Abstract: Over the past sixty years, forest tenure in China has oscillated unpredictably between private and common-property regimes. This policy-induced uncertainty has distorted land owners’ harvesting decisions and has lowered the value of China’s forest output. We provide an analytical framework for assessing these effects quantitatively and conclude that substantial losses in the net value of wood harvested over time have occurred. Understanding the consequences of this policy-induced uncertainty is particularly important since China is currently engaged in an ambitious plan to increase its domestic supply of timber. Contrary to the standard result in the literature that catastrophic risk—whether from natural disasters like forest fires or from government expropriation—necessarily leads to premature harvesting, we find that farmers may delay harvesting if sufficient compensation for loss is paid.

Abstract: When every individual's effort imposes negative externalities, self-interested behavior leads to socially excessive effort. To curb these excesses when effort cannot be monitored, competing output-sharing partnerships can form. With the right-sized groups, aggregate effort falls to the socially optimal level. We investigate this theory experimentally and and find it makes correct qualitative predictions but there are systematic quantitative deviations, always in the direction of the socially optimal investment. By using data on subjects' conjectures of each other's behavior we show that deviations are consistent with both altruism and conformity (but not extremeness aversion).

Abstract: In developing countries, consumers can buy many goods either in formal markets or in informal markets and decide where to purchase based on the product's price and anticipated quality. We assume consumers cannot assess quality prior to purchase and cannot, at reasonable cost, identify who produced the good they are considering. Many products (meats, fruits, vegetables, fish, grains) sold both in formal groceries and, less formally, on the street fit this description. We assume that producers can adjust quality at a cost and only firms in the formal sector are subject to government regulation. In the long run, producers migrate to the sector that is more profitable. Using this model, we demonstrate how regulations in the formal sector can lead to a quality gap between formal and informal sector goods. We moreover investigate how changes in regulation affect quality, price, aggregate production, and the number of firms in each sector.

Abstract: Price collars have frequently been advocated to restrict the price of emissions permits. Consequently, collars were incorporated in the three bills languishing in Congress as well as in California's AB-32; Europeans are now considering price collars for EU ETS. In advocating collars, most analysts have assumed (1) collars will be implemented by government purchases and sales from bufferstocks, just like bands on foreign exchange rates or commodity prices; and (2) firms must surrender permits whenever they pollute. In fact, however, no actual emissions trading scheme has conformed to these assumptions. In the current paper, we maintain the second assumption (continual compliance) and show that while a price collar supported by a suffciently large bufferstock can restrict permit prices, a price collar supported instead by auctions with reserve prices cannot. In a companion paper (Hasegawa and Salant, 2012), we show that neither method works once account is taken of delayed compliance.

Abstract: The forestry literature has sought to describe competitive equilibria by first solving social planning problems. This "indirect" approach may cease to be useful in determining market equilibrium if the government intervenes. The equilibrium price path of timber is characterized directly here under the assumption that once a site is cleared, the site is used for some other purpose of exogenous value. While extreme, this assumption permits us to show that familiar Herfindahl results from the Hotelling literature extend to forestry economics: if differing in age, older trees are harvested first; if different in site value, trees on more valuable land are harvested first. As trees of the same vintage (or site value) are harvested, the timber price may decline during intervals when wood volume grows faster than the rate of interest. As the concluding section suggests, some of these results reappear in special cases of the model with replanting.

Abstract: Previous analyses assumed that firms must surrender permits as they pollute. If so, then the price of permits may remain constant over measurable intervals if the government injects additional permits at a ceiling price or may even collapse if more permits are injected through an auction. However, no cap-and-trade program actually requires continual compliance. The three federal bills and California's AB-32, for example, instead require that firms surrender permits only periodically to cover their cumulative emissions since the last compliance period. Anticipated injections of additional permits during the compliance period should have different effects than under continual compliance. We develop a methodology for analyzing the effects of such permit injections. Using it, we explain why the sales provisions of one federal bill might generate a speculative attack in the permit market and why one provision of AB-32 may undermine the very existence of an equilibrium.

Abstract: Efforts to limit cumulative emissions over the next century may be partially thwarted by the responses of fossil fuel suppliers. Current price-cost margins for major reserves are ample, leaving scope for significant price reductions if climate policies reduce demand for fossil fuels through conservation or substitution to clean alternatives. Most models simulating the consequences of climate policies completely disregard these supply responses. As for theoretical models, under standard assumptions they predict such strong supplier responses that climate policies may have no effect on cumulative emissions and may even leave society worse off, suffering damages from global warming sooner and with less time to adapt (the “green paradox”).We contribute to this literature by developing a richer theoretical model that takes account of the different extraction costs and emissons rates of different fossil reserves. We use this model to compare the qualitative effects of four policy options—accelerating cost reductions in the clean backstop technologies, taxing emissions, improving energy efficiency, and a clean fuel blend mandate. We also discuss the consequences of mandating carbon capture and sequestration. All policies can reduce cumulative emissions, but the backstop policy accelerates emissions while conservation policies (energy efficiency or blend mandates) delay emissions. We then calibrate the model using data on costs, reserves, and emissions factors for five major categories of oil. Using this calibrated model, we estimate the interemporal leakage rate—the percentage error in cumulative emissions reductions that would arise if no account is taken of the supply responses of oil producers. We find that conservation policies can have higher intertemporal leakage rates and backstop policies can have lower leakage than an emissions tax. Leakage rates generally decline as the policies become more stringent.

Abstract: Individuals extracting common-pool resources in the field sometimes form outputsharing groups to avoid costs of crowding. In theory, if the right number of groups forms, Nash equilibrium aggregate effort should fall to the socially optimal level. Whether individuals manage to form the efficient number of groups and to invest within the chosen groups as theory predicts, however, has not been previously determined. We investigate these questions experimentally. We find that subjects do vote in most cases to divide themselves into the optimal number of output-sharing groups, and in addition do decrease the inefficiency significantly (by 50% to 71%). We did observe systematic departures from the theory when the group sizes are not predicted to induce socially optimal investment. Without exception these are in the direction of the socially optimal investment, confirming the tendency noted elsewhere in public goods experiments for subjects to be more “other-regarding” than purely selfish.

Abstract: Common intuition and experimental psychology suggest that the ability to self-regulate ("willpower") is a depletable resource. We investigate the behavior of an agent with limited willpower whooptimally consumes over time an endowment of a tempting and storable consumption good or "cake". We assume that restraining consumption below the most tempting feasible rate requires willpower. Any willpower not used to regulate consumption may be valuable in controlling other urges. Willpower thus links otherwise unrelated behaviors requiring self-control. An agent with limited willpower will display apparent domain-speci?c time preference. Such an agent will almost never perfectly smooth his consumption, even when it is feasible to do so. Whether the agent relaxes control of his consumption over time (as experimental psychologists predict) or tightens it (as most behavioral theories predict) depends in our model on the net e¤ect of two analytically distinct and opposing forces.

Abstract: In markets for fruits, vegetables, and many imported goods, consumers cannot discern quality prior to purchase and can never identify the producer. Producing high-quality, safe goods is costly and raisesthe "collective reputation" for quality shared with rival arms. Minimum quality standards imposed on all arms improve welfare. If consumers can observe the country of origin of a product, quality, profits, and welfare increase. If one country imposes a minimum quality standard on its exports, consumers benefit, the profits of arms in the country with regulation rise, and the profits of arms in countries without regulation fall.

Abstract: We consider a health authority seeking to allocate annual budgets optimally over time to minimize the discounted social cost of infection(s) evolving in a finite set of R >/= 2 groups. This optimization problem is challenging, since as is well known, the standard epidemiological model describing the spread of disease (SIS) contains a nonconvexity. Standard continuous-time optimal control is of little help, since a phase diagram is needed to address the nonconvexity and this diagram is 2 R dimensional (a costate and state variable for each of the R groups). Standard discrete-time dynamic programming cannot be used either, since the minimized cost function is neither concave nor convex globally. We modify the standard dynamic programming algorithm and show how familiar, elementary arguments can be used to reach conclusions about the optimal policy with any finite number of groups. We show that under certain conditions it is optimal to focus the entire annual budget on one of the R groups at a time rather than divide it among several groups, as is often done in practice; faced with two identical groups whose only di fference is their starting level of infection, it is optimal to focus on the group with fewer sick people. We also show that under certain conditions it remains optimal to focus on one group when faced with a wealth constraint instead of an annual budget.

Abstract: We derive conditions under which cost-increasing measures - consistent with either regulatory constraints or fully expropriated taxes - can increase the profits of all agents active within a common-pool resource. This somewhat counterintuitive result is possible regardless of whether price is exogenously fixed or endogenously determined. Consumers are made no worse off and, in the case of an endogenous price, can be made strictly better off. The results simply require that total revenue be decreasing and convex in aggregate effort, which is an entirely reasonable condition, as wedemonstrate in the context of a renewable natural resource. We also show that our results are robust to heterogeneity of agents and, under certain conditions, to costless entry and exit. Finally, we generalize the analysis to show its relation to earlier work on the effects of raising costs in a model of Cournot oligopoly.

Abstract:

The growing trend in interstate shipments of municipal solid waste is a topic of substantial public debate, including numerous Supreme Court decisions concerning waste shipments in the context of the Interstate Commerce Clause and recent Congressional proposals to exempt waste from jurisdiction of that clause. To date, however, very little is known about the effects such proposals might have on the interstate waste market. If interstate waste shipments are restricted, what is the likely economic effect on the public? Are the effects likely to be borne by the producers of waste disposal facilities, or by consumers? Are the effects likely to differ among regions of the country, such that some are better off and others are worse off?

Our research models the interstate market for municipal solid waste and evaluates the potential economic effects of public policies proposed to restrict waste flows. To our knowledge, this research is the first to quantitatively evaluate these proposals. We develop a computerized version of economic models of the use over time of spatially differentiated resources — characteristics which well describe the nation's waste disposal facilities. The model provides quantitative estimates of the aggregate social surplus which potentially can be generated by the solid waste industry, and involves calculation of how the capacities of landfills located in different states in the United States should be used over time and which population centers these landfills should serve. We then use the model to calculate how much aggregate surplus would change by the imposition of a variety of non-technological constraints, such as flow controls permitted by the Congress. In addition, we quantify the distribution of these changes in surplus across geographic regions and between producers and consumers of disposal services.

We focus on two regions of the United States, the northeast and midwest. These regions account for about 80% of interstate trade by volume, and involve sufficiently large volumes of transshipments to be subject to recent Congressional proposals for trade restrictions (the proposals generally target large shipments). We also focus on waste that is landfilled, as this is the disposal method for most interstate waste. However, an important input in our model is the cost of alternative disposal methods.

The model we present is rich in detail and flexibly permits a wide variety of policy simulations. Because the effects of policies can be difficult to predict on producers and consumers, across geographic regions, and in the long-run as well as the short-run, these simulations can shed light on understanding numerous implications of various proposals. For example, one of the most important of our results is that restricting the volume of waste that one state may ship to any other state, as recent Congressional bills propose, can actually lead to an increase in the number of interstate shipments as states export smaller volumes to even more states in order to meet limits on the size of shipments to any one state. We also find that policies to restrict interstate waste shipments through import surcharges or volume-based restrictions reduce economic welfare, although some landfill owners in some regions of the country may benefit. Our model generates a lower bound on the magnitude of the reduction in economic welfare from these types of policies; it is about $4 per person per year, although in some regions of the country, the per capita net loss is $30 to $40 per year.

We have organized our report as follows. First, we briefly review proposed legislative developments to restrict interstate shipments of waste and the arguments underlying the debate over them. We then describe our model of interstate waste trade, including key assumptions and the data we use to parameterize the model. After describing our model and data, we analyze four policies: surcharges on imported waste, restrictions on the volume of waste exports, a combination of surcharges and volume restrictions, and an outright prohibition of interstate shipments. We then estimate the effects of each of these restrictions on the interstate waste market, including the extra costs of waste disposal, which geographic regions are most likely to bear them, and whether the costs fall on producers, consumers, or both.

Important caveats about our research involve key assumptions we make and limitations of the publicly available data we use to calibrate our model. We realize that waste trade restrictions may confer benefits as well as impose costs; for example, communities may feel better off when waste imported into their locales is reduced. Although we do not take these benefits into account in our research, our results can serve as benchmarks of the costs against which to measure these benefits. Among our most important assumptions are two that are required to make the model computationally feasible. These assumptions are that waste generation originates, and that disposal facilities are located, in one or at most two locations within a state, and that generation and disposal are co-located (within the same major city) in a state. As we could expect, these assumptions cause our model to underestimate some waste transshipments, particularly small volume shipments. We discuss these and other implications of our assumptions in detail.

The data that we use to calibrate our model are publicly available data on waste generation, waste disposal and transportation costs, estimated demand elasticities for waste generation, and other information. The data are quite limited for several, widely recognized reasons. For example, only recently have some states begun collection of statistics about waste generation, disposal, exports and imports, and data are generally not consistently categorized across states, limiting inter-state comparability. In addition, reported volumes of imports and exports typically do not match between any pair of states (a similar problem arises in international trade statistics on imports and exports).

Despite these assumptions and limitations, we have confidence in the results of our model for several reasons. Our baseline model performs remarkably well in approximating some of the more "credible" "real world" data. For example, it generates estimated average landfill tipping fees and an aggregate volume of interstate shipments that closely approximate the available data. In addition, the pattern of trading partners and the relative volumes of waste traded among partners is consistent with available information.