Pricing the environment

Dear Kate,

I gather, you took a minor in environmental economics. I once heard that you guys like to value clean air, healthy water, sequestered carbon etc by putting a price on them. How do you do that?

TreeHugger @ Borneo


Dear TreeHugger,

There are many ways to do that. Let me take one here, called hedonic price estimation. You are Foke that governor. Suppose you want to clean the Jakarta's air. Calculating the cost is easy: sum up the prices of labor, equipments, capital, etc. But you would need an estimate of benefit. After all, you can only approve a project when its benefit outweigh the cost - especially because you're using public money from the taxpayers, you would be held accountable. Measuring the benefit of cleaner air is not straightforward, because air is not market good ie it doesn't have a price tag ready like the t-shirt you buy in Plasa Senayan.

This is where hedonics comes into rescue (I'll tell you someday why it is called 'hedonic' approach). It measures the benefit of non-market good via the price of a market good. How? Think about the time when you were about to buy your house. What were your factors of consideration? Of course you would care about its price, its structure, its location, its neighborhood. But you also care about the environment, the air right? With only price and environment vary, other things being the same, which one would you buy: House A, cheaper but with dirtier air, or House B, more expensive with cleaner air? Keep in mind, life is about choosing and tradeoffs.

That is what hedonic approach exploits. It tries to extract the environmental part in your set of consideration when you buy a house. Using an advance econometric approach, you set all variables but price and an environmental proxy unchanged. Then you can see what a change in environmental variable would impact on the house price. Then you multiply this number by the population house in the area. This is the social benefit of having clean air in Jakarta.

You want more? Ahem, hire me :)

Greeny yours,
Kate

Twitter

Hi, I'm officially on Twitter now (@katesalemba). As in the other social networkings, I'm a latecomer. I gather, the baristas are there too: Aco (@acopatunru), Ape (@ari_perdana), and Ujang (@ujangw). Rizal is still in denial, while Sjamsu 'can not handle one more additional networking' (what, is he Paris Hilton or something? Haha).

So, let's see how this Twitterati plays out. Wanna bet how long I'll be ... what's the term, tweeting?

Twittery yours,
Kate

Gary Becker's World View -or Something Like That

One feature I like from Chicago political-economy school is their optimistic view on market-like competition and the ability of people to generate it --regardless of any (usually government) attempt to suppress such competition.

Gary Becker interview here is one example. Unlike the right-wing radicals who saw the passing of healthcare bill as a doomsday for America, Becker remains rather optimistic that voters as well as competing interest groups generally would place more realistic assessment and control on this political and politicians' product.

I share his view on the role of interest groups competition - including on the latest Pansus brouhaha.

My favorite lines, however, is his explanation on people's anti-market bias. Becker says at ease:

"There's one bias that we're up against all the time: Markets are hard to appreciate. People tend to impute good motives to government. And if you assume that government officials are well meaning, then you also tend to assume that government officials always act on behalf of the greater good. People understand that entrepreneurs and investors by contrast just try to make money, not act on behalf of the greater good. And they have trouble seeing how this pursuit of profits can lift the general standard of living. The idea is too counterintuitive. So we're always up against a kind of in-built suspicion of markets. There's always a temptation to believe that markets succeed by looting the unfortunate."

Yes, indeed market is hard to appreciate - mostly based on appeal to emotion.

Akerlof and Kranton's Identity Economics

Do economists simply disregard social norm in their analysis?

Contrary to common belief, economists have tried to incorporate social norms in at least three ways. First, in collaboration with psychologists, they tried to model an agent's maximizing utility behavior with additional constraint of psychological bias. Second, they also tried to take into account other's utility function into the representative agent's utility function; known as endogenous preference approach.

This first two approaches still hold up a single representative agent behavior as micro-foundation of a social phenomena.

Akerlof and Kranton, in their latest book, Identity Economics, 2010, offer a different perspective. They use more than one representative agent and respective utility function (they called it identities) in looking at a certain social pattern.

I have read this interesting and readable book for the general public, but haven't had time to peruse the more technical academic journal articles behind this book --those on the bibliography. With that in mind, this is my knee-jerk reaction: how do we decide the number of agents' types and utility functions we need to put into account in analyzing, say, gender and labor market in Indonesia? Two, three, four? What is the general rule for determining that number?

Nevertheless, the book shows that economics, after all, has never been an isolated subject full with stubborn students. It did not stop with Milton Friedman's book on Price Theory.

Obamacare, this week's name of the game

Obamacare, or the triumph of Obama/Democrat's health reform bill in the House is the name of the game this week. (Especially after Liverpool's loss to MU).

The whole process is interesting to follow. Not for its 'heroic' moment for Democrats. Not for the contents, which I am still learning about. Well, I like that there is finally an attempt to fix the problems in the US health care, including the market failures associated with it. But, like Greg Mankiw wrote, we still need to understand the trade-offs of each policy choice.

For professional purpose, I have been trying to follow the issue, read here and here. Oh, by the way, the blog is my new playground -- a nerdier version than this Cafe.

I was entertained by how the politics are played in Washington. Not because it's beautiful. On the contrary, we've seen the good, bad and ugly side of Washington politics. Where ideas, idealism and ideology meet pragmatism, negotiations and bargaining.

Also on what I considered as 'the cattenaccio of politics' played by Obama. He distanced himself from the micromanagement, orchestrating the Democrats in both chambers of Congress to get bogged down with the nitty-gritty details. When Mass. senate seat went to Republican Scott Brown, eliminating Democrat's supermajority, they changed the tactics. House voted for an earlier Senate version, so they don't need another round of vote from the Senate. Big kudos to Nancy Pelosi who led a successful army of arm-twisting, nail-pulling efforts, making sure the bill was passed.

Now, compare that to the Pansus drama...

Sure, some friends argued it was all about ideology. It was the triumph of government over market and big corporations. Well, fine if you think that way. But for all the pro-government enthusiasts, two things are missing from Obamacare: a government-run commercial insurance and single-payer system.

Ah, and of course some DPR members failed to get the story right. This guy screamed Obama's Asia-Australia trip delay was a sign of diplomatic failure. Our government (SBY, that is), failed to convince the US that Indonesia is safe. Well, what can we expect?

Undergrad Student The Cafe Would Love to See More

I used to think that going to Juilliard and studying whatever there is always more fun than taking economics. Thus it came as a bit surprise that taking economics, after all, is more interesting than studying violin, even at Juilliard, at least for A.K Barnett-Hart.

And more importantly, her excellent undergrad thesis on Collateralized Debt Obligation (CDO) is indeed worth perusal (see the link on that WSJ piece)

The Cafe would like to see more undergrad students like her, not those who love to throw stones at KFC or fight against the police. In fact, the Manager is thinking to give free coffee to students who produce an A+ thesis.

(HT: Greg Mankiw)

On Obama's visit

Visitors of this cafe might remember, I wasn't very thrilled by Obama when he was first elected (as channeled by the guys here in Warung Sebelah). But I shared many observers' view that he's much better than Bush.

Now, with Indonesia's rising role in international fora (e.g. G20) as well as its impressive economic achievement (e.g. upgrades by Fitch, Moody's, S&P), I think the Obama factor has become even more important than before. Yes, there's an ongoing change in the geopolitics in the area with China's leadership esp. as the locomotive of the so-called regional production network. But issues like currency talk, global economy rebalancing with US and China will be around for quite a while. Add the tension between China and Japan on ASEAN+3 or ASEAN+6 to it, we would all see that Indonesia should really take these other countries very seriously. And that includes giving proper respect to their leaders, including that of the US, namely Obama.

But why am I bringing this up? And why here in the cafe rather than there in the boring and pretentiously serious Exegesis? Well maybe because I'm sick of this die-hard Americo-phobia displayed by many elements in the community, e.g. HTI and some other religious-based groups. Ah yes, some lazy students too plus narrow-minded media. So I'm saying this with the usual cafe angst.

And I post here so as the other baristas will chip in :D

On Good Coffee, Jazz, and Economic Data

Let us discuss those things this Cafe loves to talk about.

First, coffee. Finally New York City took their coffee seriously. This is actually a problem for almost all of American cities, that is, low per capita good coffee places. Come on, if you think Illy is the best coffee you can get, then you're in a serious need for better taste caffeine.

Unlike their counterparts in Europe, America needs much more good coffee -- and bread, I must add.

Second, jazz. Brad Mehldau is about to issue a new album, Highway Rider (HT: Sisil). It looks promising and you can listen to some of the sample here. Mr. Mehldau is one of Cafe Salemba's favorites for contemporary jazz --along with Joshua Redman and Branford Marsalis, to mention some. Of course we also listen to Vampire Weekend and Arctic Monkey, while on Lady Gaga, there's been a wide disagreement amongst us.

In this new album, apparently Mr. Mehldau is back to his old style as in Largo album. He seems indeed really good in expressing the melancholy of journey in life.

Third, economic data. Google launched visualization of the World Development Indicators subset (HT: Tyler Cowen). Any serious development economist must have been familiar with this data set at one point or another. The visualization is fun too. You can now see how good (or bad) Indonesia is, relative to other countries, using a real data --not an appeal to emotion.

(Not) the Java Jazz

I've overheard that the Java Jazz Festival 2010 was disappointing.

Well, I am not sure if it's true. But anyway, you still have us, the Cafe, keep playing the jazz as we know it.

Here some for you, a real cool (and touching) piece from Dave Brubeck's Allstars Quintet, The Jazz Ambassadors of US Army Field Band, and The Four Sons of Dave Brubeck, played the medley of Unsquare Dance, Kathy's Waltz, Take Five, Blue Rondo ala Turk, and Happy Birthday, honoring Dave Brubeck at the Kennedy Center, December 2009.

And John and Toni who, again? :-D