Odin K. Knudsen

The Demand for Calories in Developing Countries

This paper uses household survey data on consumption to analyze the determinants of calorie intakes in developing countries. It relies on characteristic demand analysis for a demand function specification for calories. It explores the effect of calories price differences, income, and other socioeconomic factors on the intracountry and intercountry distribution of calorie intakes. The paper reaches three broad conclusions: (i) both income and price elasticities of demand for calories are below unity and are substantial for poorer consumers; (ii) even a moderate increase in calorie prices implies a large nutritional sacrifice for the poor if present income growth and distribution trends continue; and (iii) if moderate redistribution policies permit a substantial portion of the income increase to be allocated to the poor, sizable calorie price increases would not rule out elimination of malnutrition.

Bringing Social Standards into Project Evaluation under Dynamic Uncertainty

Society often sets social standards that define thresholds of damage to society or the environment above which compensation must be paid to the state or other parties. In this article, we analyze the interdependence between the use of social standards and investment evaluation under dynamic uncertainty where a negative externality above a threshold established by society requires an assessment and payment of damages. Under uncertainty, the party considering implementing a project or new technology must not only assess when the project is economically efficient to implement but when to abandon a project that could potentially exceed the social standard. Using real-option theory and simple models, we demonstrate how such a social standard can be integrated into cost-benefit analysis through the use of a development option and a liability option coupled with a damage function. Uncertainty, in fact, implies that both parties interpret the social standard as a target for safety rather than an inflexible barrier that cannot be overcome. The larger is the uncertainty, in fact, the greater will be the tolerance for damages in excess of the social standard from both parties.

Sustainable Development: Valuing the Future for the Environment and Equity

We argue that sustainable development is at its essence the destruction and creation of expansion options under the shroud of uncertainty. Without this options approach, the future is undervalued because of uncertainty and the opportunity to stage investment. As a result of this undervaluation, protecting the environment, in particular combatting climate change, is underinvested in favor of short-term returns. We extend this argument to income and wealth distribution arguing that public policy should favor longer-term investment and suppress returns on shorter-term capital. That is, policy should favor the future. In making this argument, we extend the analysis of the influential book by Piketty to real options analysis of investment under uncertainty. We find that taking into account the term structure of investment is more important than the average rate of return on capital in income and wealth distribution. Valuing the future not only benefits the environment but also results in a more equitable income distribution. Both are at the heart of sustainable development.

Bringing Social Standards into Project Evaluation Under Dynamic Uncertainty: Bringing Social Standards into Project Evaluation

Society often sets social standards that define thresholds of damage to society or the environment above which compensation must be paid to the state or other parties. In this article, we analyze the interdependence between the use of social standards and investment evaluation under dynamic uncertainty where a negative externality above a threshold established by society requires an assessment and payment of damages. Under uncertainty, the party considering implementing a project or new technology must not only assess when the project is economically efficient to implement but when to abandon a project that could potentially exceed the social standard. Using real-option theory and simple models, we demonstrate how such a social standard can be integrated into cost-benefit analysis through the use of a development option and a liability option coupled with a damage function. Uncertainty, in fact, implies that both parties interpret the social standard as a target for safety rather than an inflexible barrier that cannot be overcome. The larger is the uncertainty, in fact, the greater will be the tolerance for damages in excess of the social standard from both parties.

The economics of pollution trading and pricing under regulatory uncertainty

In this paper, authors explore the effects of uncertainty on pricing of pollution permits, through the use of a dynamic model of pollution markets. Authors consider two major sources of uncertainty - that arising from the volatility of demand for the underlying resource and that coming from the regulatory environment. Both sources of uncertainty are common in pollution permit trading as not only does the market respond to the volatility of fundamentals but also to the vagaries of the institutional structure, created by public policy and enforced through regulation. The paper shows that even in the presence of strategic behavior on the part of the agents involved, the trading of permits effectively reduces emissions, and pricing does reflect opportunity costs and environmental objectives. Furthermore, and somewhat paradoxically, the higher uncertainty, the greater the impact of regulation.

Performance of Mexican Agriculture: Discussion

The importance of macroeconomic events and policy in influencing the incentives to agriculture has become one of the stylized facts of modem agricultural economics. Schuhs papers, beginning in 1974 on the relation between exchange rates and agriculture, are one of the major contributions in establishing this fact for North American agriculture. The recent World Bank studies guided by Krueger, Schiff, and Valdes provide additional evidence for developing countries by showing that indirect taxation of agriculture through maroeconomic policy has overwhelmed the positive protection given import-substituting agriculture through direct interventions on pricing and trade. The papers presented in this session reaffirm this growing evidence of the importance of macroeconomic phenomena in determining the incentives to agriculture. In particular, Villa-Issas paper outlines how changes in government policy in Mexico affected agriculture in particular from the postwar period. He implicitly hypothesizes that these linkages occurred through import-substituting protection and macroeconomic policy as reflected by changes in the real exchange rate and the internal terms of trade between agriculture and industry. In this note, I will elaborate on this linkage in the case of Mexico from 1965 to the present.