The next Nobel Prize

Monday, the next "Nobel Prize" in Economics will be announced and everybody is playing a game of predictions, so why not me? I have a wish that happens to coincide with my prediction: William Nordhaus.

Why? Because environmental economics has been long rumored to get it and it deserves to be recognized. Within that field, Nordhaus has made major contributions that brought this field to the mainstream. And he is a genuinely good guy, always helpful and willing to listen to you or help you out. Also, the signals I have been receiving from members of the Prize committee is that they really like his work.

I am afraid, though, that he may have to share his work with Martin Weitzman. Who has made the more seminal contributions to the field can be discussed, but Weitzman is all the opposite in terms of attitude. In addition, I do not like his way of trying to make a name of himself, like I showed previously. He has also been caught and punished for stealing horse manure, so his ethical standards are definitively not up to par.

Greening production through information

People in general prefer green products, although they are not always ready to pay a significant markup for a greener product. If they know that a product has been manufactured using green procedures, there will attach more value to it if the claim is credible. Several green labels, supposed to certify such claims, have emerged, but none have much recognition, in fact one sometimes wonders whether some of them are really weak.

Another approach is voluntary disclose of pollution emissions and other environmental disclosures by the industry. This is reviewed by, take a deep breath, Venkatachalam Anbumozhi, Qwanruedee Chotichanathawewong and Thirumalainambi Murugesh with a focus on Asia. They highlight that the final consumer is not necessarily the one targeted by this information. For example, some investment funds, in particular sovereign wealth funds, are under pressure to invest in ethical firms. Or potential employees may avoid polluters, and local planning may benefit form the available information, thus encouraging local investment.

The authors argue that there is little environmental regulation in most of Asian, with makes the price of environmental benefits close to zero. If you want firms to start abating, you need regulation, and then they also be willing to should how well they abate, leading to more abatement. In some larger Asian countries, a few modest disclosure programs have started, and they have shown excellent prospect in increasing environmental compliance.

How to tax addictions

Addiction is most often a problem of self-control. If one is not capable of factoring in the future consequences of one's actions, one way to make this is taken into account is to distort prices appropriately. This is what taxes (and subsidies) are good at. While we know rather well how to design taxes on externalities born by others or the community, the case is more difficult for externalities inflicted on future selves.



Luca Bossi, Paul Calcott and Vladimir Petkov get on the case i the context of externalities, self-control issues and imperfect competition, as applicable for cigarettes and their highly concentrated industry. They also implement time-consistent taxes to accommodate the addiction, which means that people or government would not want to deviate from the social optimum. Taxes are thus state dependent and described by a rule. One important result is that combining addiction and imperfect competition leads to lower taxes that previously reported, because prices are already higher to start with if providers are oligopolistic. Were some drugs to be legalized, one has thus to keep in mind that the new market structure matters in the design of the new taxes.

Property rights and natural resources

It is a firmly established conventional wisdom that natural resources are best preserved when there are well established property rights. It is the quintessential example of the tragedy of the commons that if everyone is allowed, say, to take water, water will be over-exploited. This wisdom takes, however, a crucial assumption: that once the resources is taken, property rights are well established and uncontestable. What would happen if not?

Louis Hotte, Randy McFerrin and Douglas Wills show that reverting this assumption can have a dramatic impact. Suppose that you took a freely available resource, but that now anyone can contest your ownership of that resource. Depending on the consequences, you may not want to extract in the first place. It thus matters in which way the state is weak. If it is weak in that it gives away rights to natural resources, then there will be over-exploitation. If it is weak in that it cannot enforce property rights in general, and in particular when it comes to bring product to the market, then it is the Wild West and under-exploitation may ensue. Theft is a powerful mechanism to kill markets.

Pollution has an impact on worker productivity

Pollution regulation is typically cast as a game between citizens and firms, the first suffering the consequences of pollution while the second are the origin of the pollution. In such a case, there is no incentive for firms to abate pollution, and the government has to mediate. But could a case be made that firms should be willing, individually or collectively, to reduce pollution. One way can be green labeling, which could increase the demand for their products. Another would be if firms realize pollution has an impact on their on productivity or on the labor supply.

Joshua Graff Zivin and Matthew Neidell take the worker productivity angle by using a dataset of dairy farm workers from a large farm in the Central Valley of California. In particular, they look how ozone levels impact the output of piece rate workers. At it is substantial. For example, a 10 ppb reduction of ozone increases productivity by 4.2%, noting that the standard deviation of ozone levels is 13 ppb. And if you object that some of the workers fall under minimum wage law and may not exert the right effort, be reassured, the authors took that into account. In addition, this impact happens even when the ozone level is well below the current national standards. Realizing this, industry should be more willing to accept the suggested tightening of pollution standards for ozone, and for nitrogen oxides and volatile organic chemicals that are the source of ground-level ozone.

Should there be international trade in pollution rights?

A basic principle in Economics is that of comparative advantage: a country will produce the goods that it is relatively better at producing, even it is bad at it. The traditional story usually includes relative endowments in capital and labor, and the capital intensity of goods matters. Now add environmental externalities. Comparative advantage would say that polluting production should take place were pollution is the "cheapest," that is. where it would have fewer consequences. This is the principle being the introduction of an international market for pollution rights. Such markets are already active within countries, with the idea that firms that can best control pollution will produce the polluting goods, as they need fewer pollution rights. Would this basic principle also hold across countries?

Jota Ishikawa, the late Morihiro Yomogida and Kazuharu Kiyono claim that it is not necessarily beneficial to have an international market. Indeed they point out that rich countries could import pollution rights from the poor countries, thereby further deteriorating the environment in the developed economies. So instead of relocating production, pollution is imported. It all depends on comparative advantage.

Using public firms to regulate the environment

There are various approaches to regulate the pollutions of firms. One can regulate them, one can tax them, or one can create a market for pollution permits. Or one can ask the firms to self-regulate them. Or the government can take over one firm and let it set an example. Which option works best depends on market conditions and how emissions can be observed.

Davide Dragone, Luca Lambertini and Arsen Palestini look at a Cournot oligopoly for the last option. We know that when competition is less than perfect, less will be produced, which is good when the externality is negative. To adjust production to the right level, the public firm choose output and price to coerce the private firms to do the right thing. Basically, the latter are forced to internalize the externality. But this only works if there are not too many firms. The public firm reduces output such that the private one reduce as well, due to lower aggregate output and increased market power. One could thus imagine the government simply shutting down firms. But of course, this is valid only if there is no free entry in the industry, a big if.

Paying farmers for landscaping

Switzerland has had for centuries a rather unique system of communal land tenure for the alpine areas. Indeed, cattle owners send their livestock up from the villages for the Summer season, and these grazing areas are commonly owned and rights to them are inherited. The returns of agriculture in the mountainous areas are, however, far from competitive in this era of globalization, and Switzerland has resorted to compensating farmers for keeping the cows up there. The reason is that cows and some other farming bring landscaping benefits, for example keeping the grass short improves snow management for avalanche prevention and skiing, or preserves biodiversity and prevents invasive plants to take foothold. These direct payments are very close to making farmers civil servants. Note that payments depend on the size of the farm, its location, the treatment of animals and the general ecological friendliness of the business.

A pair of recent papers analyze the new situation for farmers in the Swiss Alps. Chiara Calabrese and Gabriele Mack used an agent-based model to study how incomes of a large number of heterogeneous livestock farmer families would evolve until 2020. Different scenarios are explored (a not described status quo, more subsidy for summered livestock and lump sum subsidy to all alpine farmers proportional to farmed area). Results are not unexpected (no change, more summered livestock and income, less of both). Prices are assumed to grow at a steady rate unknown to reader. Give the recent wide fluctuations for food, that needs to be made more explicit and additional scenarios are needed. Also, this study basically assumes that the government does not face a budget constraint and will always be willing whatever it takes to maintain a policy. At least the costs of the program should be reported.

The other study by Nadja El Benni, Stefan Mann and Bernard Lehmann looks at how these direct payments to farmers influence the distribution of incomes. Due to the terrain, farms are small almost everywhere in the country, and Gini coefficients for farmer income have been rather low compared to other countries. The new policy increased the Gini coefficients even though the payments were implemented in part to redistribute income and they constitute now 79% of a farmers income. The reason is that the disparities in market income have increased tremendously and direct payments are tied to farm size after all.