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An Extended Post on the Benefits and Costs of Oil and Gas Drilling

If there is any upside to the epic oil spill down in the Gulf (and heading this way), it is that it provided a learning opportunity for my courses in Political Economy of Regulation (Econ 240) and Environmental Economics (Econ 280).  I’ll start with the benefit-cost analysis (I actually started this yesterday and have touched on it here and here), and I will try to get to the regulations next week.

The Environmental Economics class looked at the benefit-cost analysis of offshore drilling described in the Draft Proposed Outer Continental Shelf (OCS) Oil and Gas Leasing Program 2010–2015. The document covered areas in Alaska, California, and the Gulf. The students looked at the benefits and costs of expanding offshore production, including the quantification of the environmental (external) costs.

The results deviated little from the extant program from 2007-2012 (see table), where the quantified benefits were far higher than production and external costs. Most of the benefits manifest themselves in the difference between oil and gas prices and the production costs (net economic value in the table). The producers take a chunk of profit and the federal government takes a 12.5% gross production royalty that it redistributes to the states.


The net benefits calculation is the consumer surplus and producer profits less the environmental costs. As can be seen in the table, the values are dominated by producer profits (roughly equivalent to “net economic value”). The analysis assumes $46/b oil prices, $7 / McF natural gas prices, and a 7% real discount rate.

Continue reading An Extended Post on the Benefits and Costs of Oil and Gas Drilling

No Holiday Econ TeaBA

Grill, Baby, Grill

We kick off the final week of classes with a holiday, perhaps an apt metaphor for where many of you have been mentally for the past week.  The holiday preempts the usual slot for the Economics TeaBA, paving the way an afternoon barbecue for the missus and me.

We get back to serious business in my courses Wednesday. In environmental economics (Econ 280), small groups will be reviewing the cost-benefit analysis of the Minerals and Management Services offshore leasing program. Then in the afternoon, the political economy of regulation course  (Econ 240) will be going through some of the administrative regulations governing offshore drilling, truly a look at how the sausage is made.  If you are interested, stop on in to see whether they’ve learned anything.

So, I’m headed over to the parade.  Hope to see you there.

“We deal with them by ignoring them until they happen, and then overreacting”

That’s the answer.  The question is from a nice piece at is:  How do we deal with low probability, high consequence events?  And the source of the quotation in this case is John Harrald from George Washington University.

The article is a pretty nice profile of what I would call risk regulation. I am pretty certain risk regulation is somehow different than regulating externalities, but I’m not sure exactly how and I’m not certain that there’s always a bright line. So, I’m asking my political economy class to figure this out for me.

One reason, of course, is that damages are determined in terms of expected values.  Regulating low probability events with highly-uncertain outcomes and benefits is problematic indeed.  Homeland security measures are notoriously difficult to even frame, let assign a “net benefit” to.  How many incidents have our securities regulations discouraged or prevented?  What bad things would have happened? What benefit would we have assigned to them?  See, for example, this paper by Farrow and Shapiro on the analytical tractability of this problem.

So that gets us back to the original question, which is, should we think about the regulatory framework for the current oil spill fiasco in terms of regulating some sort of risk or internalizing an externality? And, does it make a difference which approach we take in terms of the types of regulations we would want?

All that said, I’m not sure we always wait until bad things happen and then overreact.  In many cases, I would think there is excessive ex ante precaution that mitigates the intrepid adoption and diffusion of new technologies.

The good news is that these are exactly the sort of issues we grapple with in the Political Economy of Regulation course.  The bad news is, I’m not sure how far we get with these problems.

Freshman Studies Thought for the Day

“It was a good idea to get science and democracy from the ancient Greeks. It’s not such a good idea to get fiscal policy from the modern Greeks.” — David Boaz from The Cato Institute

I’m guessing Professor Wulf would find this amusing.

Speaking of Professor Wulf and Freshman Studies, it is shaping up to be awesome this fall, so I encourage you to enroll as a Freshman to take advantage.

A Modest Change to YOUR Future

Yesterday, Professor Gerard posted the course offerings for fall.  One of those, which should interest students who seek a broad based 200 level course will be the history of economic thought.  The registrar suggests that students should sign up for the actual course rather than for a tutorial. This will be possible after May 12th.  The course was  last taught by Professor LaRocque here in 2001.  We have resurrected the course number and title.  SO:  sign up for ECON 330 – The Evolution of Economic Thought after May 12th.  If you seek further information, please contact Professor Finkler.

Monkey business

In Introductory Microeconomics, we have been discussing trade. We all know that Adam Smith wrote that trade was a result of people’s “propensity to truck, barter, and exchange one thing for another.” But did you know that he also wrote “Nobody ever saw a dog make a fair and deliberate exchange of one bone for another with another dog. Nobody ever saw one animal by its gestures and natural cries signify to another, this is mine, that yours; I am willing to give this for that.” (Wealth of Nations, Book I, Chapter II) This video calls all of that into question, it would seem (thanks to Adam King). On a related note, listen to this podcast from NPR to get an interesting perspective on early trade (thanks to Max Randolph).

See Your Future, Be Your Future…

Alright, folks, here is the unofficial unveiling of the courses coming for next year.  If you don’t see what you think you should see here, get in touch with one of your friendly neighborhood LU economists and ask about possible independent and group study options.

Fall 2010


ECON 170 FINANCIAL ACCOUNTING 2:30-4:20 TR  Mr. Vaughan

ECON 200 ECONOMIC DEVELOPMENT (G,W) 12:30-2:20 TR  Mr. Finkler

ECON 390 HISTORY OF ECONOMIC THOUGHT 2:30-4:20 TR  (Sign up for tutorial with Professor Finkler)


ECON 430 CAPITAL AND GROWTH (Q) 9:00-10:50 TR Mr. Finkler

ECON 520 ADVANCED MACROECONOMICS (Q) 1:50-3:00 MWF Ms. Karagyozova

Continue reading See Your Future, Be Your Future…

13 Bankers or 1 Federal Puppet Master?

On the news that Goldman Sachs allegedly engaged in securities fraud and also posted $3.46 billion in quarterly earnings, the intersection of politics and high finance is of special interest.   My Political Economy of Regulation class read Simon Johnson’s “Quiet Coup” about the cozy relationships between Wall Street and federal regulators as a possible example of capture theory (making a convincing case to some).

Now Johnson is back with 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown, bolstering his case with the help of co-author James Kwak.  Tyler Cowen reviews the book for The Huffington Post and comes to a much different conclusion:

Much as I admire their analysis and exposition, I see the problem a bit differently than they do. Whereas they see banks as the puppet master and our government as the fool, I wonder whether it is not more accurate to think of the government as running the show….

[N]amely that the U.S. government stands at the center of a giant nexus of money raising, most of all to finance the U.S. government budget deficit and keep the whole show up and running. The perception at least is that our country requires the dollar as a reserve currency, requires New York City as a major banking center with major banks, and requires fully credible governmental guarantees behind every Treasury auction and requires liquid financial markets more generally. Furthermore the international trade presence of the United States (supposedly) requires the federal government to strongly ally with major commercial interests, just as our government sides with Hollywood in trade and intellectual property disputes. To abandon banks is to send a broader message that we are in commercial and political decline and disarray, and that is hardly an acceptable way to proceed, at least not according to the standards of the real Washington consensus.

Back to square 1, I guess.  I see a discretionary writing assignment for Friday on the horizon.


UPDATE: Russ Roberts interviews Johnson on EconTalk, and a summary of the interview.

The Nobel-ist Triumph?

The economics Nobel selection committee evidently isn’t the only body impressed with Oliver Williamson’s Transaction Cost Economics (TCE). Personally, I have always liked transaction cost economics because I found the construct consistent with my own intuition.  Put succinctly, watch out because someone might be looking to screw you over.

Evidently, the students in my Economics 450, Economics of the Firm course, share my enthusiasm.

Here is a full accounting of their written responses from this term’s course evaluations:

Q:  What was the best topic in this course?


TCE! Williamson changed my life :-)


I love Williamson’s TCE forever and ever. I also really liked talking about McDonalds. I dont think the Innovation and Econ was particulary central to the class but I really enjoy it too!


Food for Thought, Students Going Bananas

This question came up in class the other day — are you peeling your bananas wrong?   As usual, the Armchair Economist Steven Landsburg has something to say about the matter:

My friend Petal peels her bananas from the bottom. Well, it’s the top, actually, since bananas grow upside down. Come to think of it, that’s not quite right either—bananas grow the way they grow, which should be right-side up by definition, even if we think of them as upside down. So let me start over. Petal peels her bananas from the end without the stem.

Petal’s method is counterintuitive and thus instantly appealing to economists, who love nothing more than to overturn conventional wisdom. Multiple experiments (well, two experiments, actually, since we only had two bananas) quickly convinced a majority of the department that Petal’s way is—surprisingly—easier than the traditional method, though the econometricians thought you’d need to test at least 30 bananas to report that result with confidence. The labor economists immediately resolved to apply for a grant.

Still not convinced?  Well, you aren’t alone.  But the peel-from-the-bottom case is a compelling one:

In the anti-Petal camp, we have the theorists who argue that peeling from the stem end must be optimal because that’s what people do. But Petal counters—and indeed this is her clincher argument—that monkeys do it her way (though I think it would be more accurate to say that she does it the monkeys’ way) and monkeys are the real experts.

If such knotty problems interest you, you should consider taking Econ 300 with me this fall.   In fact, you should consider it anyway.

Are you feeling lucky, Prius?

My colleague Paul Fischbeck is in the news for calculating the incremental risks from driving a Toyota with an accelerator problem.  According to his press release:

In the U.S., there is a little more than one fatality for every 100 million miles driven. The average U.S. vehicle logs about 13,000 miles each year. Based on these averages, for the 2.3 million Toyotas being recalled, there are about 340 fatalities every year for causes unrelated to the accelerator. The accelerator problem is adding about six deaths every year to this total — meaning that the accelerator problem is increasing the driving risk by about 2 percent.

So there’s a meat-and-taters public policy question for you — do the benefits of fixing the problem justify the costs of a massive recall?   To put this in context, a 2 in a million chance is about the same as flipping a coin 19 times and getting heads every time.

See you in 240.

Are You Ready for Some Econ?!?

It’s come to my attention that many of you have not registered for Spring term.   You can’t be serious!

Here’s what’s in store:

  1. Professor Galambos: Econ 100: INTRODUCTORY MICROECONOMICS (Q) 12:30-02:20 TR
  2. Professor Karagyozova Econ 120: INTRODUCTION TO MACROECONOMICS (Q) 11:10-12:20 MWF BRIG 223 09:50-11:00
  3. Professor Galambos Econ 180: ENTREPRENEURSHIP IN THE ARTS & SOCIETY (S) 09:00-10:50 TR
  4. Professor Gerard Econ 240: POLITICAL ECONOMY of REGULATION (W) 03:10-04:20 MWF
  5. Professor Gerard Econ 280: ENVIRONMENTAL ECONOMICS 09:50-11:00 MWF
  6. Professor Finkler Econ 320: MACROECONOMIC THEORY (Q) 09:50-11:00 MW and  08:30-09:40 T
  7. Professor Finkler Econ 425: ENTREPRENEURSHP & FINANCIAL MARKETS 12:30-02:20 TR
  8. Professor Karagyozova Econ 460: INTERNATIONAL ECONOMICS (G,Q) 01:50-03:00 MWF

Count ’em, two courses on entrepreneurship, a new 400-level chance to take International, and my new writing-intensive course on the political economy of regulation.   If you are itching to take that one, signal your interest by getting on the waiting list.

The schedule for next year is up on Viking as well.  Start planning ahead if you need to fill those econ boxes.

Off to Björklunden

The faculty and students are headed to the great whitish north for its (first annual) departmental retreat, featuring presentations from Economics of the Firm (my personal favorite),  Game Theory, and Urban Economics courses.     It’s not too late to sign up.

Speaking for the economics of the firm course, there will be presentations on:

*** why Lawrence outsources its food service (can’t we do this ourselves?)

*** why Lawrence has its own campus security (why not use a professional security company?)

*** why Lawrence has its own vehicles for student use (why not use Enterprise?  They pick you up!)

*** why universities have endowments, and how reliant Lawrence is on its endowment (I’m not sure, and I don’t know… looks to be a good one)

    If you can’t make it this weekend, we hope to see you Monday for tea!

    The Nature of the (Urban) Farm

    From our pals over in Environmental Studies:

    Does meeting with fellow students and faculty to talk about running a farm in the ghettos of Oakland, dumpster diving to feed pigs, and corralling runaway turkeys in downtown Oakland sound like fun?

    During the Spring term  Green Roots and the Environmental Studies program will be sponsoring a for credit campus read program.  The book is Farm City: The Education of an Urban Farmer, by Novella Carpenter.  Her work covers topics including sustainable agriculture, urban communities, and healthful eating.  As a special treat, the author will be in the Fox Cities in mid-April, just before Earth Day!

    Contact Andrew Knudsen or Jason Brozek for more information.