Economics – Page 132 – a sibilant intake of breath

Protecting parks

While it is excellent to have national parks established, the difficulty with making them meaningful lies in the enforcement of rules on entry and activity within the defined territory. Even American national parks are having trouble with poachers. The problem is certain to be more acute in less affluent areas, where the impulse to protect nature is more immediately threatened by poverty. Just 14 rangers patrol the 4,200 square kilometres of the Nouabale-Ndoki national park in Congo. Technology can play a part in park management: from satellite tracking and motion sensors to networks of internet connected metal detectors looking for guns and machetes.

Ultimately, technical fixes will probably not be adequate protection in the most vulnerable areas. The reasons for this are primarily economic. There is more money to be had in exploiting the content of parks than in protecting it, and there is no incentive for local people to refrain from damaging activities and be vigilant in preventing others from doing so. As with climate change, the biggest challenge lies in creating institutional and financial structures that encourage environmentally responsible behaviour. Growing recognition of that among policy-makers and the NGO community may eventually lead to much more effective enforcement mechanisms.

This article discusses the TrailGuard metal detectors in much more detail. They sound very clever, even if they are unlikely to solve any problems in and of themselves.

Cameron Hepburn on climate economics

Dr. Cameron Hepburn gave an informative presentation in the Merton MCR this evening on the economics of climate change. While it was largely a reflection of the emerging conventional wisdom, it was very professionally done and kept the audience in the packed Merton MCR asking questions right until it became necessary to disband for dinner. Dr. Hepburn, incidentally, is my friend Jennifer Helgeson’s supervisor.

My notes are on the wiki.

PS. When I imagined Oxford before coming here, the kind of rooms I imagined were more like the Merton MCR than most of the places I have actually seen. That probably derives from having my expectations defined by The Golden Compass and The Line of Beauty.

The IPCC and the cost of mitigation

The second half of the IPCC’s Fourth Assessment Report has now been released (PDF). Much like the earlier Stern Review, it was intended to assess possibilities for mitigating climate change and the costs associated with them. As with the Stern Review, the conclusion is that the problem can be dealt with at a fairly modest cost. Certainly, the sums in question are much smaller than the costs that would arise if the worst possible consequences of global warming were realized: from large-scale migration, to problems with C3 crops, to widespread agricultural failures (see this article on the ongoing Australian drought). The Economist is calling it “a bargain.”

That the Stern findings and those of the IPCC broadly agree is not at all surprising. After all, the Stern Review was based almost entirely upon the scientific conclusions of previous IPCC reports. Even so, such agreement can only help to foster increased political consensus, both within and between states, that climate change should be and can be dealt with. More than ever, it seems as though we are witnessing the start of a serious progression towards a low-carbon society.

Dealing the the problem of climate change will require unprecedented foresight and cooperation. As such, it is not unreasonable to think that the emergence of the kind of international regime that would be necessary to address it will foster cooperation in other areas. Something like global fisheries management does not have the same level of importance as addressing climate change, but the tools that will need to be developed to sort out the latter may advance our ability to behave more appropriately in relation to the former.

Nash equilibria and the environment

While A Beautiful Mind had a good deal to recommend it as a film, the explanation of the Nash Equilibrium that was included leaves a good bit to be desired. The film explained that in a situation with multiple players, a most desirable objective, and many less desirable objectives, it is rational for each player to pursue the less desirable goals. This is because everyone going after the same thing will probably lead to nobody getting it. The strategy of pursuing the less desirable but more plentiful option therefore maximizes the chances of getting some level of payoff, even though it may not be the highest payoff possible in the game.

The essential characteristic of the Nash Equilibrium is similar to that of Pareto Optimality. Basically, both describe situations in which players do not want to change their behaviours unilaterally. Pareto optimality can be most easily be explained by considering a large group of people with items to trade voluntarily. Eventually, they will trade to the point where no more voluntary exchanges will occur. The arrangement may not generate the maximum possible level of utility that could be achieved with the goods in question; for instance, a person with a large stock of insulin would not transfer any to a diabetic who had nothing to trade for it.¹ In a Nash Equilibrium, no player would want to change the strategy they are employing, given that no other players are going to change their own strategies. For the equilibrium to exist, this must be true independently from any information they might receive about the strategies of the other players. For instance, learning that other players have certain thresholds beyond which they will behave quite differently might provide an incentive for any one player to alter their strategy.

While Pareto Optimality is mostly a thought experiment, the Nash Equilibrium is directly applicable to many situations in which there are problems of coordination. For example, it can be applied to climate change policy. Assuming that the policy of each state is set independently, there is no incentive for a single state to unilaterally cap emissions. The effect of one country doing so would be small, while the cost in that country would be high. Hence, inaction is a Nash Equilibrium. It is only through the development of a system that changes the strategies of many actors that a low-carbon outcome can be achieved.

The absence of a Nash Equilibrium can also be problematic, when addressing environmental problems. Imagine a conservation regime based around an international ban on the sale of tiger products. From the perspective of any one state, there is an incentive to violate the ban, provided everyone else will maintain their strategy of conservation. The lack of a Nash Equilibrium threatens to make the regime unstable.

While elements can be built directly into such games to encourage cooperation and discourage defection, they always seem likely to encounter these two kinds of problem. As such, it may be that the only way to establish stable environmental regimes that require sacrifice for the common good is to embed them in a larger super-game. Here, defection on one issue threatens the ability of the defecting state to achieve its aims in other areas. States that continue to emit large amounts of greenhouse gas or who undermine conservation regimes might find themselves unable to enter preferential trade arrangements and the like. In a general way, the perception of a state as being a responsible or irresponsible member of the international community imposes some such pressure. To do so more formally requires the prioritization of environmental issues by all governments involved, as well as a certain strength of will in following up such threats. Despite that, it seems more plausible that such a combined approach could yield desirable outcomes, as opposed to one that focuses on narrow issue areas.

[1] This assumes that the participants derive utility only from the objects being traded, and not from higher order phenomena such as the perception that the distribution that exists is desirable or fair. Agents that place some value upon the happiness of the other agents might generate outcomes quite different from the kind envisioned in neoclassical economics.

Pondering remedy design

Sorry to be so uninteresting of late. While waiting for me to hammer my thesis together, why not read some fine web comics:

These have all been mentioned here before, but may prove novel to those who haven’t been paying very close attention. Feel free to suggest more to one another.

For random thesis mutterings, follow this link:

Continue reading “Pondering remedy design”

Equilibrium ruminations

Working on chapter three, I have been talking a lot about different kinds of equilibria, and what implications they have for environmental policy. Uncertainty about which sort we are dealing with – as well as the critical points of transition between them – make it exceptionally difficult to consider global environmental problems in cost-benefit terms.

Stable equilibria

One common view of the characteristics of natural equilibria is that they are both stable and singular. An example is a marble at the bottom of a bowl. If you push it a bit in one direction or another, it will return to where it was. Many biological systems seem to be like this, at least within limits. Think about the acid-base conjugate systems that help control the pH of blood, or about an ecosystem where a modest proportion of one species gets eliminated. Provided you like the way things are at the moment, more or less, such stable equilibria are a desirable environmental characteristic. They allow you to effect moderate changes in what is going on, without needing to worry too much about profoundly unbalancing your surroundings.

Unstable equilibria

Of course, such systems can be pushed beyond their bounds. Here, think about a vending machine being tipped. Up to a certain critical point, it will totter back to its original position when you release it. Beyond that point, it will continue to fall over, even if the original force being exerted upon it is discontinued. Both the vertical and horizontal positions of the vending machine are stable equilibria, though we would probably prefer the former to the latter. For a biological example, you might think of a forested hillside. Take a few trees, wait a few years, and the situation will probably be much like when you began. If you cut down enough trees to lose all the topsoil to erosion, however, you might come back in many decades and still find an ecosystem radically different from the one you started off with.

Multiple equilibria

The last important consideration are the number of systems where there are a very great many equilibrium options. One patch of ocean could contain a complex ecosystem, with many different trophic levels and a complex combination of energy pathways. Alternatively, it could feature a relative small number of species. The idea that we can turn the first into the second, through over-fishing, and then expect things to return to how they were at the outset demonstrates some of the fallacious thinking about equilibria in environmental planning.

The trouble with the climate is that it isn’t like a vending machine, in that you can feel the effect your pushing is having on it and pretty clearly anticipate what is going to happen next. Firstly, that is because there are internal balances that make things trickier. It is as though there are all sorts of pendulums and gyroscopes inside the machine, making its movements in response to any particular push unpredictable. Secondly, we are not the only thing pushing on the machine. There are other exogenous properties like solar and orbital variations that may be acting in addition to our exertions, in opposition to them, or simply in parallel. Those forces are likely to change in magnitude both over the course or regular cycles and progressively over the course of time.

How, then, do we decide how much pushing the machine can take? This is the same question posed, in more economic terms, when we speculate about damage curves.

Nicholas Stern on climate change

During the initial coverage of Nicholas Stern’s report on the economics of climate change, I wondered why the media was paying so much attention. After all, the man is an economist reporting on something that scores of scientists have addressed comprehensively through the IPCC process. Now that I have heard him lecture, and spoken briefly with him personally, I have a much better sense. The man is what Karen Litfin calls a ‘knowledge broker,’ translating scientific data into policy options.

His basic position is the realistic liberal optimist one:

Climate change is real and potentially devastating
It is essentially a massive economic externality
Regulating greenhouse gas (GHG) emissions is the way to stop it
This can be done at moderate cost (1% of GDP) and without a massive change in (a) the basis of economic activity within the developed world or (b) the way in which people choose to live their lives.

He acknowledges that the energy balance needs to shift dramatically. In order to be responsible, he says, we need to shift all electrical production in the rich world to carbon neutral forms (renewables, nuclear, and possibly hydrocarbons with sequestration) by 2050. By that time, land transport should also be based on power sources that do not emit GHGs, whether because they are using stored electricity, or because they use fuels that are GHG neutral. India and China need to be encouraged to sequester the CO2 emitted from their coal stations, probably at the expense of the rich world. All in all, rich states should bear 60-80% of the costs of mitigation.

He focused a great deal on atmospheric CO2 levels. His target is to stabilize between 450ppm and 550ppm. This would lead to a likely scenario where mean global temperature rises by about 2 degrees Celcius (though by much more at the poles, given the nature of the climatic system). On the basis of a ‘business as usual projection’ we will hit 450ppm in eight to ten years. To stabilize at 450ppm, we would need to slow the rate of growth in GHG emissions immediately, having it peak in 2010. Then, we would need to reduce at about 6-10% a year thereafter. If we delayed the peak to 2020, we would likely be at the 550ppm portion of the range: an area that the German head of climate change policy expressed grave concern about, during the question session. Stern himself said that 550ppm is the “absolute upper bound” which it would be “outrageous” to exceed.

As for his very controversial decision about discounting rates, I think he defended himself admirably. He broke it into two bits: the possibility there will be no future generations beyond date X (they ascribed a 0.1% chance a year to an event like a comet or gamma ray burst that would simply snuff humanity out) and the strong likelihood that people in the future will be richer. The latter means that it may be economically efficient to delay some of the costs of dealing with climate change, especially given the probability that new technology will emerge.

I need to move on to other work, though I could discuss his comments for many thousands of words. I will transfer my handwritten notes to the wiki later this evening and link them here: notes from Nicholas Stern’s 21 February 2007 address to Oxford University.

PS. A few weeks ago, my default thesis music was Jason Mraz‘s superb album “Live at Java Joe.” Now, I am listening to Enter The Haggis‘ frantic song “Lannigan’s Ball” from their album Aerials over and over again.

The Landlord’s Game

Lee Jones, author of in vino veritas, recently posted a surprising statement about the origins of the game Monopoly, the best selling commercial board game in the world:

Monopoly was designed in 1903 by a Quaker named Elizabeth Magie, who intended the game to highlight the evils of private property. Her version included squares like ‘Lord Bluebood’s Estate’ and ‘Soakum Electric Company’. A 1927 version stated in its rulebook:

“Monopoly is designed to show the evil resulting from the institution of private property. At the start of the game, every player is provided with the same chance of success as every other player. The game ends with one person in possession of all the money. What accounts for the failure of the rest, and what one factor can be singled out to explain the obviously ill-adjusted distribution of the community’s wealth, which this situation represents? Those who win will answer ‘skill’. Those who lose will answer ‘luck’. But maybe there will be some, and these, while admitting the element of skill and luck, will answer with Scott Nearing [a socialist writer of the time] ‘private property.’ “

Lee takes this as a demonstration of the power of capitalism to co-opt and subvert criticism (reach for your Gramsci everyone). This understanding also makes me think about Rousseau‘s statement that “”The first man who, having fenced in a piece of land, said “This is mine,” and found people naïve enough to believe him, that man was the true founder of civil society.”

One of the more obvious products of recent economic development has been a trend towards large increases in the income of the most well-off coupled with fairly modest ones for those of moderate income. This is true both internationally and within countries including Canada, Britain, and the United States. The willingness of people to tolerate that differential – whether justified by merit, libertarianism, or some other doctrine – would seem to hinge upon the same sorts of considerations as those which have transformed the societal understanding of the game of Monopoly.

PS. I wrote previously on executive pay and income inequality.

Executive pay

This week’s Economist features a survey on executive pay that basically argues that, while there have been excesses, executive pay is generally awarded in a fair and legal way. The crux of the matter, as presented, is that executives earn less in pay than they add to the value of the company. More specifically, they add more than the most qualified person willing to work for less could.

At one point, the article holds up Robert Nardelli from Home Depot as an example. When he left the company, he got a severance package of $200 million. Even if his performance did earn more than that from the company, I think a case can be made that it is fundamentally unjust for one human being to have that much money. It enormously outstrips the needs a person could possibly have, and it is awarded in a world where millions domestically and billions around the world live in poverty. While emotionally satisfying, that argument may be fallacious: poverty alleviation is not the alternative usage for this money, and there isn’t a fixed amount of the money in the world to be distributed to one thing or another. It is at least logically possible that the economic contributions of chief executives do generate societal benefits.

Is the marginal value versus marginal cost perspective really the right way to evaluate executive pay? The degree to which the public tends to view such people as little better than venomous snakes suggests that the idea clashes with general moral intuitions. (Personally, I don’t think that venomous snakes belong in the category of things to which moral judgments can be applied; they are like large falling stones.) Of course, that doesn’t advance argument very far on the matter of what could or should be done about it. As discussed before, the problem is not that inequality is inherently morally problematic, but rather that it seems impossible that the differences between one human being and another could justify such excessive differences in payment. Furthermore, the reasons for which any such differences might exist are largely the product of chance.

Climate change game

The BBC has made a free online game, in which you try to manage European policies during the next century so as to deal with climate change, all while maintaining political popularity. It is quite difficult, and perhaps not overly realistic. Dealing with energy is extremely easy (I could never even come close to selling my surplus), whereas food and water require constant management. In reality, I would expect markets to deal with food and water problems fairly easily (especially if the latter were priced intelligently), whereas large scale energy issues require government leadership. More information about the game is here.

Perhaps the greatest flaw of the game is how it deals with the popularity of initiatives. The way in which public opinion is modeled seems badly off-kilter. One would not expect to be able to get a screen at the end that says all of the following:

Well done!
Europe emitted a very low level of carbon emissions, which is likely to result in global temperatures increasing by 1.4-2.5 degrees Celsius.
You left the economy in ruins. Hyper-inflation and joblessness are endemic across Europe. People are starving and crime and lawlessness have taken hold.
You were generally liked and seemed to consider public opinion on almost all the decisions you took.

I am not sure what this ‘victory’ screen says about the BBC’s opinion on European voters, but the combination strikes me as supremely implausible. The willingness of the other world leaders to accept binding targets is also rather greater than one would expect.