Specifications of Social Welfare in Economic Studies of Climate Policy: Overview of Criteria and Related Policy Insights

An important assumption in economic studies of climate policy is the social welfare function. This paper shows that applying distinct decision or social welfare criteria can result in different optimal policies of climate control, notably if climate change impacts are uncertain. First, decision criteria in current climate-economic studies are reviewed. Next, the most important alternatives are discussed, including their (mathematical) formalization and incorporation in economy-climate models. Most of these alternative criteria suggest more stringent climate policies to be optimal than the standard discounted utilitarianism approach. However, several important welfare criteria have not or hardly seen any application in the economic analysis of climate policy. We conclude that there is clear need for systematic research on this theme, for which the current review provides a solid basis.     

Complexity and the limits to learning

In this paper we look at the manner in which ideas coming from complexity science change our understanding of the cognitive powers of agents that is really necessary to explain the evolution of markets and of firms. The general ideas behind complex systems dynamics and evolution are presented and then two examples are treated in detail. The first in an evolutionary model of a market in which some new product is developed by competing firms and their “task” is to find a strategy in terms of quality and price that will be sustainable. This essentially requires agents/firms to discover mutually compatible strategies, and to create thereby sustainable market niches. The second example considers the internal structure of firms, in terms of their constituent working practices and skills. It demonstrates that it is precisely their ignorance of the consequences of adopting any particular practice that generates diversity in the emergent capabilities of firms, exploring the dimension of potential demand and therefore leading to a successful and sustainable business sector. The work supports the notion that the cognitive abilities that are involved are not about deduction and logic, as a traditional view of rationality might suggest, but are about the development and contraction of interpretive frameworks, which will be different for each player. The paper links these examples to a general recognition of the idea that complex, multi-agent systems evolve through successive “structural attractors”—multi-dimensional dynamical systems—with temporary structural stability. Because real systems contain both the structure and deviations from it, then there is a constant probing of structural stability and the possibility of qualitative change to a new structural attractor. This resembles the ideas in biological evolution related to “punctuated equilibria,” but it also links this to the idea of emergent and evolving networks of interaction, never of course near thermodynamic equilibrium.      

The Nonparametric Approach to Applied Welfare Analysis

Changes in total surplus are traditional measures of economic welfare. We propose necessary and sufficient conditions for rationalizing individual and aggregate consumer demand data with individual quasilinear and homothetic utility functions. Under these conditions, consumer surplus is a valid measure of consumer welfare. For nonmarketed goods, we propose necessary and sufficient conditions on input market data for efficient production, i.e. production at minimum cost. Under these conditions we derive a cost function for the nonmarketed good, where producer surplus is the area above the marginal cost curve. We are greatful to helpful remarks and comments of the referees and the editor. The work is partially supported by the Spanish Ministry of Science and Technology, through Grant BEC2002-2130, the Generalitat de Catlaunya, through Grant 2005SGR-00454 and the Barcelona Economics Program (CREA).     

Neuroeconomics as a Natural Extension of Bioeconomics: The Shifting Scope of Standard Economic Theory

Synopsis Neuroeconomics rightly has been claimed to be a natural extension of bioeconomics. One of the things bioeconomics investigates is what behavioral dispositions and what behavioral patterns evolutionary processes have produced. Neuroeconomics extends this to the study of evolved mechanisms that are at work in decision-making at the neural level of the brain. The paper argues that in another respect neuroeconomics and bioeconomics are discontinuous, however. Bioeconomics maintains that the applicability of standard economic theory’s constrained maximization framework is not confined to human behavior. The constrained maximization framework is believed to be suitable to describe behavior throughout the animal kingdom. By contrast, despite some minor internal disagreements all neuroeconomists seem to agree that human behavior is predicted poorly by standard economic theory in several social and economic situations. Neuroscience is believed to hold out the hope of an advanced understanding of when and why this is the case.      

Voluntary development of environmental management systems: motivations and regulatory implications

Encouraging firms to develop voluntarily more comprehensive environmental management systems (EMSs) is touted as a policy tool to augment mandatory environmental regulations. Using a unique dataset of environmental management practices of Japanese manufacturers and controlling for self-selection bias in survey responses, we find that proxies for regulatory pressures and consumer pressures are the most important factors that motivate firms toward more comprehensive EMSs. Despite the oft-claimed “voluntary” nature of EMS development, our results show that the government may have a role to play in both directly and indirectly affecting EMS development by firms.      

Spatial Evolution of Social Norms in a Common-Pool Resource Game

We study the conditions for the emergence of cooperation in a spatial common-pool resource (CPR) game. We consider three types of agents: cooperators, defectors and enforcers. The role of enforcers is to punish defectors for overharvesting the resource. Agents are located on a circle and they only observe the actions of their two nearest neighbors. Their payoffs are determined by both local and global interactions and they modify their actions by imitating the strategy in their neighborhood with the highest average payoffs on average. Using theoretical and numerical analysis, we find a large diversity of equilibria to be the outcome of the game. In particular, we find conditions for the occurrence of equilibria in which the three strategies coexist. We also derive the stability of these equilibria. Finally, we show that introducing resource dynamics in the system favors the occurrence of cooperative equilibria.      

Optimal Environmental Policy Differentials in Open Economies under Emissions Constraints

Is there a case for preferential treatment of the exposed sector in an economy when compliance to an aggregate emissions constraint induced by an international environmental agreement is mandatory? This question is being debated in many countries in the context of the implementation of the Kyoto Protocol. We address the issue in a general equilibrium framework and theoretically cover several market structures, including perfect competition, the large country case and oligopoly. We identify the conditions under which preferential treatment of the exposed sector is not warranted from the point of view of maximizing social welfare. In addition, we demonstrate that in the case of oligopoly, instituting a more stringent environmental policy on the exposed sector might be profit-enhancing for this sector. This finding lends theoretical support to a specific interpretation of the Porter hypothesis.     

Cross-Border Mergers as Instruments of Comparative Advantage

A two-country model of oligopoly in general equilibrium is used to show how changes in market structure accompany the process of trade and capital-market liberalization. The model predicts that bilateral mergers in which low-cost firms buy out higher-cost foreign rivals are profitable under Cournot competition. As a result, trade liberalization can trigger international merger waves, in the process encouraging countries to specialize and trade more in accordance with comparative advantage. With symmetric countries, welfare is likely to rise, though the distribution of income always shifts towards profits.     

Are Co-integrated Stock Prices Consistent with the Efficient Market Hypothesis?

This paper responds to the unsatisfactory argument that there is no correspondence between co-integration and the efficient market hypothesis. A law of one co-integrating vector of prices is proposed for the exchange rate and domestic and overseas stock prices. Markets must therefore be efficient in long-run equilibrium because no arbitrage opportunities exist. However, arbitrage activity via the disequilibrium error correction allows above-average (risk-adjusted) returns to be earned in the short run. The elimination of these arbitrage opportunities means that stock market inefficiency in the short run ensures stock market efficiency in the long run.     

KIDNEY TRANSPLANTS AND THE SHORTAGE OF DONORS: IS A MARKET THE ANSWER?

This article examines the problem of kidney shortages for transplant in the United States. Following a study by Kaserman and Barnett, we reexamine the viability of allowing a market for cadaveric kidneys and estimate the implied equilibrium price based on our survey responses. In sharp contrast to the findings of Kaserman and Barnett, we estimate that a market equilibrium price for cadaveric kidneys may be prohibitively high. Consequently, we support other policy alternatives to increase supply, particularly presumed consent and mandated choice. Our findings also highlight the importance of obtaining data through experiments, rather than a survey, to estimate the impact of financial incentives. ( JEL I18, I12, I00)