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Annual Review of Resource Economics - Volume 2, 2010
Volume 2, 2010
- Preface
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On the Increasing Role of Economic Research in Management of Resources and Protection of the Environment
Vol. 2 (2010), pp. 1–11More LessThis paper follows precedent in mixing substantive matters related to resource and environmental economics with an autobiographical framework. Unavoidably, this pushes the contents toward my own contributions to the field—especially those that, in my belief, have not received the attention they merit. After following precedent and beginning with some words on my origins and my subsequent affiliations, I focus on several examples showing how economic analysis has helped to illuminate this subject that is so critical for the general welfare. I begin with the origins of our understanding of externalities and their increasing role in the literature on the subjects under discussion here. Second, I turn to the issue of effective policy measures and the political obstacles that impede their adoption. As part of this, I discuss markets in emission permits as a way to make the Pigouvian taxation approach more palatable. I show that these two are basically equivalent, but the same is not true of the carrot and the stick approaches—i.e., taxes on emissions and subsidy rewards for reducing such environmental damage. Third, I use a Leontief approach to show how the benefits of the use of substitutes for scarce resources are commonly exaggerated and can inadvertently hasten depletion of a scarce resource, despite appearing to contribute to preservation. Finally, I turn to as-yet-unpublished material, which shows that the cost disease model I have used to account for the persistent, cumulative, and rapid rise in the real cost of activities such as health care, education, and the performing arts also describes and explains the pecuniary source of much of the threat that currently besets the environment—paradoxically doing so through the decreasing real costs of other products that are an inescapable companion to the rising costs that beset other economic activities.
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Empirical Challenges for Risk Preferences and Production
Vol. 2 (2010), pp. 13–31More LessThe importance of risk preferences in agricultural production has long been identified as an important and preeminent issue of policy relevance. Recent developments in the study of production risk have called into question much of the core of risk production research. This article provides an overview of the prominent literature attempting to quantify the impact of risk preferences on production and a discussion of the recently discovered challenges. These challenges are typified by (a) an inability to discern risk preferences, (b) an inability to discern the factors that relate to risk preferences, (c) evidence that prior estimation has severe problems, and (d) a general failure of current models to address the important policy or behavioral issues. Although some of these challenges may appear at first blush to be insurmountable, we suggest a new agenda for risk research in production that directly addresses each of these issues.
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Real Options in Resource Economics
Vol. 2 (2010), pp. 33–52More LessIn the real options approach to capital budgeting, plans that allow for flexibility in the design or timing of an investment or economic action are valuable. Real options naturally arise in decisions to develop, extract, or harvest natural resources. We (a) review the existing literature in the economics of forestry, fishery, water, and nonrenewable resources; (b) illustrate the real options approach in resource economics through a series of simple models; and (c) suggest open questions and new areas of application when taking a real options approach to the development and management of natural resources.
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Economics of Health Risk Assessment
Vol. 2 (2010), pp. 53–75More LessThe methods that scientific and technical experts have developed for constructing quantitative assessments of health and safety risks have major shortcomings as tools for decision analysis. We use a model of cost-effective risk management under uncertainty to discuss shortcomings of standard risk assessment methods as decision support aids, including problems of (a) comparability of risk estimates and costs of saving statistical lives from compounded conservatism and (b) lack of flexibility in modeling regulatory intervention. Offsets and risk shifting due to regulation-induced changes in firm and household behavior show that risk assessments need to incorporate economic and behavioral science models. Empirical studies demonstrate that the tools of economic analysis can help risk assessments generate much richer information sets both at the overarching level of embedding risk assessments in decision-theoretic frameworks for risk management decisions and at the internal level by giving risk assessments the capacity to capture the effects of behavioral changes on risk.
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Invasive Species and Endogenous Risk
Vol. 2 (2010), pp. 77–100More LessInvasive species policy is an economic issue. People affect the spread of invasive species, and these invaders affect people. This review discusses bioeconomic modeling using endogenous risk theory to capture the idea of jointly determined ecological and economic systems. This perspective adds precision to risk assessment and cost-benefit estimation. Bioeconomic modeling can help increase the chance of developing policies that promote better invasive species protection at lower cost. Several key points emerge. Differentiating between import- and export-related externalities determines the ability of agents to manage risk. A manager has four general economic strategies to mitigate invasive species risk and associated damages: prevention, eradication, control, and adaptation. When flexibility and timing play a critical role, a real options framework becomes the more appropriate analytical framework relative to traditional cost-benefit analysis. For many invasive species, valuation exercises will involve eliciting preferences to delay in the inevitable invasion and spread.
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Managing Infectious Animal Disease Systems
Vol. 2 (2010), pp. 101–124More LessWe review the bioeconomic and disease ecology literatures on managing the spread of infectious diseases among and between wild and domestic animals. Management recommendations derived from these two literatures are compared and shown to differ due to the way each treats human behaviors. Conventional disease ecology models treat human behaviors as external to the disease system, whereas bioeconomic analysis treats behavior as an internal component of a jointly determined human-disease ecology system. The complexities of animal disease systems, including multiple state variables and imperfect controls, are shown to influence the overall level of optimal disease control, the optimal allocation of controls across species and activities, and long-run outcomes. Eradication is not always optimal, nor may it be optimal to pursue a steady-state outcome. Human responses to disease risks in decentralized settings are also examined. Finally, we conclude with a discussion of future research avenues.
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Antibiotic Effectiveness: New Challenges in Natural Resource Management
Vol. 2 (2010), pp. 125–138More LessProblems of optimal natural resource extraction that were first addressed by economists in the contexts of fisheries and forests have reemerged in the context of a newly recognized resource: antibiotic effectiveness. This review introduces economists to the growing literature on optimal use, innovation, and regulation of antibiotic effectiveness. Along the way, we draw links and parallels to similar problems in the management of other resources with which economists may be more familiar, and we address new questions that have arisen in the context of antibiotic effectiveness but that are also relevant to other resources.
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The Life Satisfaction Approach to Environmental Valuation
Vol. 2 (2010), pp. 139–160More LessIn many countries, environmental policies and regulations are implemented to improve environmental quality and thus individuals' well-being. However, how do individuals value the environment? In this paper, we review the life satisfaction approach (LSA), which represents a new nonmarket valuation technique. The LSA builds on the recent development of subjective well-being research in economics and takes measures of reported life satisfaction as an empirical approximation to individual welfare. Microeconometric life satisfaction functions are estimated, taking into account environmental conditions along with income and other covariates. The estimated coefficients for the environmental good and income can then be used to calculate the implicit willingness to pay for the environmental good.
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The Benefit-Transfer Challenges
Vol. 2 (2010), pp. 161–182More LessPresidential Executive Order 12,866 requires federal agencies to design “cost-effective” regulations and to assess “costs and benefits” of these regulations on the basis of “the best reasonably obtainable scientific, technical, economic, and other information.” Benefit transfers are one economic approach used to estimate these benefits and costs, and the use of existing economic information to predict the effects of new policies is well established. However, advancing the practice of benefit transfers is crucial if economists are to play a role in developing federal policies. We review contributions to the benefit-transfer literature and present a unified conceptual framework to guide the design and evaluation of benefit-transfer guidelines.
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Consumer Surplus with Apology: A Historical Perspective on Nonmarket Valuation and Recreation Demand
Vol. 2 (2010), pp. 183–207More LessWhen economists first turned to applied benefit-cost analysis in the 1930s and 1940s, prices were the only widely accepted measure of benefits. Perhaps surprisingly, economists did not consider measures like consumer surplus, which seemed quite foreign. Consequently, when they turned to nonmarket valuation for goods like outdoor recreation, their constructed demand curves seemed less informative than a simple equilibrium price. As they struggled with how to make use of such information, natural resource economists set important precedents for the larger profession in coming to consumer surplus as a new measure of benefits. By creating important precedents and learning through practice, they shaped the discipline as much as they were shaped by received theory. At the same time, by coming to these notions in the context of political debates, they were also shaped by the norms of the state.
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What Have We Learned from 20 Years of Stated Preference Research in Less-Developed Countries?
Vol. 2 (2010), pp. 209–236More LessOver the past two decades, hundreds of stated preference studies have been conducted in less-developed countries. This article examines what has been learned on the methodological front from stated preference research, and it summarizes the empirical evidence from stated preference studies about household preferences in less-developed countries. The main conclusion is that households' willingness to pay for a wide range of goods and services offered to respondents in stated preference scenarios is low, in both relative and absolute terms and in comparison to the costs of service provision. This article discusses why this finding is important for development professionals. The article also identifies what is missing from the literature on stated preference studies in less-developed countries.
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Providing Safe Water: Evidence from Randomized Evaluations
Vol. 2 (2010), pp. 237–256More LessThis paper uses a public economics framework to review evidence from randomized trials on domestic water access and quality in developing countries and to assess the case for subsidies. Water treatment can cost-effectively reduce reported diarrhea. However, many consumers have low willingness to pay for cleaner water; few households purchase household water treatment under retail models. Free point-of-collection water treatment systems designed to make water treatment convenient and salient can generate take-up of approximately 60% at a projected cost as low as $20 per year of life saved, comparable to vaccine costs. In contrast, the limited existing evidence suggests that many consumers value better access to water, but it does not yet demonstrate that better access improves health. The randomized impact evaluations reviewed have also generated methodological insights on a range of topics, including (a) the role of survey effects in health data collection, (b) methods to test for sunk-cost effects, (c) divergence in revealed preference and stated preference valuation measures, and (d) parameter estimation for structural policy simulations.
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Costs of Mitigating Climate Change in the United States
Vol. 2 (2010), pp. 257–273More LessWe consider the large range of estimated costs of meeting U.S. climate policy targets. Some of this range is due to different studies using different cost measures, and in principle such differences could be eliminated by more careful comparisons and greater transparency in studies that estimate costs. Still another source of differences is how the proposed policy is represented. Here, again, this source of difference could be reduced by more careful comparison and by better definition of implementation details. Even if these sources of difference could be eliminated, there would remain substantial uncertainties because of the difficulties of projecting economic activity over the long horizon of proposed policies. We show the importance of several of these factors, using a consistent modeling framework.
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Innovation and Climate Policy
Vol. 2 (2010), pp. 275–298More LessReducing emissions of the greenhouse gases that cause climate change will require dramatic changes in the way that energy is produced and consumed. The cost of technological changes such as alternative energy sources and improved energy efficiency will play a large role in determining the overall cost of combating climate change. Government policy will heavily influence the development of such technologies. Both environmental and R&D policies provide incentives encouraging the development of clean technologies. Understanding the incentives provided by these policies, and their influence on the development of new technologies, is important for understanding the ultimate effects of climate policy. This article reviews the literature on environmental innovation and diffusion, with a focus on studies relevant to the development of clean energy technologies necessary to address climate change. I discuss the implications of this literature for the development of climate policy.
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Economic Incentives and Global Fisheries Sustainability
Vol. 2 (2010), pp. 299–318More LessWidespread global collapses of fisheries corroborate decades-old predictions by economists, made long before large-scale industrialization of the world's fisheries, that open access would have deleterious ecological and economic effects on fishery resources. Incentive-based alternatives (collectively called catch shares) have been shown to generate pecuniary benefits, but little empirical evidence exists for, or against, a link to global fisheries sustainability. We report and expand on an analysis of >11,000 fisheries worldwide, in which we investigated the causes of fisheries collapse from 1950 to 2003. Using a program evaluation design, we found that catch shares prevent and, in some specifications, reverse fisheries collapse. Subsequent scientific studies reinforce and challenge these findings, suggesting fruitful avenues for future research linking incentive-based resource management to sustainability.
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Regulatory Environmental Federalism
Vol. 2 (2010), pp. 319–339More LessThis survey encompasses multiple areas. The theoretical literature on environmental federalism continues to expand in areas such as capital competition and political economy. On the empirical side, emphasis is put on the existence of strategic interaction among states, the effects of President Reagan's decentralization of environmental policy, and possible free-riding behavior. Moreover, the European Union is currently conducting a major policy experiment with its emissions trading scheme, which has implications for policy making in federal systems.
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Product Differentiation and Quality in Food Markets: Industrial Organization Implications
Vol. 2 (2010), pp. 341–368More LessThis paper summarizes and evaluates recent research on food product quality and differentiation, both key dimensions of modern food markets. We emphasize the implications for modeling of violation of the product homogeneity and perfect information axioms of perfect competition and focus on issues that are important and/or unique to agriculture. We first review modeling approaches for studying competition in differentiated-agricultural-product markets and then address research in the areas of product quality, labeling, and certification. A unique aspect of agricultural industries is the autonomy that they often have to engage in collective action and self-regulation through producer-controlled marketing organizations. We investigate the role of these organizations in influencing and certifying product quality and in creating product differentiation.
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Agricultural Labor and Migration Policy
Vol. 2 (2010), pp. 369–393More LessFarmers in high-income countries invest in the political process to gain access to foreign workers, with potentially far-reaching social welfare ramifications both at home and abroad. This review examines the unique features of the farm labor market that result in an intimate relationship between some types of agricultural production and migration policy. A theoretical model and Monte Carlo simulations are used to illustrate the farm labor problem. The agricultural labor history of the United States and comparisons of experiences across countries reveal a diversity of policies to secure workers for farms through immigration. There are reasons, however, to question the sustainability of a labor-intensive agricultural system's dependence upon low-cost imported labor.
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