- The limitations of behavioral economics
- "BP to Pay $1 Billion for Gulf Restoration"
- Freakonomics on hypothetical bias
- Texas governor fails to recognize the difference between an efficient and an equitable distribution of water
- Daily demand and supply (Earth Day edition)
- Gas Price Quote of the Day
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It's Friday night and I'm getting ready for a night of clubbing. Just one more post ...
I just reviewed a nudge style paper, and it was cool, but the extensions don't seem to be there:
Or take a recent study in Sacramento, Calif., that tried to curb household electricity consumption. (Prime Minister Cameron has repeatedly cited this research.) While traditional energy bills inform customers only about their own consumption, these bills directly compared them with their neighbors. The hope was that homeowners would compete to use less energy. But usage fell only about 1.5%. That won't do much for energy independence or to fight climate change.
There are two problems with these reforms inspired by behavioral economics. The first is that the nudges of policy makers must compete against the nudges of the marketplace. A fast-food meal might contain a frightening number of calories, but it's also delicious. (Fat and sugar taste good.) In these cases, the nudge that appeals to our irresponsible side often wins.
The second problem is that such nudges are ill-equipped to solve thorny societal problems. Take energy consumption. As the behavioral economists George Loewenstein and Peter Ubel have pointed out, the most effective way to reduce energy consumption is to increase its cost through higher taxes on carbon. That solution, of course, isn't popular or trendy, which is why most politicians aren't interested. Nevertheless, such an old-fashioned fix, rooted in the assumptions of classical economics, would be far more effective than a redesigned electricity bill. Sometimes, we don't need a nudge. We need a shove.
So, say we impose voluntary contribution type climate policies but we force firms to opt-out instead of allowing them to opt-in. Would we get more voluntary contributions?
I burned one of my freebies on this one, I should at least get a blog post out of it:
BP will provide $1 billion for early oil spill restoration efforts in the Gulf of Mexico in a voluntary agreement with the federal government and five states, company and government officials announced on Thursday.
The agreement, the largest of its kind in an oil pollution case, does not absolve BP of legal liability for the explosion and spill that occurred April 20, 2010, or from the costs of any additional economic and environmental damages. The company faces fines and penalties of as much as $21 billion as a result of the disaster, the worst offshore drilling accident in United States history. The company could face additional penalties under a Justice Department criminal and civil investigation.
The advance payment, to be divided among the states and the two lead federal agencies overseeing restoration efforts, will be used to rebuild coastal marshes, replenish damaged beaches, conserve ocean habitat and restore barrier islands.
The $1 billion does not represent the governments’ estimate of the ultimate environmental cost of the explosion and spill, which poured nearly five million barrels of oil into the gulf over 87 days last year. Federal and state officials are conducting a review known as a natural resource damage assessment to measure the injury to the gulf habitat and devise a plan for restoring it, a process that generally takes years. Any restoration efforts financed by the $1 billion will count toward the company’s final liability, officials said.
And it's mostly bungled:
... Note especially the final line in the excerpt below. It’s a lovely, concise summary of the difference between declared and revealed preferences — and why, if you’re at all interested in describing how the world actually works, you should put all your energy into chasing the latter and ignoring the former.
Sales of Green Works have fallen to about $60 million a year, and those of other similar products from major brands like Arm & Hammer, Windex, Palmolive, Hefty and Scrubbing Bubbles are sputtering. “Every consumer says, ‘I want to help the environment, I’m looking for eco-friendly products,’ ” said David Donnan, a partner in the consumer products practice at the consulting firm A. T. Kearney. “But if it’s one or two pennies higher in price, they’re not going to buy it. There is a discrepancy between what people say and what they do.”
Here is what I wrote when I read that line:
Differences between what people say and what they do is called hypothetical bias. The cool thing is there are ways to mitigate and even eliminate the bias so that data from what people say they will do can be used to make more accurate forecasts.
Yet, the offending line is partly correct. If all you care about is understanding how people behave under usual conditions then you want revealed preference data. But if you are interested in how people might behave under unusual conditions (e.g., when policy might change environmental quality) and there is no variation in usual conditions then you need stated preference data. And, I know Freakonomics is pushing field experiments as the only way to understand behavior under unusual conditions and that is where the "all your energy" stuff comes from but that is either narrow minded or plain ol' rent seeking. Open minded social scientists understand that a picture becomes more clear as the types of data and theories applied to a problem increases. Field experiment, stated preference, attitudinal, etc, data are complements, not substitutes. If stated preference data is cheaper than conducting field experiments then the rational researcher should choose stated preference data.
Here is another statement of that in my SuperFreakonomics review, motivated by the guys dumping on lab experiments.
Texas Governor Rick Perry called on Texans to pray for rain as cooler temperatures on Thursday helped firefighters contain wildfires that have charred more than 1.5 million acres across the state.
... FLASH FLOOD WATCH REMAINS IN EFFECT THROUGH SATURDAY AFTERNOON...
THE FLASH FLOOD WATCH CONTINUES FOR
* PORTIONS OF INDIANA... KENTUCKY AND OHIO...
Are green cleaning products subject to the laws of demand and supply?
But America’s eco-consciousness, it turns out, is fickle. As recession gripped the country, the consumer’s love affair with green products, from recycled toilet paper to organic foods to hybrid cars, faded like a bad infatuation. While farmers’ markets and Prius sales are humming along now, household product makers like Clorox just can’t seem to persuade mainstream customers to buy green again.
Sales of Green Works have fallen to about $60 million a year, and those of other similar products from major brands like Arm & Hammer, Windex, Palmolive, Hefty and Scrubbing Bubbles are sputtering. “Every consumer says, ‘I want to help the environment, I’m looking for eco-friendly products,’ ” said David Donnan, a partner in the consumer products practice at the consulting firm A. T. Kearney. “But if it’s one or two pennies higher in price, they’re not going to buy it. There is a discrepancy between what people say and what they do.”...
Sales have gone south, too. In the 12 months through March, sales of Nature’s Source Scrubbing Bubbles all-purpose cleaner have dropped 71 percent, to $589,614, according to the SymphonyIRI Group, which tracks sales at mass-market United States stores, excluding Wal-Mart. Nature’s Source Windex dropped 35 percent, to $1.8 million. Nature’s Source Scrubbing Bubbles tub and tile cleaner dropped 61 percent, and Nature’s Source toilet bowl cleaner dropped 78 percent.
And that was as prices on all of those items were reduced.
The recession officially ended in June 2009. According to the BEA [PDF], per capita disposable personal income increased by about 2.7% from the fourth quarter of 2009 to the fourth quarter of 2010. As income went up, demand for green cleaning products fell ("prices on all of those items were reduced"), suggesting that these are inferior goods. But that makes little sense. Is there a lag between income changes and changes in demand for green cleaning products? We know there is a lag between employment growth and income growth so maybe the demand for green products is more closely correlated with employment and income expectations.
Update: See this post on some of Matt Kahn's research.
Another update, this one from the blog formerly known as Green, Inc:
Similarly, sales of Seventh Generation rebounded to “solid double-digit growth” in 2010, after a relatively meager 2 percent gain in 2009, said John Replogle, chief executive.
Up above I didn't make a clear distinction between name brand products with green flavor and actual green companies with green products. Sales of green products from green companies has been increasing. These are the true normal goods. The income elasticity of Seventh Generation products is positive.
Note: Differences between what people say and what they do is called hypothetical bias. The cool thing is there are ways to mitigate and even eliminate the bias so that data from what people say they will do can be used to make more accurate forecasts.
Prodded by growing public frustration over sharply rising gasoline prices, the Justice Department on Thursday announced the formation of a team -- the "Oil and Gas Price Fraud Working Group -- tasked with the goal of ensuring consumers are not victims of price gouging.
While promising official vigilance, the attorney general acknowledged regional differences in gasoline prices, and said, "It is also clear that there are lawful reasons for increases in gas prices, given supply and demand."
OK, maybe not everyone in the political arena is an idiot.
And do we really need to go down the price gouging road again?
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