All posts by d.anderson

Is there a bipartisan solution to pollution?

Each political party has a stake in the environment because, without natural resources, we have no inputs for production, no jobs, and ultimately no consumers. The hard part is finding agreement about how to protect the environment, but at least one policy is getting bipartisan support.

The Energy Innovation and Carbon Dividend Act, H.R. 763, would place a fee on the carbon released in the combustion of fossil fuels. A carbon fee would encourage energy conservation and clean energy production. But why might both sides agree on such a policy?

H.R. 763’s win-win recipe combines emissions reductions with fewer regulations and more help for the poor. Specifically, a pause on new EPA regulations on CO2 would accompany the fee to incentivize clean energy. The poor, along with everyone else who uses less than the average amount of fossil fuels, would receive a net gain from the policy because the government would divide the revenue from the fee evenly among all Americans. That right–you would receive a monthly check to spend as you please.

Suppose the average American pays $25 in fees per month, which are built into the price of energy. Average fossil fuel users will feel no pain because they will pay $25 per month and subsequently receive a check for $25 each month. Anyone using less than the average amount of fossil fuel energy will pay less than $25 in fees per month and enjoy a net gain from their $25 monthly check. Relatively heavy users of fossil fuels will pay more than $25 in monthly fees, but only be out the difference between their payment and the $25 they receive back.

The policy would create jobs in the clean energy industries, which already outnumber jobs in the fossil fuel industries. Purchases spurred by the monthly checks would create jobs. And the incentives of H.R. 763 would take us on a path toward cleaner air and water, better health, and less climate change.

The broad appeal of these benefits has already garnered bipartisan support. If this policy addresses issues you care about, read more about it here.

The Hidden Cost of Crime

Some crimes provide benefits that exceed their costs to society. If you must double park to make a crucial job interview, steal food to survive, or speed a dying person to the hospital, it may be best to commit the offense. More often, crime presents an externality problem because the burdens of crime are felt beyond—or external to—those causing them. Since criminals don’t bear the full cost of their behavior, they often commit crimes with larger costs than benefits.

Clarity on crime’s cost helps us prioritize crime-prevention efforts. It also helps individuals grapple with decisions as potential offenders. We face daily dilemmas about speed limits, drinking laws, piracy of copyrighted music and images, and other assorted temptations for mischief. To the extent that we care about the people around us, hidden consequences matter to our decision making.

Early crime-cost studies that focused on direct losses due to theft and vandalism misrepresented the extent of crime’s burden on society. The indirect costs have society reaching far deeper into its pocketbook. Even minor crimes such as spray painting on walls and shoplifting trigger large hidden costs. By creating an environment of fear and distrust, seemingly petty crimes erode property values and divert money to defensive expenditures. This includes the purchase of security cameras, alarms, fencing, lighting, gates, guards, theft insurance, protective firearms, locks, safes, and self-defense training.

Growing crime rates cause residents to spend time and money on neighborhood watch programs, and bring communities to invest in more police, replete with pricey police cruisers and equipment. And then there are the costs of the expansive criminal justice system and the prison system, where it costs as much to house an inmate as it does to send a student to college. Although this spending creates jobs, the same spending could have created jobs in schools, parks, and hospitals if it had not been spent in response to crime.

The total cost of crime eclipses the direct costs of theft and vandalism. In the United States we lose $3.5 trillion to crime each year, about the same amount we spend on all U.S. health care. That figure highlights the value of high moral standards.

More information

David A. Anderson (2012), “The Cost of Crime”, Foundations and Trends in Microeconomics: Vol. 7: No. 3, pp 209-265.

Why are there reflectors on my spin bike?

Economics can explain the bizarre. Consider the reflectors on this spin bike. It makes no sense to put reflectors on bikes destined to live indoors, does it?

In fact it does, if we reflect on the shapes of cost curves. A typical long-run average total cost curve slopes downward initially as an indication of economies of scale. That is, as a manufacturer increases the quantity of a particular product, the average cost of making it falls.

A company that makes road bikes and spin bikes has a choice. It can make smaller quantities of two types of pedals—those with and without reflectors—or it can make a larger quantity of pedals with reflectors and put that one type on both road bikes and spin bikes.

The firm enjoys economies of scale by making just one type of pedal, which makes sense because it only needs one design and one assembly line to make all of the pedals it needs. So, although you will never hit the streets on a one-wheeled spin bike, the reflectors on the pedals are helpful because they lower the price.