Anthony C. Fisher

Environmental Preservation, Uncertainty, and Irreversibility

A number of recent contributions by economists have provided a clear insight into the causes of the varied forms of environmental deterioration, and have also suggested, implicitly or explicitly, policies for more efficient management of environmental as well as other resources.1 Yet, as Allen Kneese has pointed out in a review of empirical studies of pollution damages, “a general shortcoming of [these studies] has been that they have treated a stochastic or probabilistic phenomenon as being deterministic.”2 The purpose of this paper is to explore the implications of uncertainty surrounding estimates of the environmental costs of some economic activities. It is shown in particular that the existence of uncertainty will, in certain important cases, lead to a reduction in net benefits from an activity with environmental costs. In such cases the implication for an efficient control policy will generally involve some restriction of the activity.

Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach

Will U.S. Agriculture Really Benefit from Global Warming? Accounting for Irrigation in the Hedonic Approach. Wolfram Schlenker, W. Michael Hanemann, and Anthony C. Fisher ∗ There has been a lively debate about the potential impact of global climate change on U.S. agriculture. Most of the early agro-economic studies predict large damages (see, for example, Richard M. Adams, 1989; Harry M. Kaiser et al., 1993; and Adams et al., 1995). In an innovative paper Robert Mendelsohn, William D. Nordhaus and Daigee Shaw (1994) - hereafter MNS - propose a new approach: using the variation in temperature and precipitation across U.S. counties to estimate a reduced form hedonic equation with the value of farmland as the dependent variable. A change in temperature and/or precipitation is then associated with a change in farmland value which can be interpreted as the impact of climate change. Adams et al. (1998) characterize the hedonic approach as a spatial analogue approach, and acknowledge that ”the strength of the spatial analogue approach is that structural changes and farm responses are implicit in the analysis, freeing the analyst from the burden of estimating the effects of climate change on particular region-specific crops and farmer responses.” On the other hand, one of the potential disadvantages of the hedonic approach is that it is a partial equilibrium analysis, i.e., agricultural prices are assumed to remain constant. 1 While year-to-year fluctuations in annual weather conditions certainly have the potential to impact current commodity prices, especially for crops produced only in a relatively localized area, (such as citrus fruits which are grown mainly in California and Florida), changes in long-run weather patterns (i.e., changes in climate) might have a smaller effect on commodity prices because of the greater potential for economic adaptation, particularly shifts in growing regions. 2 The hedonic approach as implemented by MNS predicts that existing agricultural land on average might be more productive and hence result in benefits for U.S. farmers. 3 The hedonic approach has received considerable attention in our judgment in part because the conclusions are at variance with those of some other studies

Market failure and energy policy A rationale for selective conservation

Abstract Appropriate activities for the government in the energy sector of the US economy are suggested on the basis of market failures in this sector. Alleged market failures are explored and specifically targeted remedies proposed where indicated. The resulting government policies can be characterized as selectively conservationist: designed to induce lower levels of use of particular fuels - sometimes in particular industries.

Quasi-option value: Some misconceptions dispelled

Abstract We discuss a couple of important issues in the recent literature on quasi-option value. We show that the assertion that quasi-option value can be negative in a model with independent learning is based on confusion between quasi-option value, which is always positive, and the net benefit of preservation (of a natural environment subject to development), which is not. We also explore the significance of different assumptions about the nature of learning and show that the result that quasi-option value is positive is surprisingly robust.

The Impact of Global Warming on U.S. Agriculture: An Econometric Analysis of Optimal Growing Conditions

We link farmland values to climatic, soil, and socioeconomic variables for U.S. counties east of the 100th meridian, the historical boundary of agriculture not primarily dependent on irrigation. Degree days, a nonlinear transformation of the climatic variables suggested by agronomic experiments as more relevant to crop yield, gives an improved fit and increased robustness. Estimated coefficients are consistent with the experimental results. The model is employed to estimate the potential impacts on farmland values for a range of recent warming scenarios. The predictions are very robust, and more than 75 of the counties in our sample show a statistically significant effect, ranging from moderate gains to large losses, with losses in the aggregate that can become quite large under scenarios involving sustained heavy use of fossil fuels.

Exploration and Scarcity

Noting that a suggested measure of natural resource scarcity, resource rent, is unobservable, we show that rent is linked to (observable) marginal exploration cost. A two-period model of extraction and exploration reveals that rent is equal to this cost when discovery is certain. Under risky exploration, cost data can be used to bound rent. The model also indicates how exploration uncertainty affects the competitive firms extraction and exploration decisions. Finally, the behavior of U.S. oil and gas exploration costs suggests that these costs were rising in the postwar era, which has different implications for scarcity than indicated by other measures of scarcity.

Investment under uncertainty and option value in environmental economics

A question has arisen concerning the relationship between the financial theory of options and the concept of option value developed in the literature on environmental preservation. This article presents simple models in each approach and then demonstrates their equivalence. The conventional, differing interpretations of results in the two approaches are also shown to be consistent though consideration of the difference can lead to a deeper understanding of the concept of option value.

Resource Conservation, Environmental Preservation, and the Rate of Discount

I. Discounting and conservation, 359. — II. A model for natural environmental resource allocation: the concept of effective discount rates, 362. — III. Concluding remarks, 370.

Valuing long run ecological consequences and irreversibilities

Abstract In this paper we consider the special nature and implications, for economic theory and policy, of resource uses that involve adverse effects on the physical environment that are difficult or impossible to reverse. Distinctions are drawn between reversible and irreversible activities, between replaceable and irreplaceable resources. The existence of an “irreversibility premium” is demonstrated under certain plausible conditions, including uncertainty and shifting time perspective.

Research Trends and Opportunities in Environmental and Natural Resource Economics

The research questions and topics most likely to emerge in the near term future are assessed. A common theme is that policy issues will be an important driving force, as has generally been true in the past. More specifically, future theoretical advances are expected to occur in the treatment of uncertainty, the incorporation of stock service flows into natural resource analysis, and the incorporation of institutional considerations into models of resource exploitation. Research on valuation is expected to remain vigorous, primarily in the testing of basic assumptions and reconciliation of existing inconsistencies. Opportunities in renewable resource economics center on the incorporation of richer behavioral and technological detail in the general frameworks that already exist. A better understanding of what drives technology, and how environmental agreements can be negotiated and enforced among sovereign nations, are two topics likely to shape future research on global externalities. Finally, questions related to spatial aspects of natural resource use, and matters of land use more generally, seem likely to emerge as important topics on the professions future research agenda.