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- Volume 4, 2012
Annual Review of Resource Economics - Volume 4, 2012
Volume 4, 2012
- Preface
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A Conversation with Arnold Harberger
Vol. 4 (2012), pp. 1–26More LessThe Annual Review of Resource Economics presents Dr. Richard E. Just in conversation with economist Dr. Arnold Harberger. Dr. Harberger is Professor Emeritus at the University of Chicago and is currently a professor at the University of California, Los Angeles. Dr. Harberger has had an incredible impact on the field of public finance, especially in taxation and exchange policy, in both academic and policy circles. What sets his work apart is an emphasis on elucidating major issues of practical importance with understandable simplicity and transparency while at the same time tackling the general equilibrium dimensions of policy issues of importance at the national level. In this interview, Dr. Harberger talks about his career as well as about his views on theories in economics.
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Adoption Versus Adaptation, with Emphasis on Climate Change
Vol. 4 (2012), pp. 27–53More LessThis article presents lessons from the rich adoption literature for the nascent research on adaptation. Individuals' adoption choices are affected by profit and risk considerations and by credit and biophysical constraints. New technologies spread gradually, reflecting heterogeneity among potential adopters, processes of learning and technological improvement, and policies and institutions. Adaptation is the response of economic agents and societies to major shocks. We distinguish between reactive and proactive adaptation. The latter is important in the context of climate change and consists of mitigation, reassessment, and innovation that aim to affect the timing and location of shocks. Adaptation strategies also include adoption of innovation and technology transfer across locations, insurance and international trade, and migration and invasions. Recent research emphasizes multidisciplinary collaborations; historical analysis; and the roles of returns to scale of key technologies, social networks, behavioral economics, path dependency, and ex ante adjustment in explaining patterns of adoption and adaptation.
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Including Jobs in Benefit-Cost Analysis
Vol. 4 (2012), pp. 55–73More LessPublic policies may affect employment by directly creating jobs or facilitating job creation. In labor markets with high unemployment, such employment changes may have significant net efficiency benefits, which should be included in benefit-cost analyses. The research literature offers diverse recommendations on measuring employment benefits. Many of the recommendations rely on arbitrary assumptions. The resulting employment benefit estimates vary widely. This article reviews this literature and offers recommendations on how to better measure employment benefits using estimable parameters. Guidance is provided on measuring policy-induced labor demand, estimating the demand shock's impact on labor market outcomes, and translating labor market impacts into efficiency benefits. Two measures are proposed for efficiency benefits, one relying on adjusted reservation wage gains and the other relying on adjusted earnings gains.
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Behavioral Economics and Environmental Policy
Vol. 4 (2012), pp. 75–99More LessThis article provides an interpretive survey on implications of insights from behavioral economics for environmental policy. In particular, it discusses whether, and if so how, policy implications based on conventional economic theory have to be modified when insights from behavioral economics are considered. More specifically, it discusses concerns for cooperation, fairness, self-image, social approval, and status. Moreover, it addresses potential crowding-out effects, context-dependent and incoherent preferences, risk misperceptions, ambiguity aversion, and regulator bias. We conclude that behavioral economics has a lot to offer environmental economics and that some normative policy recommendations have to be modified. Yet the most fundamental policy recommendations in environmental economics generally prevail and are sometimes even reinforced through behavioral economics insights.
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Environmental Tax Reform: Principles from Theory and Practice
Vol. 4 (2012), pp. 101–125More LessOn the basis of the environmental tax literature, this article recommends a system of upstream taxes on fossil fuels, combined with refunds for downstream emissions capture, to reduce carbon and local pollution emissions. Motor fuel taxes should also account for congestion and other externalities associated with vehicle use, at least until mileage-based taxes are widely introduced. An examination of existing energy/environmental tax systems in Germany, Sweden, Turkey, and Vietnam suggests that there is substantial scope for policy reform. Policy options include harmonizing taxes for pollution content across different fuels and end users, better aligning tax rates with (albeit crude) values for externalities, and scaling back excise taxes on vehicle ownership and electricity use that are redundant (on environmental grounds) in the presence of more targeted taxes.
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Carbon Sequestration in Forests and Soils
Roger Sedjo, and Brent SohngenVol. 4 (2012), pp. 127–144More LessForests can play a large role in climate change through the sequestration or emission of carbon, an important greenhouse gas; through biological growth, which can increase forest stocks; or through deforestation, which can increase carbon emissions. Carbon is captured not only in tree biomass but also in forest soils. Forest management and public policy can strongly influence the sequestration process. Economic policies can provide incentives for both forest expansion and contraction. Systems that provide prices for carbon sequestration or taxes for emissions can have important effects on emission and sequestration levels. Issues involve carbon additionality, permanence, and leakage. Forest measurement, monitoring, and verification also provide serious challenges. Various economic models are used to estimate the effects of various economic policies on forest carbon stocks. Estimates from the literature of some actual and potential levels of forest carbon are presented.
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An Overview of Carbon Offsets from Agriculture
Vol. 4 (2012), pp. 145–160More LessAlthough climate change has largely been removed from the federal policy agenda of the United States in the near term, the continued reliance on fossil fuels as a dominant energy source leaves many analysts to conclude that climate policy will eventually reappear on that agenda. We present a review of recent research related to the design and implementation of one instrument for greenhouse gas (GHG) reduction: offsets. As these are implemented, policy makers must understand the way these programs work. In this review, we describe the basic features of carbon offset markets, along with the potential supply of offsets from agricultural sources and associated cost considerations. In this discussion we highlight the role of institutional design of contracts and transactions costs. We then turn to the benefits of including offsets in policies to reduce GHGs and complete the review with a discussion of the challenges in implementing the programs.
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Measuring Indirect Land Use Change with Biofuels: Implications for Policy
Vol. 4 (2012), pp. 161–184More LessThe indirect land use change (ILUC) effect of biofuels has called into question the greenhouse gas (GHG) mitigation benefit of biofuels compared with that of fossil fuels. This article reviews the various economic modeling approaches being used to assess the ILUC effect and discusses the key factors that influence estimates of its magnitude. We find that there is considerable variability in the magnitude of ILUC associated with a biofuel pathway across studies and within a study, depending on underlying model parameters. These estimates are sensitive to the scale of biofuel production, the mix of policies and biofuels considered, variations in the parametric assumptions that govern price transmission through international trade, and the ease of changes in land use at the intensive and extensive margins. We discuss the challenges in implementing policies to address ILUC.
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Commodity Prices over Two Centuries: Trends, Volatility, and Impact
Vol. 4 (2012), pp. 185–206More LessDoes trade raise growth rates of commodity exporters less than those of industrial goods exporters? Do industrial countries gain more from trade? Do world trade booms over the past two centuries help account for the widening gap between rich and poor countries because of some asymmetric growth impact? These old questions can now be answered with hard evidence, and the answer is yes to all three. World trade booms have always been associated with commodity price booms and thus with terms-of-trade improvements favoring the commodity exporter. But whereas commodity exporters' GDP levels increased—that is, they gained from trade—their growth rates either did not increase or increased by much less than did rates of their industrial trading partners. This survey reports these results for the period 1800–1939, but it also shows how this so-called resource curse history has changed in recent decades.
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On the Value of Agricultural Biodiversity
Vol. 4 (2012), pp. 207–223More LessCrop biodiversity is very important for both the functioning of ecological systems and the generation of a vast array of ecosystem services. More agricultural biodiversity is associated with higher agriculture production and lower risk exposure. This article explores the recent contributions on the economics of agrobiodiversity. The focus is (mostly) on the empirical literature. Future issues are also highlighted.
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The Economics of the Food System Revolution
Vol. 4 (2012), pp. 225–264More LessA revolution in food systems—food supply chains upstream from farms, to the food industry in the midstream segments of processing and wholesale and in the downstream segment of retail, then on to consumers—has been under way in the United States for more than a century and in developing countries for more than three decades. The transformation includes extensive consolidation, very rapid institutional and organizational change, and progressive modernization of the procurement system. In this article we examine the economics of these system-wide changes. We argue that the steps of conceptualizing and empirically researching this transformation—its patterns and trends, determinants, and impacts on farms and processing small and micro enterprises—are still in their infancy because of (a) remaining limitations on data suitable for formal modeling and hypothesis testing and (b) the sheer complexity of food system–related decisions that need to be modeled and understood. With the rapid accumulation of high-quality data now under way, conceptual and theoretical progress is also likely to be rapid.
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Agricultural Trade: What Matters in the Doha Round?
David Laborde, and Will MartinVol. 4 (2012), pp. 265–283More LessThis survey concludes that including agriculture in the negotiations was particularly important economically. Although agricultural exports are less than 10% of merchandise trade, the high and variable protection in this sector appears to account for the majority of the cost of distortions in global merchandise trade. Within agriculture, most of the costs appear to arise from trade barriers levied on imports, because these barriers tend to be high and variable across products and over time and are levied by many countries that do not use subsidies. The diverse interests of participants resulted in very complex proposals and a tendency for countries to focus on the political costs of an agreement, rather than on the potential economic benefits. The negotiations faced a need for balance between discipline in reducing tariffs and flexibility in managing political pressures. Although the approach of providing flexibilities on a certain percentage of tariff lines is seriously flawed, the proposed modalities still appear to provide worthwhile market access. There need to be better ways of dealing with developing countries’ concerns about food price volatility while reducing the collective-action problems resulting from price insulation.
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(The Economics of) Discounting: Unbalanced Growth, Uncertainty, and Spatial Considerations
Vol. 4 (2012), pp. 285–301More LessThe economics of climate change and the various measures that should be implemented to reduce future damages are highly tied to the use of cost-benefit analysis. Traditional approaches ignore the fact that environmental amenities do not experience the same growth rate as do most of the sectors in the economy, which leads to changing relative prices. Uncertainty should also be considered, especially when one is conducting cost-benefit analysis involving the long-run damages from climate change. This article reviews some theoretical approaches to the economics of discounting and discusses issues associated with unbalanced growth, uncertainty, and spatial discounting.
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Taking Stock of Malthus: Modeling the Collapse of Historical Civilizations
Vol. 4 (2012), pp. 303–329More LessThe collapse of historical civilizations has received much attention in archeology and anthropology. The findings are in line with the ideas of the classical economist Thomas Malthus, who envisioned a society in which environmental limits crucial for livelihood bind, leading to a Malthusian trap for the society. It is easy to dismiss Malthus as painting an unrealistic global future or to say that his forecast has so far not materialized, but the evolving problem of global warming provides reasons for concern. If our biosphere were to decline drastically due to global warming, no substitute could soon take our biosphere's place. If only to be prudent, it is incumbent upon us to take stock of Malthus. We can gain insight by considering the modeling literature on collapse in resource economics. The literature explains the evolution of the historical societies and attempts to solve their problem. This literature offers a gloomy outlook, although the situation is not hopeless. There are things we can do to avoid a Malthusian outcome for the global society.
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International Trade in Natural Resources: Practice and Policy
Vol. 4 (2012), pp. 331–352More LessNatural resources account for 20% of world trade and dominate the exports of many countries. Policy is used to manipulate both international and domestic prices of resources, yet policy is largely outside the disciplines of the WTO. The instruments used include export taxes, price controls, production quotas, and domestic producer and consumer taxes (equivalent to trade taxes if no domestic production is possible). We review the literature and argue that the policy equilibrium is inefficient. This inefficiency is exacerbated by market failure in long-run contracts for the exploration and development of natural resources. Properly coordinated policy reforms offer an avenue to resource-exporting and resource-importing countries to overcome these inefficiencies and to obtain mutual gains.
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The Origins and Ideals of Water Resource Economics in the United States
Vol. 4 (2012), pp. 353–377More LessAn abbreviated history of water resource economics is reported within the context of coevolving water issues and the emerging institutions of the United States' past two centuries. Notable principles of water economics and their US origins are discussed. Some of the long-standing wisdom of the field is recalled. Landmarks for the founding doctrines of water marketing and efficient water pricing are identified.
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The New Fisheries Economics: Incentives Across Many Margins
Vol. 4 (2012), pp. 379–402More LessNew research in fisheries economics addresses incentives across many margins. These margins include within-season effects, incentives to harvest different ages and sizes of fish, responses to ecological disturbances, spatial choices, and multispecies interactions. Even developments in global seafood markets are relevant for understanding contemporary fisheries management. What connects this diverse literature is the attempt to align incentives of harvesters with the objectives of optimal management and reflections on when delineating policy instruments along particular margins is worthwhile. This theme echoes the older fisheries bioeconomic literature that first identified the commons problem and proposed solutions to it using an elegant but now principally metaphorical model of a single stock.
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