Hard Work at Public Universities

I just gave my last lecture for the Winter 2013 quarter at UCLA.  There were 100 students registered for my undergraduate environmental economics class.  You can look at all of the class material here.    UCLA did not assign a graduate Teaching Assistant for this class. Instead, I hired a very talented undergraduate to work with me on the course but she didn't do any grading for the class.  By the end of this class, I will have graded one midterm, one final exam, five homeworks and one 600 word paper for each student.  The course was supposed to have a 70 person cap but being a sucker, I signed in an extra 30 students.  There were some excellent students in my class but these classes are too big.  I would like to teach smaller classes.  The solution to this challenge of enrollment in upper division courses is that my University must raise its endowment.   When I taught at Harvard in 1997, I had an excellent Teaching Assistant in a class with just six students!

Switching subjects, I want to talk about dead pigs floating into Shanghai.  While I don't know all of the details, this is a nice example of the Tragedy of the Commons and the Law of Unintended Consequences and the connection between agricultural regulation and city quality of life.   How could there be over 6000 dead pigs in the Huangpu River?

"The surge in the dumping of dead pigs, believed to be from farms upriver in Zhejiang Province, followed police campaigns to curb the illicit trade of pork products harvested from diseased pigs."

So, as the rural police addressed the nasty pork problem (and its threat to the food supply's quality), the owners of the dead pigs disposed of the bodies in a Mafia Style by dumping them in the river and they flowed down to the mega city causing challenges there. Since the river is public property, this was a rational (but socially inefficient) solution for the farm owners.

  

A Few Comments on the IIED's "Assessing the Costs of Adaptation to Climate Change"

Given my ongoing interest in climate change adaptation, I sat down and skimmed this  this 2009 report on the cost of climate change adaptation.   This 116 page report uses the word "incentives" just once and never mentions the words "technological progress".   This strange report engages in a "top down" central planning exercise counting how many billions of dollars will be needed to be spent to achieve climate adaptation.

Here is a sense of the "top-down" exercise:

DIRECT QUOTE:

• Water supply. The water estimate (Kirshen, 2007) considers the effect of additional water demand and changes on the supply side. Investment decisions are made in anticipation of 2050 water needs.
• Human health. The health estimates (Ebi, 2007) are the extra prevention costs for three health issues: malnutrition, malaria and diarrhoea. The health impacts are based on the Global Burden of Disease study (McMichael et al., 2004).
•  Coastal zones. Coastal protection costs are based on the DIVA model (Nicholls, 2007), which considers a limited set of adaptation options that are applied globally. Uniquely, the coastal estimate considers both adaptation costs and residual damages. For long-life defence infrastructure, investments are made in anticipation of sea-level rise in 2080.
• Infrastructure. The infrastructure estimate adopts the World Bank (2006) methodology, using insurance data to determine the share of climate-sensitive investment, and applying a percentage increase on current infrastructural investment to suggest additional costs for climate-proofing new infrastructure. (However, the background paper by Satterthwaite (2007) took a different approach.)
•  Ecosystems. An indication of adaptation costs for ecosystems was derived from the costs of increasing protected areas to at least 10% of the land area of each nation or ecosystem, although it was not possible to split this into baseline costs of meeting current deficits and incremental adaptation. See Berry (2007).

The five categories listed above are all important for our long run standard of living. Permit me to discuss each of the big five in order.

Water Supply  --- The rise of the smart meter will provide real time information to consumers about their own consumption.  Water utilities can use time of use pricing and this will induce conservation in the short run and long run. As water prices rise, innovators will have an incentive to devise new ways of augmenting our water supply and ways of recycling our water. The net effect of this better pricing will be that the IIED vastly over-states the necessary investment.  This organization also faces the challenging of disentangling the marginal extra investment in water infrastructure caused by climate change. In the developing world, nations are building water treatment systems because they are growing richer and their population is urbanizing. This is response to the need to urbanize (which is a climate change adaptation strategy).

Human Health --- As the developing world grows richer, the three health issues listed above will continue to decline as a threat. Clean water, access to better food and health care will help to reduce the death rate from these diseases.  Economic development and free trade reduce these threats and reduce the likely billions that the IIED claims will need to be spent on these serious challenges.

Coastal Zones and Infrastructure --- As shown by Hurricane Sandy, cities can be resilient in the face of terrible storms if the area has a robust economy.  The IIED does not discuss how economic development reduces the costs posed by  natural disasters.  We are also always rebuilding our cities as depreciation takes place. How does the IIED  distinguish between investment that is required because of standard depreciation (i.e old buildings falling down and repairs for roads) versus accelerated depreciation caused by climate change?   If climate change causes damage to a coastal area, is there a "silver lining" that the new infrastructure (while costly) will reduce the damage caused by the next natural disaster because of improvements in engineering techniques.   The 116 page piece never discusses new knowledge and new ideas and innovation reducing the price of adapting to the new challenges that climate change will pose. 

Ecosystems:  Here is a direct quote from the report:

"The study closest to identifying actual adaptation costs is for the Netherlands, where it has been

estimated that €1 billion are spent on nature conservation, with €285 million for managing

national parks and reserves and €280 million for new reserve networks and habitat improvement.

This action was aimed at reducing the threat from habitat fragmentation and other sources.

The planned national reserve network will reduce the vulnerability of ecosystems and species to

climate change and thus a (significant) proportion of the above costs could be considered as

climate change adaptation costs." (see page 97)

Note the strange double counting here.  Does Holland only invest in its national parks and nature conservation to adapt to climate change?  Such investments offer a stream of benefits such as beauty and leisure opportunities.  To attribute all of these accounting expenditures to "climate change adaptation" is to engage in accounting tricks.  A good economist would estimate what is the extra expenditure that Holland will engage in to protect ecosystems because of climate change. This would be the estimate of the marginal cost of climate change adaptation.

My Summary

This strange "macro" report never discusses any Micro issues of how rational firms, households and governments will respond to new challenges induced by climate change.  Ultimately, climate change is a micro-behavioral issue.   What incentives would induce self interested households, firms and governments to take actions to reduce their exposure to climate change risk?  If households move away from areas they understand are risky, if firms produce new solutions to help households to adopt, if governments adopt new rules to protect their citizens and invest in public goods and reduce international trade restrictions, how much climate change risk can be avoided at low price?  The report doesn't bother to discuss any of these issues.

Now, I must admit to one issue here.  One of the authors of this report, David Satterthwaite, wrote a tough review of Climatopolis.   If this is the best work he can do on this important topic, then he needs to retrain and take some Ph.D. Econ classes at LSE.   We are both graduates from that great school but I think we studied different subjects while there.

Here was my 2010 response to Dr. Satterthwaite.   Read the short version of Climatopolis!  Watch the videos and think about this issue.  Join the 99,000 who have watched my UCSB Lecture on this issue.

Green Space as a Strategy to Displace Sex Offenders From Your Neighborhood

Few communities seek to have registered sex offenders living nearby.  This NY Times article sketches out a "killing 2 birds with 1 stone approach".  Neighborhoods in LA are creating small public parks.  By law, sex offenders can't live within 2,000 feet of such a park.  So, a neighborhood that creates a park gains double benefits as a set of people can no longer live in the neighborhood and this is common knowledge.  

Economics can quantify how much the marginal member of this community (i.e the person just indifferent between living there or not) is willing to pay (WTP) for a new park using past real estate studies.   This marginal WTP can be quantified if you take hedonic estimates from the urban green space literature on the increment in home prices if the same home is located close to a park and you add in the Sex Offender discount quantified in this AER paper.  As a supporter of the rise of "green cities" and "green communities", I hadn't anticipated this bundled benefit.

What is the Rate of Return When Deans Invest in Economics Departments?

As an economist who is married to an economist, I firmly believe that the wise Deans should invest more in academic economics.  But, this is an age of scarcity and there is an opportunity cost associated with investing in Economics Departments.   Given that we can't run a randomized field experiment where the Deans choose a department at random and give it $10 million dollars and then judge value added ten years later, how do we evaluate what is the rate of return on investments in Economics?

Washington Univ. in St. Louis offers a salient case study.  This important university has invested a large amount of $ in its Economics Department.  I have read about the Department's very nice new building.   It has hired some older faculty to sit in this new building.   Given this Department's "Big Push" starting in 2006, one could look at some outcome indicators such as output targets such as papers published in top 10 journals, or graduate students placed at top 50 universities.   How have the undergraduates benefited from a stronger Econ Department?  Have they become better problem solvers? Did they conduct their own original research? Are more of them entering top 20 Econ Ph.D. programs?  Are they increasingly likely to receive offers from Fortune 500 Companies?   So, this is an example where we can't calculate the rate of return on a large investment in a well known economics department.  There are objective criteria for determining excellence.  Which Departments are offering a high rate of return?

In this new age of accountability, will departments that offer a higher rate of return be rewarded by deans by receiving more resources?   Deans could substitute away from academic economists given that our wage per course taught is quite high.  What can we do to be more cost-effective?  Do academic demand curves slope down?

China's Mayor Now Have Incentives to Pursue Tangible Environmental Progress

 In joint research with several of my friends in China, I have released a new NBER Working Paper with the boring title; "Incentivizing China's Urban Mayors to Mitigate Pollution Externalities: The Role of the Central Government and Public Environmentalism".

Siqi Zheng, Matthew E. Kahn, Weizeng Sun, Danglun Luo

NBER Working Paper No. 18872
Issued in March 2013
NBER Program(s):   EEE   PE   POL 

China’s extremely high levels of urban air, water and greenhouse gas emissions levels pose local and global environmental challenges. China’s urban leaders have substantial influence and discretion over the evolution of economic activity that generates such externalities. This paper examines the political economy of urban leaders’ incentives to tackle pollution issues. Based on a principal-agent framework, we present evidence consistent with the hypothesis that both the central government and the public are placing pressure on China’s urban leaders to mitigate externalities. Such “pro-green” incentives suggest that many of China’s cities could enjoy significant environmental progress in the near future.

Since I know that the readers of this blog prefer pictures to words, permit me to show you a single slide that tells the whole story.   For those who want more Laffont and Tirole in their lives, there is a double principal-agent issue here.  China's urban mayors are the agents who have private information about their pollution mitigation efforts. The two principals are the central government in Beijing and the urban public.  Our paper makes progress on investigating how reductions in information costs and the role of civil society play in mitigating this classic problem.