Annual Review of Resource Economics - Volume 3, 2011

In this paper I report on work that has aimed at measuring and understanding the sources of productivity differences among firms and their changes over time. These issues have been investigated at the micro level, which is the decision-making level. The relationship between inputs and the economic environment is informed by an underlying economic model. The issues involved in the specification and estimation of production functions are related to the role played by errors in production and optimization decisions. Under this general umbrella, the paper traces my interaction with the literature on some key subjects in production and supply. Turning to the macro level, I review subjects related to the analysis of agriculture as a sector of the economy and the determinants of agricultural growth. The incentives and constraints are affected by sector-specific and sector-neutral policies, by world prices, and by the implementation of new technology. The paper concludes with a review of empirical work on these subjects.

We observe that the value of the gross natural increment in natural capital is the appropriate entry in the income side of the national accounts, when “greened.” This entry is zero for the special case of nonrenewable resources. Greening is motivated by the desire to account for the value of changes in the size of the stock of natural capital in net national product. We also report on the problem of the use of distorted prices in national accounting.

The joint implications for welfare measurement of three recent literatures are considered: the behavioral welfare economics literature, the structural versus reduced form debate in econometrics, and the use of sufficient statistics for characterizing behavior. The first permits the revealed preference paradigm to include a wide variety of so-called anomalous behavioral criteria. Sufficient statistics permit aggregation under heterogeneous behavioral criteria, not only heterogeneous characteristics, to facilitate meaningful economic welfare analysis. Atheoretic reduced form econometrics and traditional treatment-effect econometrics do not support welfare analysis, but marginal treatment-effect econometrics is useful for a certain type of policy problems. More generally, estimation of sufficient statistics requires theory-based reduced form econometrics. Sufficient statistics are further suggested for general equilibrium welfare measurement. Under certain assumptions about endogenous government behavior, robust concepts of economic welfare measurement emerge that rationalize the terminology and concepts of traditional welfare economics, although with a much broader conceptual basis.

Federal regulatory policy and the evaluation of regulations using benefit-cost analysis continue to be quite contentious. Advocates for more regulation claim that benefit-cost analysis loses information and impedes our understanding of the real beneficial consequences of regulatory action. Against this backdrop, economists and advocates of economic analysis have sought to improve the quality and technical content of benefit-cost analysis. This article examines key changes made by the 2003 guidelines in Circular A-4 for regulatory analysis issued by the U.S. Office of Management and Budget in an effort to strengthen such analysis. We discuss the motivation and basis for these changes—the treatment of discount rates and uncertainty and the cost-effectiveness analysis for rules affecting health and safety—and evaluate the U.S. Environmental Protection Agency's response to the A-4 changes in its analysis of environmental rules.

Periodically, the global economy experiences great commodity booms and busts, characterized by a broad and sharp comovement of commodity prices. There have been two such episodes since the Korean War. The first event peaked in 1974 and the second in 2008, 34 years apart. Both created major economic and political shocks, including fallen governments and human suffering due to high food prices. Each occurrence raised serious concerns over food and energy security and led to more government intervention in the commodity markets. Although there is no simple explanation for what causes such complex events, they do share similar characteristics. We find at the core of these cycles a set of contemporaneous supply and demand surprises that coincided with low inventories and that were magnified by macroeconomic shocks and policy responses. In the next few decades, the world faces the prospect of continued increases in the demand for commodities and greater uncertainty about supply. However, because market participants are likely to respond by increasing inventory holdings and investing in new technologies, we see no reason to expect an increase in the frequency of dramatic commodity booms and busts.

Quality considerations are increasingly important drivers of production and coordination choices for players in the agrofood chain. Incentive contracts between farmers and processors, shippers, and other buyers are an increasingly popular means of coordinating to improve food quality. This review examines the economic literature regarding incentive contracts and the provision of food quality, with a focus on empirical analyses. Studies of specific value chains find that a desire for higher quality or specific quality attributes increases the likelihood that a contract, rather than the spot market, is used. Consistent with economic theory, studies regarding the selection of contract provisions find that financial incentives are used when an attribute is easily observable at the time of sale, whereas requirements for specific inputs and actions tend to be used when an attribute is not easily observable.

In 1994, nutritional facts panels became mandatory for processed foods to improve consumer access to nutritional information and to promote healthy food choices. Recent applied work is reviewed here in terms of how consumers value and respond to nutritional labels. We first summarize the health and nutritional links found in the literature and frame this discussion in terms of the obesity policy debate. Second, we discuss several approaches that have been used to empirically investigate consumer responses to nutritional labels: (a) surveys, (b) nonexperimental approaches utilizing revealed preferences, and (c) experiment-based approaches. We conclude with a discussion and suggest avenues of future research.

We show that grandfathering fishing rights to local users or recognizing first possessions is more dynamically efficient than auctions of such rights. It is often argued that auctions allocate rights to the highest-valued users and thereby maximize resource rents. We counter that rents are not fixed in situ but rather depend additionally upon the innovation, investment, and collective actions of fishers, who discover and enhance stocks and convert them into valuable goods and services. Our analysis shows how grandfathering increases rents by raising expected rates of return for investment, lowering the cost of capital, and providing incentives for collective action.

The literature on game theory and fisheries is reviewed, beginning with the initial papers from the late 1970s on cooperative and noncooperative games. Later developments considered repeated games and trigger strategies as well as the stability of coalitions. It is argued that the latter literature is overly pessimistic in that it does not pursue breakdown of successive coalitions to its ultimate end, which may provide a worse outcome than an apparently unstable coalition. The choice of strategic variable is considered at some length, but in the existing literature this choice is seldom explicitly motivated. Similarly, the spatial distribution of fish is seldom analyzed in the existing literature, but it could make a difference. This article looks at fishing in a common pool, fishing in separate pools with interacting substocks, and sequential fishing. Fishing on the high seas is discussed and the enforcement issue identified as an underresearched problem. Imperfect information on fish stocks and their migrations is also underresearched.

Much of the improvement in living standards in developed and developing countries is attributable to the exploitation of nonrenewable and renewable resources. The problem is to know when the exploitation occurs at rates and with technologies that are sustainable. If the technologies used are not sustainable, resource exploitation presents a serious problem for the future because welfare will decrease. A long-term management perspective is needed to avoid irreversible degradation of renewable resources. This article examines major challenges to natural resource management as well as policy options.

We review key developments in the cost-benefit analysis of water projects, including conceptual and empirical issues. We emphasize general equilibrium and dynamics, in particular the links between economic and ecological systems.

Regulation of hazardous waste and cleanup of contaminated sites are two major components of modern public policy for environmental protection. We review the literature on these related areas, with emphasis on empirical analyses. Researchers have identified many behavioral responses to regulation of hazardous waste, including changes in the location of economic activity. However, the drivers behind compliance with these costly regulations remain a puzzle, as most research suggests a limited role for conventional enforcement. Increasingly sophisticated research examines the benefits of cleanup of contaminated sites, yet controversy remains about whether the benefits of cleanup in the United States exceed its costs. Finally, research focusing on the imposition of legal liability for damages from hazardous waste finds advantages and disadvantages of the U.S. reliance on legal liability to pay for cleanup, as opposed to the government-financed approaches more common in Europe.

Economics plus epidemiology provide models of infections and associated behavior of private individuals. They show how infections generate problems of dynamic externalities, scope for government to offset externalities, and problems of the second best when government cannot or does not. Features of these models affect conclusions about individual behavior and government policy: the transition states into and out of infection; the nature of matching among susceptibles and infecteds; the opportunities for prevention, including vaccination, and for therapies and their costs; and the targeting of these health interventions at people, depending on health status. There may be multiple endemic optimal steady states.

This review discusses the ways in which countries are affected by natural disasters, depending on their socioeconomic characteristics, their level of development, and their inherent levels of natural disaster risk. We also explore various aspects of ex ante disaster mitigation such as improvements in natural disaster risk information and natural disaster insurance markets, as well as ex post responses to natural disaster in the form of postdisaster aid and long-run growth prospects. By highlighting some of the recent findings in this literature, we synthesize what we know about the economics of natural disasters and identify research areas of interest for future work.

The value of mortality risk reduction is an important component of the benefits of environmental policies. In recent years, the number, scope, and quality of valuation studies have increased dramatically. Revealed-preference studies of wage compensation for occupational risks, on which analysts have primarily relied, have benefited from improved data and statistical methods. Stated-preference research has improved methodologically and expanded dramatically. Studies are now available for several health conditions associated with environmental causes, and researchers have explored many issues concerning the validity of the estimates. With the growing numbers of both types of studies, several meta-analyses have become available that provide insight into the results of both methods. Challenges remain, including better understanding of the persistently smaller estimates from stated-preference than from wage-differential studies and of how valuation depends on the individual's age, health status, and characteristics of the illnesses most frequently associated with environmental causes.

The growing literature on ecosystem services suggests that these benefits are the direct or indirect contributions that ecosystems make to the well-being of human populations. Although the approach to valuing ecosystem services seems straightforward, in practice there are a number of challenges. The majority of ecosystem services are not marketed, and it is often difficult to determine how changes in ecosystem structure, functions, and processes influence the quantities and qualities of ecosystem service flows to people. Only when these difficulties are overcome is it possible to use existing valuation methods to assess the impact on human well-being that results from a change in ecosystem services. The example of wetland ecosystems and case studies from developing economies, the United States, and Europe are discussed to illustrate these issues involved in pricing nature.

Non-point-source (NPS) pollution refers to a form of pollution in which neither the source nor the size of specific emissions can be observed or identified with sufficient accuracy. In NPS pollution the ambient concentration of pollutants associated with the individually unobserved emissions is typically observed. NPS pollution due to agricultural runoff is a major source of water pollution, eutrophication, and hypoxia. Due to informational asymmetries and stochastic effects, the use of traditional environmental policy instruments such as emissions taxes or tradable quotas to regulate NPS pollution is very difficult. This article reviews the main theoretical approaches, up to the present, to the regulation of NPS pollution—input-based schemes, ambient schemes, and endogenous monitoring—and discusses issues associated with NPS pollution regulation and their relation to the theoretically proposed instruments.

The past decade has witnessed significant advances in the microeconometric analysis of recreation data. In this review, we focus on two areas in which these innovations have been especially prolific: accounting for unobserved preference heterogeneity and controlling for unobserved and possibly endogenous site characteristics, such as congestion. Failure to appropriately address these issues with the nonlinear models typically used in recreation demand analysis can severely bias parameter and welfare estimates. We consider these issues of widespread importance within and beyond recreation demand applications. We also expect these estimation challenges to become more ubiquitous as the field gradually moves toward region-wide, multisite applications in reaction to large-scale environmental changes.

Reflecting the emphasis of recent work in the field of trade and the environment, this review focuses on empirical issues, primarily econometric estimates of the pollution haven effect and simulation-based calculations of carbon leakage. A brief discussion of the theory explains why intuition from partial equilibrium models may not carry over to a general equilibrium setting.