Friday, January 21, 2011

Biotech Alfalfa: Who May Harm Who

From Drovers/Cattle Network "Using Property Rights Is A Trick Against Biotech Crops"

"Some politicians wrap themselves in the flag to justify their positions, and then there is Secretary of Agriculture Tom Vilsack appealing to farmers and ranchers' belief in "private property rights" to justify limiting biotech crop production"

Great article with a lot of great points. For the sake of this discussion, lets view biotech contamination of organic crops as 'pollution.' (despite the evidence that the risks are slight)

Traditionally when it comes to environmental pollution, the general philosophy was that 'the polluter pays'. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don't like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. (or in this case, the biotech alfalfa grower pays for genetic contamination of organic alfalfa)

The economist Ronald Coase brought additional insight to this issue. 

1) yes it is true that my operation is harming you via air pollution. (odor)
2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.

Coase says that the issue is that nonone owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one's behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major government regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the 'Coase Theorem"

However, if transaction costs are high, then bargaining may not take place. In that case, Coase emphasizes that any assignmnet of property rights should be based on which party can bear the externality at the lowest cost. Transaction costs can change based on changes in technology, which can also change how we define property rights. (for example, the technology that allows us to monitor CO2 emissions is what makes the concept of cap and trade possible).

How might this apply in the context of biotech alfalfa?  According to the Coase Theorem, it shouldn't matter who is assigned the rights in this case (giving the biotech producer the right to pollute, or giving the organic producer the right to stop neighbors from planting biotech). Both parties could bargain ahead of time to determine the optimal mix of biotech/organic production. Transaction costs should not be any higher than any normal land rental agreement.  Alternatively, one producer or the other could purchase insurance that would pay an indemnity in the event of contamination. (who would have to pay the premiums would depend on who has the right to pollute etc.) However, monitoring and enforcement costs could be high in terms of determining genetic contamination.

Another option would be a regulatory approach, limiting planting options for biotech producers.  This is what the Drovers article is critical of Tom Vilsack for. You could say it is enforcing property rights, but  only in a very arbitrary way, and unnecessary.

The agriculture industry offers some of the greatest examples of how technological advances and market forces lead to self correcting or internalization of externalities.  The adoption of biotechnology has led to reduced groundwater pollution, increased biodiversity, and reduced greenhouse gas emissions. All of which has occured in absence of taxes or government regulations. In the case of biotech alfalfa, a technological advancement that would trump legal or regulatory remedies would be use of 'terminator' gene technology.  Of course, that takes the power and prestige away from regulators, and empowers  property owners and market forces. In any case, what the Coase Theorem tells us is that there is no case for arbitrarily giving organic growers a trump card over those that want to use biotech alfalfa. The principle of polluter pays is not always optimal.

Thursday, January 20, 2011

Editorial: The Only Way to Go Green

The only way to truly go green is to efficiently allocate our resources. The economic definition of efficiency is getting the most out of our scarce resources. Sustainability is essentially dynamic efficeincy, getting the most our of our scarce resources over time. Decisions about allocating scarce resources must be based on the best information we have, using the best technology available. Market prices serve this role in information coordination and resource allocation. However, as we see in the editorial below, our ability to sustainably feed the world is often limited by institutional constraints on market forces:



"Warnings of a global food shortage are cropping up in the news. This should not be happening in 2011. But while our technologies have advanced, our politics are still prehistoric....Man cannot control the weather. But famine today is as much man-made as it is a force of nature."


"Zimbabwe, for instance, was once considered the breadbasket of Africa. It exported wheat, corn and sugar cane across the continent and beyond. But the country's agriculture industry has been destroyed by a Marxist government that has seized privately owned farms in the name of "land reform."


"Friends of the Earth publicly asked governments in the hungry African countries of Ghana and Sierra Leone to recall U.S. food aid that contained genetically modified rice. Zambian President Levy Mwanawasa set the wrong tone in 2002 when he called the food offered to his famished nation "poison" and "intrinsically dangerous."


"Given that we have the technology to grow larger crops on smaller parcels and fly fresh food around the world to where it's needed in a matter of hours, the obstructionism is inexcusable. We need policymakers who are as advanced as today's technology."

Wednesday, January 19, 2011

Huffington Post: How The Federal Reserve Bought The Economics Profession

This is an older article but still interesting: From the Huffington Post
A lot if interesting statements in the article, and I believe they get this correct:
"In the field of economics, the chairman remains a much-heralded figure, lauded for reaction to a crisis generated, in the first place, by the Fed itself. Congress is even considering legislation to greatly expand the powers of the Fed to systemically regulate the financial industry."

Not so much this:

"Paul Krugman, in Sunday's New York Times magazine, did his own autopsy of economics, asking "How Did Economists Get It So Wrong?" Krugman concludes that "[e]conomics, as a field, got in trouble because economists were seduced by the vision of a perfect, frictionless market system." So who seduced them? The Fed did it."

I have a hard time believing that the Fed promotes or believes in a frictionless market system. If so, it certainly doesn't practice what it preaches.  Perhaps this belief is conditional on the their mandate for the social planning of money and interest.  But the housing crisis is a demonstration of just how 'frictionless' markets are given these interventions. If anything, what was missed was the consequences and frictions created by departures from market based information coordination and resource allocation.  (Fear the Boom and Bust)

Sunday, January 16, 2011

Feeding the 9 Billion: Rational Optimism

From 'The Rational Optimist: How Prosperity Evolves'

"Bad harvests in Russia and Australia, combined with rising oil prices, have begun to cause shortages, export bans and even riots. Does starvation loom?No"

"A few years ago environmentalists argued that fertiliser would soon run short, because it is made using natural gas, a fossil fuel. But the discovery of how to extract abundant shale gas has turned that argument on its head: there are probably many decades' worth of natural gas now available to make fertilizer."

"There are high-tech changes afoot too. Maize and rice that have been genetically modified to resist pests and use less water, soybeans with better amino acid balance for pig food, wheat that can resist rust - all these are coming. Benighted Europe may reject these GM crops for superstitious reasons but surely not for long. The environmental benefits alone are now stark: GM crops can be pest resistant without the use of sprays that kill harmless insect bystanders."

"For all these reasons food production will probably continue to rise faster than population in the decades long as trade is free and innovation flourishes, by 2050 it is easily possible that we can feed nine billion people with more and better food from less land."

There Will Be Fuel or Drill Baby Drill?

In a basic principles of economics class, students will learn that as resources become scarce, their prices rise to reflect this scarcity.(absent government intervention and price manipulation). In response to these incentives, efforts are made to find alternatives or to economize on those scarce resources. Often times, technological change augments the process. (as a result of these price incentives, profit signals, and incentivised R&D investments). As a result, the prices of most natural resources over time have either declined or stayed about the same. What we can take from this is that natural resource constraints have not been a limiting factor to sustainable economic growth. These recent articles form the New York Times are a reflection of that finding, as it relates to fossil fuels.

There Will Be Fuel: NYT

"The same high prices that inspired dire fear in the first place helped to resolve them. High oil and gas prices produced a wave of investment and drilling, and technological innovation has unlocked oceans of new resources. Oil and gas from ocean bottoms, the Arctic and shale rock fields are quickly replacing tired fields in places like Mexico, Alaska and the North Sea...."The technology producing these resources has absolutely made the difference," Mr. Odum said. "It's the same with the Arctic, with the shale oil, all over the world. Technology is the key...."When you add it up," Mr. Morse noted, "you get something that very closely approximates energy independence."

Economic Optimism: NYT

"It's true that the real price of oil is slightly higher now than it was in 2005, and it's always possible that oil prices will spike again in the future. But the overall energy situation today looks a lot like a Cornucopian feast, as my colleagues Matt Wald and Cliff Krauss have recently reported. Giant new oil fields have been discovered off the coasts of Africa and Brazil. The new oil sandsprojects in Canada now supply more oil to the United States than Saudi Arabia does. Oil production in the United States increased last year, and the Department of Energy projects further increases over the next two decades.........You can always make news with doomsday predictions, but you can usually make money betting against them. "

The Energy Future Ain't What it Used to Be: NYT

"The price of natural gas and electricity will be low over the next quarter-century, and crude oil will become more expensive but not radically so, the Energy Department predicted on Thursday, in a report that contradicts widely held notions. And even without a national global warming law, American carbon dioxide emissions will not inexorably set new records; they will stay below the rate of 2005 for the next 15 years because of economic forces, the forecast said. "