Environmental amenities and optimal agricultural land use: The case of Israel

This paper evaluates the effectiveness of changing land allocation among crops as a mechanism for increasing net-social benefits, where production profits and amenity values are augmented. A positive mathematical programming model is calibrated and applied to 43 regions in the northern part of Israel, using a crop-discriminating amenity-value function. Changes in land allocation increase net-social benefits by 2.4% nationwide and by up to 15% on the regional level, where in some regions the net-social-benefits-increase/profit-loss ratio exceeds 20. Therefore, the results indicate that a policy encouraging amenity-enhancement of agricultural land use is warranted, provided that it is implemented on a regional scale, rather than as a comprehensive nationwide-enforced program.     

Intrinsic heterogeneity in expectation formation

We introduce the concept of Misspecification Equilibrium to dynamic macroeconomics. Agents choose between a list of misspecified econometric models and base their selection on relative forecast performance. A Misspecification Equilibrium is a stochastic process in which agents forecast optimally given their choices, with forecast model parameters and predictor proportions endogenously determined. Under appropriate conditions, the Misspecification Equilibrium will exhibit Intrinsic Heterogeneity, in which all predictors are used at all times, even in the neoclassical limit in which only the most successful predictors are used. This equilibrium is attainable under least-squares learning and dynamic predictor selection based on average profits.     

The impact of fiscal policies on agricultural household decisions

This paper provides a comparative static analysis of farm household's production, consumption, and labor market decisions under alternative tax policies. We explore the implications of non-separable household decisions caused by widespread non-participation in labor, land, financial and/or food markets, as is typical of low income economies. The analytical results indicate that when labor market imperfections occur, most tax-induced responses are ambiguous, mainly due to shadow price effects. This is particularly the case for the labor market and production responses to most tax tools under study, while a decreasing demand for consumption goods appears to be the result in several cases. Furthermore, tax-induced allocation effects may differ between the non-separable and the separable model versions, indicating the potential impact of labor market constraints on farm household responses to tax policies. In particular, standard taxes as well as a land tax may imply production adjustments in the case of non-separability.     

Groundwater balance and conservation under different water pricing and agricultural policy scenarios: A case study of the Hamadan-Bahar plain

Government subsidies for agricultural activities in recent decades have encouraged farmers of Hamadan-Bahar plain to extend the number of wells and irrigated farms, with no consideration of groundwater resource conservation. As a result, the level of the groundwater table has decreased continuously in this area, threatening the life of groundwater aquifer. The objective of the study is to analyze the impacts of irrigation water pricing and agricultural policy scenarios on aquifer conservation by considering the dynamic relations between aquifer groundwater balance and the agriculture sector. For this purpose a combination of simulation and optimization techniques is considered in a dynamic framework. Firstly, dynamic treatments of groundwater and the main factors affecting the balance of studied aquifer are simulated. Then, optimization behaviour of agriculture sector related to farmers' decision-making processes is defined on the time horizon. Thereafter all of the equations are used simultaneously by a non-linear dynamic programming method, which maximize present value of gross margins of agriculture sector subject to groundwater constrains and other input limitations. The analysis of the results indicates that water pricing by itself can considerably reduce the agricultural demand for aquifer groundwater in the Hamadan-Bahar plain.     

Non‐Linear Oil Price Dynamics: A Tale of Heterogeneous Speculators?

Abstract. While some of the recent surges in oil prices can be attributed to a robust global demand at a time of tight production capacities, commentators occasionally also blame the impact of speculators for part of the price pressure. We propose an empirical oil market model with heterogeneous speculators. Whereas trend-extrapolating chartists may tend to destabilize the market, fundamentalists exercise a stabilizing effect on the price dynamics. Using monthly data for West Texas Intermediate oil prices, our STR-GARCH estimates indicate that oil price cycles may indeed emerge due to the non-linear interplay between different trader types.     

“Ex-ante” Taylor rules and expectation forming in emerging markets

The success of monetary policy in stabilizing inflation depends substantially on its influence on expectation formation of private agents. This paper provides a novel perspective on the expectation forming process of financial markets. Using forecasts for the short-term interest rate, the inflation rate, and output growth for 10 emerging markets in Latin-America, central and eastern Europe, we estimate expected (“ex-ante”) Taylor-type rules. We find evidence for significant differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for only some countries, while for the other countries it does not. The adaption of an explicit inflation targeting regime seems to explain this cross-country differences.     

Intertemporal transfers of emission quotas in climate policies

We are interested in situations in which governments are committed to some pollution abatement constraint which does not match the society's most preferred level of pollution, like in the current climate change policies undergone on behalf of the Kyoto protocol. We develop an overlapping generations model with capital and pollution in which the individuals care about the environmental quality. We show that slightly improving the intertemporal flexibility of the emission quotas by authorizing two-period backward and forward transfers allows to decentralize the whole optimal growth path at competitive equilibrium.     

Environmental performance and equilibrium

Abstract.  In this paper we show why firms' or industries' rankings in terms of environmental performance depend not only on the technology but also on market equilibrium. Between two industries committed to the same environmental constraint, the more eco-efficient is the one with the higher output level. By comparing industries and firms, we show that the rankings are not robust, for they are affected by market outcome. The role of eco-efficiency in firms' profitability in equilibrium is also scrutinized. All this shows that the usual eco-efficiency indicators are inadequate. To tackle this problem, we propose a sound indicator.     

A behavioral cobweb-like commodity market model with heterogeneous speculators

According to empirical studies, speculators place significant orders in commodity markets and may cause bubbles and crashes. This paper develops a cobweb-like commodity market model that takes into account the behavior of technical and fundamental speculators. We show that interactions between consumers, producers and heterogeneous speculators may produce price dynamics which mimics the cyclical price motion of actual commodity markets, i.e., irregular switches between bullish and bearish price developments. Moreover, we find that the impact of speculators on price dynamics is non-trivial: depending on the market structure, speculative transactions may either be beneficial or harmful for market stability.     

Evaluating Projects in a Dynamic Economy: Some New Envelope Results

Abstract. This paper deals with the modern theory of social cost–benefit analysis in a dynamic economy. The theory emphasizes the role of a comprehensive, forward-looking, dynamic welfare index within the period of the project rather than that of a project's long-term consequences. However, what constitutes such a welfare index remains controversial in the recent literature. In this paper, we attempt to shed light on the issue by deriving three equivalent cost–benefit rules for evaluating a small project. In particular, we show that the direct change in a net national product (NNP) qualifies as a convenient welfare index without involving any other induced side effects. The project evaluation criterion thus becomes the present discounted value of the direct changes in NNP over the project period. We also illustrate the application of this theory in a few stylized examples.     

Heterogeneous technology and panel data: The case of the agricultural production function

Economic growth involves reallocating resources from traditional to new techniques of production, creating new relationships between particular resources and productivity. The paper analyzes the implications of this process on the estimation of agricultural production functions using a panel of countries. The data includes a measure of capital in agriculture absent from most studies. We employ a heterogeneous technology framework where implemented technology is chosen jointly with inputs to interpret information obtained in the empirical analysis of panel data. In this framework, estimates depend upon the economic environment, which is represented by state variables. It turns out that the old problem of identifying the production function cannot be resolved through the use of instrumental variables, but can be resolved using the allocation error. The paper discusses the scope for replacing country and time effects by observed state variables. The empirical results differ from those reported in the literature for cross-country studies, largely in augmenting the elasticities of capital and land and reducing those of fertilizer and labor. The evaluation of the marginal value productivity accounts for the flow of capital and fertilizer to agriculture and the flow of labor to other sectors, thereby contributing to overall economic growth.     

Search, migration, and urban land use: The case of transportation policies

We develop a search-matching model with rural-urban migration and an explicit land market. Wages, job creation, urban housing prices are endogenous and we characterize the steady-state equilibrium. We then consider three different policies: a transportation policy that improves the public transport system in the city, an entry-cost policy that encourages investment in the city and a restricting-migration policy that imposes some costs on migrants. We show that all these policies can increase urban employment but the transportation policy has much more drastic effects. This is because a decrease in commuting costs has both a direct positive effect on land rents, which discourages migrants to move to the city, and a direct negative effect on urban wages, which reduces job creation and thus migration. When these two effects are combined with search frictions, the interactions between the land and the labor markets have amplifying positive effects on urban employment. Thus, improving the transport infrastructure in cities can increase urban employment despite the induced migration from rural areas.     

Overlapping risk adjusted sets of priors and the existence of efficient allocations and equilibria with short-selling

The theory of existence of equilibrium with short-selling is reconsidered under risk and ambiguity modelled by risk averse variational preferences. No-arbitrage conditions are given in terms of risk adjusted priors. A sufficient condition for existence of efficient allocations is the overlapping of the interiors of the risk adjusted sets of priors or the inexistence of mutually compatible trades, with non-negative expectation with respect to any risk adjusted prior. These conditions are necessary when agents are not risk neutral at extreme levels of wealths. It is shown that the more uncertainty averse or risk averse the agents, the more likely are efficient allocations and equilibria to exist.     

Environmental justice and enforcement of the safe drinking water act: The Arizona arsenic experience

Environmental justice is concerned with the fair treatment and meaningful involvement of all people regardless of race, color, national origin, or income with respect to the development, implementation, and enforcement of environmental laws, regulations, and policies. A wide variety of empirical studies have concluded that disparate-impact discrimination does in fact exist since minority and low-income communities are at disproportionate risk for environmental harm. In this paper we examine these issues in the context of enforcing the safe drinking water act (SDWA). Specifically, we focus on the association between race, income, and hazardous levels of arsenic concentration and analyze the broad equity implications of implementing the new arsenic regulation by examining the relationship between community-level exposure to arsenic and socioeconomic and demographic characteristics of the population in Arizona. The results provide no support for the contention that continued selective implementation and enforcement of the revised SDWA arsenic standard is likely to disadvantage minority or low-income groups disproportionately in Arizona.     

External balance,dynamic efficiency,and the welfare effects of unilateral and multilateral permit policies in interdependent economies

This paper investigates domestic and foreign welfare effects of unilateral and multilateral permit policies in a two-country overlapping generations model with producer carbon emissions. We show that the welfare effects of a more stringent cap on emissions depend on the external balance of the policy implementing country, the dynamic (in)efficiency of the world economy, and the preference for environmental quality. Under dynamic efficiency, the global welfare loss of policy implementation in a net foreign creditor country is lower than of a policy in the net foreign debtor country. Moreover, although the country which has unilaterally implemented a permit policy would gain from a multilateral policy, the associated welfare loss for the other country is larger than that of a unilateral policy abroad.     

Diagram for a small planet: The Production and Ecosystem Possibilities Curve

With the development of the GPI there is now an ecological alternative to GDP for measuring a country's economic performance, but we still lack an ecological alternative to the PPC for illustrating a country's economic problem. The diagram suggested here illustrates a country's production and ecosystem possibilities — including climate stability, flood control, carbon sequestration, aquifer recharge, scenery, recreation, biological diversity, and so on. Burning a rainforest to clear the land shifts a country's PPC outward, giving the visual impression of an unmitigated improvement; but such development causes a movement along the country's PEPC, as ecosystem services are transformed into GDP. The slope of the PEPC is the marginal rate of transformation, which equals the ratio of the land's marginal marketable product to its marginal ecosystem product. Changes in technology create substitution and income effects that help explain the enclosure movement and the environmental Kuznets curve. Much as employment of the human resource can be restrained to allow more leisure, development of the natural resource can be restrained to preserve more ecosystem services. Commercial lobbying interests and rivalries for positional goods create distortions that move a country along its PEPC to a materialistic misallocation, with too little conservation. An idealistic misallocation is also possible, with too much preservation of the natural environment. Small is beautiful, up to a point, and that is evident in this diagram. Jacob Viner's [Viner, J., 1937. Studies in the Theory of International Trade. Harper and Brothers, New York] analytical objections to the PPC are revived.     

A household level environmental Kuznets curve? Some recent evidence on transport emissions and income

This paper uses detailed survey data to show no evidence of an Environmental Kuznets Curve (EKC) for household transport emissions. The evidence shows that richer households still do not choose to internalize the social cost of polluting by vehicle emissions.     

Environmental regulation and trade openness in the presence of private mitigation

Acknowledging the differential ability of individuals to privately mitigate the consequences of domestic pollution for their health is essential for an understanding of their demands for regulation of the environment and of trade in dirty goods, and for analysis of the implications of these demands for equilibrium policy choices. In a small open economy with exogenous policy, we first explain how private mitigation at a cost results in an unequal distribution of the health consequences of pollution in a manner consistent with epidemiologic studies, and consequently how the benefits and costs of trade in dirty goods interact with choices concerning private mitigation to further polarize the interests of citizens concerning environmental stringency. The economy is then embedded in a broader political economy setting, and simulated to investigate the role of private mitigation in shaping political equilibria. We show that when citizens can choose between mitigating the health consequences of domestic pollution privately and reducing pollution through public policy, the same polarization of interests underlies equilibrium policy choices in both democratic and autocratic regimes.     

Learning or lock-in: Optimal technology policies to support mitigation

We investigate conditions that amplify market failures in energy innovations, and suggest optimal policy instruments to address them. Using an intertemporal general equilibrium model we show that ‘small’ market imperfections may trigger a several decades lasting dominance of an incumbent energy technology over a dynamically more efficient competitor, given that the technologies are very good substitutes. Such a ‘lock-in’ into an inferior technology causes significantly higher welfare losses than market failure alone, notably under ambitious mitigation targets. More than other innovative industries, energy markets are prone to these lock-ins because electricity from different technologies is an almost perfect substitute. To guide government intervention, we compare welfare-maximizing technology policies including subsidies, quotas, and taxes with regard to their efficiency, effectivity, and robustness. Technology quotas and feed-in-tariffs turn out to be only insignificantly less efficient than first-best subsidies and seem to be more robust against small perturbations.     

Implications of happiness research for environmental economics

Using happiness data to study economic issues is a burgeoning field in recent economic literature. This paper shows that happiness research has considerable potential for environmental economic analysis. The paper discusses some implications of happiness research for environmental policy analysis, specifically with respect to the level of socially optimal environmental quality. It discusses evidence that consumer choice may be not utility maximizing and systematically distorted away from intrinsically motivated options, especially environment-friendly consumption. Finally, the paper describes how happiness data can be used in a novel approach to the monetary valuation of environmental quality and discusses the associated benefits and problems in relation to conventional methods.