Common Tragedies

Thoughts on Environmental Economics

Archive for the ‘Behavioral Economics’ Category

Self-interest, 1. Society, 0.

Posted by Danny Morris on August 25, 2008

Ahoy everyone,

As this is my first foray into the world of the mighty Common Tragedies blog, I hope not to disappoint. Slate had a pretty interesting article today about pay and performance. A team of economists teamed up with a strawberry farmer in Great Britain to investigate how to maximize productivity of migrant workers. The article explains the experimentation process very well, but essentially, the farmer thought he wasn’t getting as much as he could from his workers and wanted to see how difficult payment schemes could affect his employees’ productivity.

It turns out workers had an incentive to collaborate and work slowly, which would get them more money for doing less work. The economists came in and set up a payment system that took away the ability for workers to cooperate, and productivity increased. In the next experiment, the economists linked managers’ pay to the performance of their underlings, and productivity increased again because managers stopped giving their friends the easiest assignments. In the third experiment, the economists organized workers into teams. While the workers initially grouped with their friends, once the more productive groups were awarded bonuses and prizes, efficient laborers left their friends and joined the more productive teams and once more, productivity climbed. In every experiment, financial benefits beat out the social links that had previously formed in the larger group.

Now, this is only one experiment with a lot of unknowns on our end (i.e. how strong were the social links to begin with, how large were the financial gains, etc), but the findings raise some interesting questions for environmental economics. Mainly, do financial incentives always trump social networks? If so, how large (or small) do the incentives have to be for this to happen? I ask the above questions because they seem pertinent to addressing environmental issues within a social context, which is what many of us are trying to do. If self-benefit always triumphs over social connections, there may not be any value in making any kind of societal-based argument for preserving or restoring the natural environment.

For example, were I an idealistic, slightly naive environmental activist employed by an unnamed advocacy organization, I might try to convince a random passerby that he owes it to his friends and family to reduce his carbon footprint because he (presumably) really care about his friends and family. But, if reducing said passerby’s carbon footprint starts to cost him money, maybe he would not value his personal relationships as much. Maybe none of us would. If your personal emissions portfolio were inversely related to the number of social connections you could maintain (i.e. less emissions means more friends and vice versa)? Would we all be lonely SUV owners or gregarious pedestrians?

Just some (ahem) food for thought…

Posted in Behavioral Economics, Random | 2 Comments »

As support increases for cap and dividend, it’s time to look under the hood

Posted by Rich Sweeney on June 5, 2008

Today Robert Reich pens his support for cap and dividend. Not too much new here, if you’ve been following the work of Peter Barnes lately. He does pose two caveats I hadn’t heard before though. The first is allocating dividends on a per adult basis, as opposed to per capita. Not sure why this is preferable, but I’m not opposed to it either (I am an adult, technically).

His other suggestion is that checks be distributed monthly, like Social Security. Again, like the per-adult discussion, the cap-and-dividend debate is still nascent enough that there aren’t many strong opinions staked out on this detail. All other things equal, monthly dividends would probably best alleviate the financial burden of increased monthly utility bills. However, I’ve always just assumed the payment would be annual, like a tax refund. In fact, I’ve also come up with a nifty justification for this arbitrary payment schedule. In Nudge, Thaler and Sunstein muse about consumers’ irrational handling of tax returns. In theory, most people should be able to roughly predict how much they’ll get back from the IRS and incorporate this future payment into current consumption. Yet in practice, people tend to treat these transfers as windfall profits, and blow them on luxury goods. Recent research out of the Chicago Fed has found that recepients of earned income tax credits are likely to spend that money on big ticket items, such as automobiles.

So why does this matter? Well, I’d argue that the behavioral evidence I just mentioned suggests that annual transfers would promote more energy efficiency/ conservation than monthly transfers would. Once we put a price on carbon, people’s utility bills are gonna go up. While this is going to be a bit painful, the idea is to induce a decrease in carbon consumption. Households will be forced to recognize the true costs of their energy usage, and will reorder their relative consumption preferences accordingly. If we simultaneously hand out money to offset these expenditure increase, people won’t conserve as much. In econ terms, the income effect of this policy will somewhat offset the intended price effect. For necessities (which are highly inelastic) this might be desirable, especially for low income households. But at the same time, the point of pricing carbon is to reduce emissions, so it’s important that we think about where we expect these reductions to come from. Though my libertarian friends will surely scoff at this idea, I’m suggesting that maybe its possible to help reshape people’s consumption patterns for the better by smartly structuring a cap and dividend program. If the dividends are handed out once a year, people will irrationally discount them, and the price effect of the policy will dominate. Fortunately, the energy efficiency/ conservation literature suggests that after the initial shock, people will adjust just fine to lower household energy consumption (look at Europe). If you believe the folks at McKinsey on the technical side, or people like Richard Layard on the behavioral side, this switch to a lower energy lifestyle could actually be welfare enhancing. On top of that, at the end of the year, people would get a vacation or a new wardrobe as a reward for conserving carbon. You can think of this as a Christmas account for energy conservation.

Posted in Behavioral Economics, cap and dividend | 3 Comments »

Energy efficiency and behavioral econ

Posted by Rich Sweeney on April 3, 2008

Normally I’m not a big fan of John Tierney, but this piece from last week was really interesting. Recounting experiments detailed in “Nudge”, Tierney muses over innovative new ways for people to monitor their carbon footprint and show off their environmental piety. Here’s the behavioral evidence that caught my eye:

“Getting the prices right will not create the right behavior if people do not associate their behavior with the relevant costs,” says Dr. Thaler, a professor of behavioral science and economics. “When I turn the thermostat down on my A-C, I only vaguely know how much that costs me. If the thermostat were programmed to tell you immediately how much you are spending, the effect would be much more powerful.”

It would be still more powerful, he and Mr. Sunstein suggest, if you knew how your energy consumption compared with the social norm. A study in California showed that when the monthly electric bill listed the average consumption in the neighborhood, the people in above-average households significantly decreased their consumption.

Meanwhile, the people with the below-average bills reacted by significantly increasing their consumption — not exactly the goal of the project.

That reaction was avoided when the bill featured a little drawing along with the numbers: a smiling face on a below-average bill or a frowning face on an above-average bill. After that simple nudge, the heavy users made even bigger cuts in consumption, while the light users remained frugal.

Tierney goes a little crazy with the jewelry stuff towards the end, but overall I like the idea of thinking outside the box when it comes to monitoring energy use.

Posted in Behavioral Economics, Efficiency | 3 Comments »

Ban the bag?

Posted by Evan Herrnstadt on November 21, 2007

I think I’ve realized that I tend to write about Britain quite a bit because they seem to at least talk about environmental pricing more than we do. A pair of surveys performed shortly before the London councils moved toward banning free distribution of plastic grocery bags address the policy:

BMRB’s poll found that most people would be willing to pay for a sturdy plastic bag that would last up to 10 shopping trips. Most – 61 per cent – would be prepared to pay up to 10p, while 11 per cent would be willing to fork out 20p per bag. Most people would be willing to pay 50p for a reusable woven bag capable of lasting a year.

AC Nielsen’s survey asked one question: whether shoppers would change to a different store if their current supermarket stopped giving bags away. Only 16 per cent said that they would go elsewhere.

The Nielsen question is important because the case could be made that free plastic bags are simply a standard customer service that must be incorporated into the supermarket’s costs. The question didn’t seem to specify a bag price, so the result must be taken with a grain of salt. Still, if people truly aren’t going to switch stores over a bag charge, then it makes no sense to offer free bags.

The BMRB survey displays a disconnect: that consumers are willing to pay 50p for a cloth bag that will last a year implies roughly a 2p bag price (conservatively assuming they go grocery shopping twice a month), not the 20p price that would supposedly deter 8 out of 9 shoppers. For context, if the London Councils don’t ban the bags altogether, they would likely support a 10-15p charge.

This discrepancy probably arises because there are other costs that must be accounted for: people forget their bags, they make impetuous decisions to go shopping, they reuse the plastic bags for other purposes (e.g. lining small trash cans), or maybe they just don’t mind paying a periodic small fee versus a “big” one-time fee. This seems to be another one of those no-brainer decisions, like switching to CFLs, that simply needs some impetus from government to get off the ground.

The proposed London law bans free distribution of plastic bags, but perhaps the government should consider the following policy: Whole Foods “rewards” shoppers (sometimes, if they remember) by giving them a 5-cent discount for each non-plastic bag they use. Is this program more or less likely to work than a simple price on bags? It’s the old carrot vs. stick problem. Will people resent a transparent bag charge on their bill more than they would take pride in a bag reward?

Posted in Behavioral Economics, Government Policy | 2 Comments »

Shifty behavior

Posted by Evan Herrnstadt on November 7, 2007

In an earlier post, I wrote briefly about how carbon mitigation will likely require a mass lifestyle change amongst the richer people of the world. However, I didn’t really have time at that point to further dig into the issue. The following article sort of thrust me back into that arena.

According to the New York Times, Fiji Water has pledged to take the necessary steps to become carbon negative in its entire operation, from bottling to shipping. However, there is an inherent problem with this plan: wouldn’t it be more sustainable to just drink tap water where it’s safe and available?

Glenn Pickett of Conservation International responds,

“Maybe it would be morally preferable to carry a bottle I filled at the tap, but bottled water is a consumer reality. So rather than operate in a moralistic framework, we’ll use the economy as it exists to make a difference.”

When Pickett favors using “the economy as it exists”, he implicitly discounts the value of a shift in the supply/demand schedules in favor of movement along the supply/demand curves. The following discussion focuses on the demand side of the market for clarity and (relative) brevity. An increasing carbon price will move us along the demand curve for carbon-intensive products (CIPs) and decrease the quantity of CIPs demanded. However, we could also work for a leftward shift of the entire CIP demand schedule. Read the rest of this entry »

Posted in Behavioral Economics, Climate Change | Leave a Comment »

Efficient solutions

Posted by Daniel Hall on October 18, 2007

I’ve had several conversations over the last few days about the numerous opportunities that apparently exist within the economy to reduce energy use and save money — opportunities that energy consumers have so far failed to take advantage of. Since economists don’t typically think that people knowingly leave $20 bills lying on the sidewalk, some explanation is needed for why exactly these apparently ‘negative cost’ energy-saving opportunities persist.

Part of the explanation is provided by a recent article in the Washington Post about a plan to reduce energy use by increasing the energy efficiency of buildings:

Virginia Tech officials announced plans yesterday to give some of the Washington area’s buildings a sweeping green makeover, using $500 million from an investor to pay for energy-saving upgrades at 100 or more properties throughout the region.

The plan, which calls for such additions as more efficient light bulbs and cooling systems, is intended to bring about significant reductions in electricity use in the area and in emissions from its power plants. It also allows for-profit investor Hannon Armstrong in Annapolis to take a slice of the money that building owners will save.

If this is a good deal for both investors and building owners, however, then surely it would be a better deal for just building owners. Why haven’t building owners previously made these energy-reducing investments and captured all the savings for themselves? The article clues us in: Read the rest of this entry »

Posted in Behavioral Economics, Electricity | 2 Comments »

What Can Policymakers Learn from Experimental Economics?

Posted by Rich Sweeney on October 15, 2007

John List fills us in, in this week’s RFF policy commentary.

Posted in Behavioral Economics | Leave a Comment »

Here’s 5 bucks–why don’t you just do it?

Posted by Evan Herrnstadt on October 4, 2007

Tim Haab cites a study that displays some interesting patterns in public opinion on various potential carbon-saving policies. Basically, subsidies for solar panels and energy efficiency and a 20 percent RPS (amounting to a tax/rate hike of $5-8/month) get around 70% support, while a gas tax of similar magnitude gets a paltry 36%.

Perhaps people perceive the first three as higher taxes that encourage society to go out and get something new (renewable energy or cheaper home improvements) while the gas tax simply means one is paying more for the same thing, with intent that we’ll actually consume less than we did before. I guess we do love buying shiny new toys (weeeee!) more than changing old habits (boring).

So we would notice $5/month at the pump, but not on our tax forms. Is this the result of some sort of collective loss aversion? Or is it temporal separation?  Would we really notice that extra 10 cents/gallon (incidentally, this is basically the relevant effect of a $10/tCo2 price)? If one could give gasoline a big hug, would Americans do so?

Most importantly: Can we really not boil behavior down to the intersection of two lines on a graph?

Posted in Behavioral Economics, Climate Change, Government Policy, Public Goods | 1 Comment »