Here’s a picture that will help: it shows how everything in the economy is actually linked together so considering household and business emissions separately makes no sense.

Now that may be a little simplistic but it’s good enough for our purposes here. Household emissions are measured by looking at the emissions generated in the production of goods that the household consumes. So the emissions come from producers, but the final product is consumed by households. Households provide the demand that causes the creation of goods that generate emissions in their production. So households are really responsible for ALL emissions. All emissions??? Yes, ALL of them.

What about businesses emissions? Well, businesses use goods to enable the production of other goods that households end up consuming. If there were no households buying things then there’d be no businesses making things. So this whole distinction between households’ and businesses’ emissions is really rather confusing, and more of a statistical device than a real division: one would not exist without the other.

Which brings us to the question of what you do about all these emissions from households. If we tax businesses then aren’t households getting off scot free? Absolutely not. Taxing businesses means that goods cost more to produce and, thus, cost more to purchase. Prices rise for household purchases and households decrease their consumption of carbon intensive goods. So we can actually decrease households’ carbon intensiveness by taxing the businesses alone. In fact, it the end it doesn’t really matter who you tax, the reduction in household consumption will be the same.

Not only that, but business income is what pays households’ salaries. So when businesses are taxed, and sell less, and make less money, household incomes go down. And they buy less, which reduces emissions, too.

The point is that you can’t consider household and business emissions as separate problems. They’re interlinked by the flow of goods and income in the economy. Solve one’s carbon externality problem and you solve both.

His central argument is that preferences are not stationary and can be influenced by publicly expressed attitudes. So, if the government subsidises green technologies as part of its climate change policy, then people’s preferences shift towards green products. Because the subsidy increases the production of green products, which are now preferred, total welfare might increase. Obviously the final welfare outcome depends on the coefficients on each effect, but Yakita shows that an increase in welfare is possible.

While that’s all well and good in theory it’d be nice to have some evidence of the effect. After all, it could get awfully close to saying that anything the government does is good because people will grow to love it. Yakita’s evidence for the effect comes from two industries. First, he points to the explosion of interest in hybrid cars, where sales growth has been huge despite the 50% price premium they command. Sales of hybrids in Japan have grown by 19%pa from ‘98 to ‘06, while the overall growth in car sales is ~1%pa.

Secondly he points to sales of organic food. While there may be dispute over whether organic foods are actually environmentally friendly, there is no doubt about how they are generally perceived. He reports that the organic food market has grown 15%pa over the last decade as the environmental movement has taken hold.

Those two pieces of evidence together do suggest that preference shifts have taken place. However, it’s a bit of a jump from there to suggesting that government action can instigate a preference shift. I’m willing to believe that preference shifts could make it worthwhile for the government to promote green activities to boost welfare, but I’d suggest the causation has to run from preference shift to government action rather than the other way around. Nonetheless it’s a novel way to look at the benefits of unilateral action on climate change.

To draw an analogy to university staff pay, the quality of university staff depends in part upon the difference between their university salary and their outside options. As Daniel Hamermesh puts it:

If a university went ahead and paid equally, lowering economists’ pay and raising French professors’ pay, it would have a great French staff and a dreadful bunch of economists.

Of course, Hamermesh is talking from the perspective of a US academic. In the US they pay different salaries for different disciplines. In NZ we do pay all university staff equally and the research bears out the truth of Hamermesh’s conjecture. So paying people with different market values equally is essentially a subsidy on those with low market value.

To come back to the issue of students’ fees, subsidising all students equally is a subsidy on students whose degrees have only private value. Surely, in order to be fair to all departments and all students, the subsidy on education should pay for only the social benefit. The entire private benefit to the student should be paid for by the student. At the very least the subsidy should be proportionate to the social benefit and differ across disciplines.

So who would be the winners and who would be the losers? Speculate away!

…two World Bank environmental advisers claim that instead of 18 per cent of global emissions being caused by meat, the true figure is 51 per cent.

So am I thinking about becoming vegetarian since meat is known to be more costly than I previously thought? Of course not. As tempting as it is to see these things in black and white, it’s very unlikely that the cost of meat will ever get high enough that we cease to eat it. Rather people will substitute away from eating as much meat as the price rises.

At present we don’t have to pay the social cost of meat so we overconsume it. From a moral perspective I may then choose to eat less meat than I otherwise would. It’s even possible that, because I don’t know the true cost but presume it to be extremely high, that I’d employ the heuristic of becoming vegetarian. However, I wouldn’t feel bad about eating a steak at Christmas if I did turn (mostly) vegetarian.

Studies like this really reinforce what we talk about constantly on the blog here: it’s very difficult to accurately guess what the morally right thing to do is. Without price mechanisms to guide us we fall back on rules of thumb that probably do a pretty poor job in many situations.

NB: I see Eric Crampton goes on about much the same thing in a few posts. If there’s one thing economists all agree on it’s the importance of prices!

plans … to crack down on illegal downloaders by threatening to cut their internet connections … could harm the music industry by punishing its core customers.

Now that seems like a stretch. The key here is to figure out a plausible counterfactual to the present situation. The Herald seems to be suggesting that, if these people didn’t have access to an internet connection then they’d lose all interest in music. Which is pretty unlikely! Let’s think about what might be a more plausible counterfactual.

Suppose there are two kinds of music: paid for and illegal. If illegal becomes more expensive all of a sudden – because of the risk of your internet being cut off – then two things happen. First, you’ll probably consume less music overall, because it’s more expensive now. Secondly, you’ll switch out some of your illegally obtained music for paid music because the two are substitutes. So a first look suggests that the music industry would probably be better off if the cost of illegal downloads went up, even if everyone who buys also downloads.

Of course, there could be other effects which confound the initial analysis. It is possible that a reduction in goodwill towards the music companies would shift people towards preferring illegally downloaded music. That might offset the price effects.

It may also be that, over time, demand for artists illegal and legally distributed tracks is complementary. For example, I doubt that Britney Spears needs any exposure via free downloads to boost her record sales. However, an emerging artist may gain sales as people hear of them through costless online downloads. Of course, there’s nothing to stop that artist from distributing some tracks for free in order to gain recognition. Many musicians already do that through their own websites and MP3 blogs. Indeed, the existence of illegal downloads just prevents artists like Britney from maximising their profits without offering any new means of distribution to emerging artists.

It’s hard to say which of these effects will prevail without some empirical evidence, but it’ll definitely be interesting to look at the figures once the UK has started to crack down hard.

Meat is a wasteful use of water and creates a lot of greenhouse gases. It puts enormous pressure on the world’s resources. A vegetarian diet is better.

[Stern] predicted that people’s attitudes would evolve until meat eating became unacceptable.

Matt talked recently about why subsidising agriculture is a bad idea, so I don’t want to rehash those arguments. What really baffles me is why Stern feels that changes in peoples’ attitudes are important. If we price greenhouse gasses, and other natural resources, appropriately then there is no need to worry about peoples’ attitudes. As Stern says, meat is far more environmentally costly to produce, so its price will rise. Meat will become a luxury that most can’t afford to eat on a daily basis. That’s something that will happen whether people consciously make a choice to become vegetarian or not.

Will attitudes then shift? I don’t see any reason to think that meat will become unfashionable because it is more expensive. I would imagien that the opposite will happen: meat will become the fancy food that you serve on special occasions because it is too expensive to eat regularly.

So why is attitudinal change important? Public support for pricing natural resources appropriately is essential if politicians are to pass enabling legislation. It’s hard to see many governments passing deeply unpopular legislation, at a significant cost, in order to protect the environment. The argument over meat is a storm in a teacup. The overarching question is whether we have the political motivation to price carbon, and other greenhouse gasses. If we can sort that out then nobody has to worry about taking a moral stand on vegetarianism, leather shoes or any other ‘trendy greenie’ issues.

A charitable reading of Epstein’s work is that he believes employment law stopping employers from putting “No Blacks or Jews” on their situations vacant ads is ineffective and counter-productive. Instead, we should allow employers to openly discriminate against people on the basis of race, age and sex because the free market will punish them for their irrational choices.

It’s a very interesting topic on which I’m no expert, so I shan’t wade into the debate on affirmative action. However, the latter sentence quoted just makes no sense from an economic perspective. A free market wouldn’t punish racially biased employers, it would price their racial bias.

Everything has a price, even racism. I’m confident that there is an employee so talented that any employer would hire them, regardless of the employer’s racist bias against them. The question is, how much better does the employee have to be before the employer is willing to hire them? Or, conversely, how much less must the employee charge for their labour in order to get a job? Those questions would be answered in a free market. There would be a wage premium for racially preferred employees which reflected the level of racial bias in the community. Far from punishing employers for being racists, a free market would reflect their preferences across races.

My understanding of Epstein’s work is that he understands all this and yet still favours the abolition of affirmative action. His argument is that you can lead an employer to minority employees, but you can’t make him hire them. While there may be laws against discrimination, it is nigh on impossible to police. If you can’t police them then you’re not going to get anyone hired who wouldn’t have been hired anyway. What you do is prevent the unskilled workers who would have to work at a lower rate than the racially preferred employees from being hired at all.

Is it better that they have a job and are discriminated against, or that they have no job but retain government recognition of their equality? I understand that Epstein plumps for the former, but it is clearly not a question with an obvious answer.

As people get richer and consumption rises, the marginal utility of consumption falls rapidly. Spending on health to extend life allows individuals to purchase additional periods of utility. The marginal utility of life extension does not decline. As a result, the optimal composition of total spending shifts toward health, and the health share grows along with income. In projections based on the quantitative analysis of our model, the optimal health share of spending seems likely to exceed 30 percent by the middle of the century.

What I find interesting is the choice of assumptions in this article. The authors assume diminishing returns to consumption spending, but constant returns to extra years of life. Obviously this means that, as consumption utility becomes saturated, more will be spent on health care as incomes rise. The assumptions drive the outcome in a way that the authors are very clear about. But is there really a constant return to extra years of life?

I wouldn’t have thought that a year of life at age 85 is equal in utility to a year at age 25. But then I have no experience so I’m just guessing. Health spending probably increases the marginal utility of an extra year, but is the MU really age invariant? I’d be interested to know what people think about this one since I have nothing but prejudice to go on

There are many ways of providing assistance to people in poor countries that do little or nothing to produce development. While we might all whole-heartedly agree that de-worming is demonstrated to be cost-effective assistance, its impact on development is, at best, tiny.
…
[A]ddressing a series of important problems for well-being like vaccinations, schools for girls, HIV/AIDS prevention or malaria does not add up to a development agenda.
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Development, as accelerated modernization… is the only demonstrated and sustained way to achieve the objectives of increased well-being.

This is particularly relevant in NZ now that Murray McCully wants to make NZAID promote development, rather than poverty elimination. Are his opponents just concerned about political manipulation of aid money, or do they really think that development is the wrong goal for an aid agency?

I think what’s often ignored here is that we face a trade-off between current and future generations. Poverty alleviation is not necessarily the best way to promote development, and development is likely the better way to help out future generations. Do the opposing sides disagree about the best way to help each group, or is there primary difference a value judgment about the relative importance of different generations?