   

The chapter then turns to what factors stimulate the demand for environmental regulation at the Federal level.  Festering quality of life challenges and recent salient disasters are both discussed as catalysts of regulation.  

I then turn to the role of state and local regulation in mitigating urban externalities. 

The chapter then does a little bit of algebra as a pollution permit market is introduced as one economic mechanism for incentivizing pollution reduction.  

While an intent of pollution per markets is to reduce pollution externalities, it is often the case that environmental regulation has unintended consequences.  In Chapter 3, I offer several examples from the U.S history over the last 35 years.    

I then turn to a more recent trend of relying on information regulation where government is a trusted source of information and it spreads this information in an attempt to change household behavior.  For example, Smog Alerts educate the public that the next day will be smoggy. If households respond by spending less time outside on polluted days then this information can break the link between outdoor pollution and individual sickness because people have engaged in self protection.  

The chapter then investigates how government policy by keeping water and electricity prices too low can actually cause environmental damage.  Government faces a series of tradeoffs and in its concern to protect the purchasing power of the poor and middle class it can send the wrong scarcity signals.  

In addition to discussing all of these topics, Chapter 3 goes on to discuss government's role in providing public goods such as subways and in the case of China Bullet Trains.   I end the chapter by presenting an algebra example of the classic free rider problem in public goods provision of "bald eagles" in the case when there is no government.   You must admit that this is a fair bit of content for one chapter in a $2 book!

 

Chapter Two of Fundamentals of Environmental Economics

This blog post sketches the contents of Chapter Two of my new book; Fundamentals of Environmental Economics.  This $2 e-book can be read as a "popular book" about free market environmentalism or as a textbook.  At the end of 2013, I will be posting power point notes, exams and homeworks based on this book.  I will be using this book as my main textbook at UCLA in my Fall 2013 undergraduate class.

Chapter Two introduces the classic local pollution externality as a profit maximizing steel factory unintentionally causes local pollution.   In gruesome detail, the chapter covers;

• What private costs the firm incurs in producing steel.
• Why it produces pollution as it produces steel and under what circumstances would this "technique effect" (i.e pollution per unit of output) be low. 
• property rights --- who owns the air the firm is polluting and thus we introduce the tragedy of the commons
• how does pollution exposure affect the health of the population who lives near the factory?
• How can data be used to quantified the causal impact of pollution on health --- and what experiments and natural experiments can researchers run versus what experiments we can't run (such as randomly blasting people with pollution to see how their health is impacted) because of ethical concerns
• The chapter has a long section on "health production functions" and the role that pollution plays as an input in causing sickness.
• how much are people willing to pay to not be sick?
• how many "victims" were exposed to the pollution?
• All of these ingredients are combined into an externality equation to quantify the social cost of steel production
• A Green Accounting introduction is then provided to teach the reader about how to deduct pollution damage from the steel factory's profit to calculate its true "value added" to society
• A benevolent planner's problem is set up to show how a benevolent planner would recognize the benefits and costs of steel production and the chapter ends by solving for the socially efficient (i.e pareto optimal) amount of steel production

This Chapter Two allows me to introduce Government in chapter 3 and we will investigate the tools that government has to tackle the externality presented in Chapter Two. As I will discuss tomorrow, Chapter Three isn't naive about government instead it takes a realistic look at the political economy of government stepping in and regulating this economic activity.

Chapter One of My New Environmental Economics book

Now that I've sold 31 copies of my $2 Amazon book Fundamentals of Environmental Economics,  I'm going to try a little bit harder to market this book.  I've set the price extremely low in order to attract some readers and to set a precedent in disrupting the expensive textbook market.

In this post, I discuss chapter one.    The chapter starts with a brief history of my teaching environmental and urban economics. I keep this section short because I realize that readers won't care.  Similar to other micro books, I state that my goal is to use economics to explain and predict behavior.

BUT, I then ask an innocent question; "When do policy makers benefit from economic analysis?"    I offer some thoughts about whether our thinking leads or lags policy making.  Do blue chip economists influence the policy debate?  Or do we simply rubber stamp wild stuff that politicians want to do but need political cover to implement?  

I then answer the question;  "What is environmental economics?"  

I then introduce "economic thinking" to the uninitiated.   I find that economists speak to other economists too often.  Here is  quote from the book;  "

"Given that my primary academic appointment is at the UCLA Institute of the Environment,   I always have students enrolled in my classes who have never taken an economics course before.  This subset of students tends to be environmental science majors.   They are sometimes offended by the economist's worldview that we (the economists) appear to view all people as selfish and egotistical.   This is not true. We celebrate diversity.  People differ.  Some are selfish and they will narrowly pursue their own goals of wealth, fame and happiness while others will have a more socially responsible goal (to find a cure for cancer or to be a leader in the community).

The environment enters this calculus along several dimensions.   Nature offers us direct pleasure in terms of its beauty, and it offers potential resources that feed and protect us and it offers us a store of assets (such as oil and wood) that we can use to create wealth and new opportunities.  Clean air and clean water increase the likelihood that we are happy and productive and enhance daily leisure.  In this sense, environmental protection offers benefits to our quality of life.  Note the economist’s perspective; we use nature to achieve our goals.  If one of our goals is “beauty” then we may choose not to use nature but again, this is our choice."  

I then discuss how nature views us when I reproduce a letter from the New York Times focused on how birds who live near San Diego have been impacted by human activity.

In my next blog post, I will finish up discussing the other topics I cover in my Chapter One.  As you can see, the book is a pinch philosophical as I try to be honest about how economists think.  The book also challenges non-economists to acknowledge that in a world where time and resource budget constraints bind we must prioritize and think hard about what are the "best" choices we can make and what investments we can make to augment our scarce resources.    The "no free lunch" logic makes students sad but at some point they have to confront this fact because if they don't the lunch will only become more expensive!

Returning to Singapore

I made my first trip to Singapore last July and at the end of August I will return as I will be spending some time visiting NUS.  I look forward to seeing my old friends and talking to more people about what's new in Singapore.   For folks looking for me, you will be able to find me here in late August.

Reconfiguring the Social Sciences at Research Universities

In the NY Times, Yale's Nicholas Christakis presents some new ideas for shaking up the social sciences at leading universities.  He writes;

"It is time to create new social science departments that reflect the breadth and complexity of the problems we face as well as the novelty of 21st-century science. These would include departments of biosocial science, network science, neuroeconomics, behavioral genetics and computational social science. Eventually, these departments would themselves be dismantled or transmuted as science continues to advance."

Given that he runs an interdisciplinary research center, such a move by his Deans would strengthen his empire!  But, let's leave self interest behind and evaluate his conjecture.  Some universities such as USC appear to agree with him as many of their top economists are not in their economics department but instead are scattered across other schools and centers across campus.  Cross-university competition will allow us to test his core hypothesis.  In contrast, other Universities such as MIT  and Princeton  keep almost all of their economists in the econ department.   This variation allows for a test of where does excellent social science emerge and when are synergies across fields especially valuable.

Dr. Christakis is making one enormous assumption.  Can experts in one field judge what is excellent work in another field?   In his ideal "big tent", who is the director of the institute?  Does this worldly intellectual have the capability of identifying excellent work in fields far from her own field of expertise?   It is my humble opinion that such "renaissance men" do not exist.  

My UCLA Institute of the Environment  is an interdisciplinary center.  As a tenured member of this Institute, I face an ongoing challenge of evaluating researchers whose work is far from what I know.  I certainly enjoy working in an interdisciplinary environment but I can see how many economists would find this frustrating.  In a diverse university setting, some people will self select and want to sit with people just like them while others will benefit from working in a more diverse intellectual environment.   The author of this piece simply assumes that "intellectual diversity" is always good for idea production.  This ignores the benefits of specialization.

Dr. Christakis also ignores the implications of his suggestion for Ph.D. training.  While students love such interdisciplinary programs will they actually get a good job when they graduate?  The key what-if asks, "what job would the same student have received had she gotten a Ph.D. in the core department rather than going to the interdisciplinary degree program?".  

So, I think that some high endowment relatively low ranked schools will try to rise in the rankings by embracing his strategy. Such field experiments will offer a test of whether he is right or not.

If Deans at good places are ambitious, they could figure out how to configure some space on campus to be a short term Hoover Institute where on campus faculty working on similar issues would sit together for a year and over coffee and lunch would  make progress through informal discussions and working groups.   This would allow for the win-win of facilitating the social connects that the author alludes to while keeping the best parts of the traditional department system.  Such a system would allow  create a within university tournament encouraging teamwork across departments.

My New Book: Fundamentals of Environmental Economics is Published

Amazon is now selling my new book; Fundamentals of Environmental Economics: Solving Urban Pollution Problems for $2 a copy.  My intent in writing this book is to create a cheap text that introduces readers to the major ideas in modern environmental economics with a focus on issues at the intersection of environmental and urban economics.  Those who embrace a University of Chicago "price theory" approach for thinking about economic activity will learn from reading this book.

To explain this book, I will start to post new YouTube videos about each chapter of the book.

The book features Sixteen chapters that include;

Chapter One:    Introduction

Chapter Two:   The Pollution Externality Created by a Steel Factory

Chapter Three:    Government’s Role

Chapter Four: Where Do Dirty Factories Locate?

Chapter Five:   Where Do People Choose to Live Across and Within Cities?

Chapter Six:   Measuring The Demand for Urban Environmental Progress  

Chapter Seven:   Transportation Externalities and Cars

Chapter Eight:    Pollution Externalities Associated with Urban Household Activity

Chapter Nine:      Endogenous Preferences: Where Do Environmentalists Come From?   

Chapter Ten:    The Economics of Green Business

Chapter Eleven:    The Challenge of Reducing Global Greenhouse Gas Production

Chapter Twelve:   Unilateral Carbon Mitigation: Why Doesn’t California Free Ride?

Chapter Thirteen:     Natural Resource Economics and Urban Economic Growth

Chapter Fourteen: Future Environmental Challenges

Chapter Fifteen:    Macroeconomic Growth and Environmental Quality Dynamics

Chapter Sixteen:   The Future of Academic Environmental and Urban Economics

Two Links for Today

First, this Wall Street Journal piece talks about my 2005 RESTAT disasters paper.  I like that! Second, did you know that Mercedes Benz has a driving academy?   A young driver just slowly rolled past my Little Holmby house in a nice training car.

Rational Thieves: Evidence from Los Angeles

The LA Times reports that a group of teenagers targeted Hollywood to rob tourists because they believed that the police were concentrating their attention on the Crenshaw District because of lingering effects of the Zimmerman Trial.

"What we're thinking is these youngsters took advantage of our redeployment of officers down to the Crenshaw District last night and decided that this would be a good night to come up to Hollywood and act a little crazy," Smith said."

For those of you who do not read the American Economic Review, Di Tella and Schargrodsky  exploit the same experimental design to measure whether cops do reduce local crime.  

Strategic thinking is a valuable skill.  I hope that our universities are doing a good job teaching the intuition behind intro game theory?

Expensive Cities Caused by Too Much Gentrification?

Has New York City become too nice of a place to live?  In this piece, Emily Badger embraces a Goldilocks point of view.  If New York City real estate is porridge, then the "porridge is too hot".  Ms. Badger bemoans that New York City renters are being priced out of their city.  This view suggests that she believes that renters have a property right to live there at "their old rent level".  But is that true?  Does she propose that NYC increase the number of rent controlled apartments so that incumbents won't be priced out?  This would be a takings from those who own these buildings.

Who holds an equity stake in a rising city?  Is it the land owners in the city or the incumbents who lived in the city?   For those of you with a taste for Karl Marx, I hope you see the analogy to whether capital or labor benefits from dynamics shocks.  

For those of you who didn't sleep through your economics classes, this is  classic example of "economic incidence".  When there is "new news" (whether it is good ---- Wall Street is booming or bad ---- the murder rate increases to an all time high),  the owners of assets such as land are the ones who either gain or lose based on the content of the news.    Since land is in scarce supply in Manhattan,  rising international demand to live in NYC raises local prices.

What is to be done?  As shown in my PNAS China Bullet Train paper, faster trains would partially address her concern.  Downtown Philadelphia could become a NYC suburb if the train between the cities moves even faster.

Another way to address her concern is to allow for more high rise buildings in NYC and to allow for micro apartments to reduce the square feet in apartments.  As Ed Glaeser has argued, NYC has designated too many buildings to merit historical preservation status and this has slowed down the increase in housing supply.  

Ms. Badger appears to want to build a wall around NYC to keep the outsiders out as they bring their wads of cash and bid up prices so that the 99% are priced out.  This raises a fundamental issue; how should scarce assets be allocated across different people? If you reject the pricing mechanism as the means for allocating such resources, what alternative approach do you embrace? Do you root for a new fair dictator to emerge and redistribute ill gotten gains to the people?  That experiment has been tried before!

While economists teach generations of students that one's wage equals one's marginal value product and that capital gains represent the returns for patiently investing rather than consuming early, more and more people appear to believe that the 1% stole their money from some honey pot and that due to general equilibrium effects that the consumption behavior of this 1% are pricing out other people.    To regain trust from society, perhaps each member of the 1% should post a Youtube video explaining how they earned their money and how they have contributed to society.





  

The "Law of One Price"? Evidence from Cross-Area Housing Opportunities

This webpage  offers a quick refresher course on the role that amenities and local labor market opportunities play in explaining real estate prices across different areas of the United States.  Why aren't the owners in Berkeley selling their small $400,000 homes and moving to Maine to live in that enormous $400,000 house?

The Competitive Coastal Housing Insurance Market Nudges Climate Change Adaptation Forward

While behavioral economists dismiss "rational expectations, there are some important economic actors with a strong incentive to discover accurate assessments of the probabilities of future events.  The insurance industry is investing in forecasting because it has the right incentives to do so.   As Grossman and Stiglitz and Hayek taught us long ago, risk prices convey information about our best guess of future probabilities of events. Read the first paragraph of this paper.

Two Thoughts About Cities

The NY Times has a long piece about China's Communist Party (CCP) forcing its farmers to urbanize.  This will be an interesting test of the Roy Model (i.e comparative advantage and sectoral choice).       The article suggests that the CCP is assuming that urbanization always raises one's wages and happiness.   Such an assumption ignores population preference and talent diversity (this may be a consistent theme with communists).   In the real world, people differ with respect to their endowments of brains and muscle and in what is their "conception of the good life".   If rural people are free to choose whether they want to urbanize, then a standard comparative advantage model would predict that those with a high brain to muscle ratio of will urbanize (because cities offer a higher wage per unit of brains than rural areas and rural areas offer a higher wage per unit of muscle than urban areas).

So, this is a long winded way of saying that China's increased incentives for rural people to urbanize is likely to lead to the fact that the marginal new migrant will have a lower brain/muscle ratio than the early migrants.  This suggests that the urbanization returns to the new cohort of rural people who now are "forced" to urbanized will be lower than for earlier cohorts.  This group will also find real estate prices to be very high. So imagine that you are forced to leave your rural social network to move to an urban area to work where you don't have the skills to qualify for good jobs and rents for housing are extremely high. This is a recipe for very low quality of life and future trouble.  

The CCP appears to believe that all farmers are identical in terms of skills and ambition.  The CCP is about to learn a lesson about marginal versus average!

Switching topics; the Los Angeles Times has a very interesting front page article about new urbanism.  More new homes have "micro lots" so they stand side by side.  Does this look like the LA you think of?



While this housing isn't for everyone, it is more "affordable" because the absence of a backyard means that the home sits on little land.   This is an example of how we adapt our urban form as our needs change.  Why Los Angeles has so much green grass when nobody spends time in their own private outdoor space remains a mystery to me.

Four Thoughts About the China PNAS "Coal Kills" Study

MIT's Michael Greenstone and co-authors have published an important paper in PNAS documenting that "coal kills".   This finding is based on a natural experiment from China where cheap winter heating was made available in certain geographic areas.  This creates a natural treatment group and control group.  This well done study is also politically shrewd.  As natural gas has grown cheaper, any research documenting the social cost of coal will be welcomed by the "green cities" coalition and those who want sharp cuts in global greenhouse gas emissions.

Comment #1:  What is the elasticity of demand for winter heating in China?

"The quasi-experimental empirical approach is based on China’s Huai River policy, which provided free winter heating via the provision of coal for boilers in cities north of the Huai River but denied heat to the south. "

If the elasticity of demand equals zero, then this policy should have induced no differential pollution effect across the policy border.  The more elastic the demand for winter heating then the larger the environmental impact.

Comment #2:  What was the efficiency of the coal boilers used by the Chinese heat providers located in the North of the Huai River?   If they had very efficient boilers then they would have needed less coal to make the heat and thus less TSP would have been released.

Comments #1 and #2 suggest that if either the boilers had been efficient or the elasticity of demand was low then there would have been no differential TSP at the border.  A "natural experiment" existed because these conditions were not satisfied.

Comment #3:  Coal burning bundles many nasty environmental treatments including TSP.  Lucas Davis discusses the wide set of environmental problems caused by burning coal. TSP is just one of them.   It is possible that TSP floats more uniformly around power plants and coal heating systems than these other toxics but Davis' results suggest that the Greenstone team may over-state the role of TSP in causing death in China because the coal burning simultaneously raises TSP and another vector of toxics that they don't measure.  Since they can measure TSP, they attribute all of the deaths to TSP but this implicitly zeroes out all of the other marginal health effects caused by other pollutants that increase because of coal burning.

Comment #4:  How much money did local governments and households north of the river save because they spent nothing on winter heating?  What did they do with this extra money?  If they bought cigarettes then they further injured their health? If the local government invested in cleaner water then this would improve health.  A future study should investigate differential consumer expenditure across the border.

UPDATE:  Towards the end of the published paper, the authors discuss this point.  Here is a quote. "Further, the free provision of coal is an in-kind transfer that increases households’ disposable income, and this may cause northern households to alter their consumption patterns in ways that are protective
(e.g., medical care) or harmful (e.g., tobacco or alcohol) for health."   They acknowledge that if the policy changes household or government behavior on health related inputs that the policy does not isolate the causal effect of TSP on mortality holding all else equal.

Classy?

In Beijing and Shanghai, I smelt much smoke and encountered many smokers at the 5 star hotels that I had the opportunity to visit.  While I stayed in a non-smoking room, my room was not smoke free.  With my recent encounter with elevated carbon monoxide levels in mind, I enjoyed reading this article about smoking trends in the United States.  Social interactions have become a major topic in modern economics focused on how a friend's choices might have a causal effect on my choices.

In the ongoing discussions of the segregation of the 1% and the 99%, what share of the 1% smoke?  What share are overweight?  What share live in polluted communities?  What % of the day do the 1% spend speaking to other members of the 1%?   How much of the choice of smoking is about group identity. After all, we smoke in public and reveal aspects of our personality through this public signal.  Do smokers prefer to hangout with other smokers?  Do many non-smokers like to hang out with smokers?   I know only 2 economists who sometimes smoke and I know hundreds of economists.

Smokers know that smoking isn't good for them.  Doctors plead with them to stop. There are nasty synergies between high blood pressure, diabetes and smoking yet many in this group keep smoking.  If all smokers stopped smoking, how much would aggregate health care costs fall each year?

In China right now, smoking rates are declining as the educated are sharply reducing their smoking rates relative to earlier cohorts.  For some evidence, read this.

Co-Authors in Shanghai

At my age, I now have a lot of co-authors.  Here is a photo of three of them that I took in Shanghai.  From left to right, you see three young stars named;  Weizeng Sun,  Jianfeng Wu and Cong Sun.

Beijing vs. Shanghai

I am back in Los Angeles after spending ten days in Beijing and Shanghai.   In Beijing,  I participated in a NBER-CCER conference and made many new friends at Peking University.  I worked with my co-authors at Tsinghua University and toured the Great Wall and the Forbidden City.  We saw some smoggy days and we experienced some Chinese humidity.  The food was great and everyone treated us really well.  Both Beijing and Shanghai have better subways than any American city.

We took the 5 hour bullet train to Shanghai.  The 180 MPH ride was smooth and we saw many Chinese cities as we glided south and east.  These cities featured new housing towers clumped close together.

Shanghai is very different than Beijing.  The river that cuts through it adds to its elegance.   The city has more charm than Beijing as the Europeans who lived there injected some non-communist architecture and style.  Beijing is too "functional". It lacks charm.   Shanghai has real neighborhoods and sometimes feels like a European city.   Both Beijing and Shanghai are "rich" , sophisticated cities.  Shanghai is home to over 200 Starbucks!  That's progress.   Both feature strong and rising economics departments.   Shanghai has a Maglev Train that takes you to the airport and has a maximum speed of 450 kilometers per hour!   It was fast!

Adaptation to Natural Disaster Risk in Bangladesh

I've been in China the last ten days.  Shanghai is an exciting city which appears to offer higher quality of life than Beijing.  While I traveled, I read the English newspapers.   The China Daily is a fun paper to read as it presents a focused Chinese leadership perspective on world issues.  A recent China Daily article offered some optimism about flood risk adaptation in Bangladesh.  More kids are attending floating schools and this allows them to continue to learn despite frequent flood conditions.  The article did not discuss transportation logistics of how the students and teachers arrive at the school.

May Apartment Update

The May results for the Houston apartment complex are in and the good performance of April has continued through May. Occupancy remained at 94%. Positive cash flow was $8,700, a noticeable improvement over April's $7,500 (which was pretty good itself). There are still some legal issues with some vendors that are increasing the administrative expenses for the month and, once again, management says these are at reduced levels compared to the past and they should be decreasing.



Rent concessions increased by about $4,000 over last month, but the loss due to vacancy decreased by about $7,500. We did have to write off almost $6,000 in bad debt compared to no write-offs last month, but we also recovered $1,000 of bad debt. Our total income was just about $1,000 less than April.



Expenses for marketing dropped, as did those for capital improvements / replacements. This is what drove our bottom line higher than last month's.



We are still running in line with the budget. We're about $3,000 over budget in income for the year and $27,000 under budget for expenses. Unfortunately, we're also $22,000 over budget for capital improvements / replacements. But overall, the property is $8,000 over budget for net income, so I really have no complaints.



Well, that's not entirely true. I do have one complaint. Management seems to be very poor at handling investor's questions via email (or at the very least, at handling my questions). Last month, when I read the news about the ongoing legal costs for vendor issues, I sent them an email asking about how many issues were still outstanding. I got no response. After reading the May results this morning, I sent them another email asking the same question. I'm also somewhat bothered that it appears t be taking longer and longer for them to get the monthly reports out. I believe back when this investment started, the monthly report would be sent out maybe 2 or 3 weeks after the end of the month. Lately, it has been coming 5 weeks or so after the end of the month.