February 25, 2007
How to Conserve Water Efficiently-BECKER
The sharp rise in world population and income during the past five decades has stimulated greatly increased demand for clean water, and concern about whether the supply of water would be adequate to meet these needs. Demand for usable water in the future will surely continue to grow at a significant pace unless steps are taken to reduce demand, while the supply of water could grow more slowly, especially if global warming reduced rainfall and increased evaporation of water. The best way to bring demand into balance with supply is to introduce much more sensible pricing of water consumption than is common in most countries.
Many discussions of water conservation create the impression that households are large and inefficient users of clean water for drinking, eating, bathing, and toilet flushing. That is a myth. About 40 per cent of all the freshwater use in the United States is for irrigating land for agriculture, another 40 percent is used to produce power, and only 8 percent is used for domestic use; these percentages are similar in other countries. Moreover, about a third of all the water used by households in rich countries goes to water lawns and for other out door purposes, so probably no more than about 5 per cent of the total demand for water is for personal use.
Water used is usually a poor measure of the net amount of water consumed since much water is returned either immediately, or after evaporation and condensation, to the source pool, where it can be used again. Thermoelectric plants use a lot of water for cooling purposes, but typically have a very high reutilization rate (about 98 percent). Household use is also efficient, with a reutilization rate of about 75 percent. As a result, neither power producers nor households are big net consumers of water. Irrigation of farmland absorbs much water since most irrigation systems have low reutilization rates. In California, the biggest water using state, irrigation systems have a reutilization rate of only about 40 percent.
Governments usually try to close the gap between the supply and demand of usable water by command and control policies that regulate water use, usually starting with households. Many local governments have introduced requirements for low flow toilet flushes, bans on lawn watering except during certain hours or days, requirements for more efficient household outdoor watering systems, and other water conserving regulations. None of these regulations do anything to economize on the water used by farmers and industry, the main demanders of water.
Water is wasted in many ways by all sectors, and regulations do nothing to affect the main source of wasteful use of water: the inefficient pricing of water. Most irrigation systems in the world price water through annual flat fees, and not through charges that rise with the water consumed. Often domestic water use is not priced at all, and when priced, flat fees are far more common than fees that depend on use. As with any other scarce good, water is wasted when the cost of using more is negligible.
The obvious solution is to implement fees that rise with the amount of water demanded. Such fees are especially important in the agricultural sector since farming is a heavy consumer of water. Consumption ideally would be defined as net use after reutilization is accounted for. With this measure, the fee per gallon of water used would be low to power plants since they recover almost all the water they use. Farmers would tend to pay a lot both because they typically use much water, and also because most agriculture irrigation systems do a poor job of recovering the water used.
Fees that rise with consumption would reduce the demand for water partly by cutting demand. For example, households would water their lawns less frequently, and sometimes would replace natural grass with artificial grass, or with rock gardens and trees, Farmers would cut their demand for water by switching away from crops that require much water, such as rice, toward crops that need less, such as wheat. They would also switch to more efficient irrigation systems, such as spraying and dripping rather than flooding (which is the cheapest), if the price of water took account of reutilization rates. With proper water pricing, California and other regions that need expensive irrigation system to grow rice and other water-intensive crops would switch to other crops, or to other uses of their land, so that water-intensive crops would become more concentrated in areas with abundant water supplies. More generally, with sensible water pricing in different countries, arid parts of the world would not grow food that absorbs much water, and would shift to other crops and activities that they would exchange for these foods.
Some opponents of effective metering of water demand claim that it would not reduce the use of water because of the mistaken belief that most of the water used goes to households for drinking and personal hygiene. The demand for water for personal use may not be very responsive to price, but households in developed countries use lots of water for lawns and swimming pools that would be sensitive to the price of water. Also public and private golf courses and some other recreational facilities require much water, and these uses too would respond to higher water costs. Clearly, the use of water in agriculture and industry would be sensitive to its price.
Effective water pricing is even more important to poor countries since they cannot afford expensive methods of increasing the supply of usable water, such as desalinization, and since a large fraction of their water is used in agriculture with inefficient irrigation systems. Yet most poor countries make little effort to price water sensibly.
Implementation of significant fees is not easy politically since households and farmers believe they have a right to as much water as they can get. In particular, farmers in richer countries are well organized politically, and often resist efforts to raise the cost of water they use to irrigate their land. Perhaps their opposition could be weakened if they received generous reductions in their water fees when they introduce irrigation systems with high reutilization rates.
Posted by becker at 6:02 PM | Comments (17) | TrackBack
The Science and Economics of Water Shortage--Posner
The shorter the supply of a natural resource, the more important it is to have an institutional structure for allocating it efficiently among demanders, both present and future. In this respect usable fresh water is not fundamentally different from other scarce resources, such as oil and gas. The qualification in "usable" is important. Global warming does not diminish the world's supply of fresh water, but it reduces the supply of usable fresh water. Spring snowmelt is an important source of fresh water in many parts of the world, including California. That source will diminish as rising global temperatures cause more precipitation to take the form of rain rather than snow--and rain is much harder to collect and distribute than the spring runoff from melting snow. Higher global temperatures also increase the demand for water, as does an increasing, and increasingly prosperous, global population.
Of course, in principle, an increase in the demand for a good relative to its supply is not a problem. Price quickly rises, reducing demand and thus reestablishing equilibrium; so no more shortage. In the slightly longer run, moreover, the higher price leads to increased supply; in the case of water, one can anticipate greater use of desalination, that is, converting sea water into fresh water. Between water conservation by consumers trying to reduce their water bill, and increased supply of fresh water by the water industry, there should be no shortage, in the sense of an imbalance between demand and supply resulting in queuing, black markets, degraded quality, technological stagnation, politicking (Becker mentions discrimination in water pricing in favor of households and farmers), and corruption.
The problem is that the market in fresh water is inefficient. Becker focuses on the inefficient pricing of publicly owned water supplies--for example, charging a flat rate regardless of the quantity consumed, or failing to take account of reutilization (that is, the consumption of return flow). But a deeper problem is the institutional structure. One aspect is public ownership of water systems. There is no reason why a city should own the water company any more than it should own the cable television company. It is true that these are both networked services and therefore have aspects of natural monopoly; it would be wasteful to have multiple grids of water pipes in the same city. But through the contractual process a city can exploit "competition for the market"--that is, it can award a contract for the sale of water to whatever provider offers the best deal for the city's residents.
A still deeper institutional problem is the inefficient system (or systems) of property rights in water. In the western United States, where water is scarce, users obtain a property right by "appropriation," that is, by actually using water from a lake or stream. The amount they take is recorded and that is their property right. Any return flow can be appropriated by a downstream user. Now suppose an upstream user wants to sell his appropriation. He cannot do so without getting the consent of any downstream user who may be adversely affected by the sale because he had appropriated a portion of the upstream user's return flow. There may be many of those users, thus greatly increasing the transaction costs of reallocating water to a higher-valued use. In addition, because ownership of water rights is based on use, there is no incentive to hold water off the market, for future use; if one doesn't use the water one has appropriated, one loses one's property right.
The basic problem is that the same resource is jointly rather than singly owned, so that before it can be sold there must be a transaction among the owners, and the more owners, the higher that initial transaction cost. The problem is greatly exacerbated when an interbasin transfer is being contemplated, that is, a transfer of water from one watershed to another. For then all the users of return flow in the originating watershed will be deprived of their water.
Such problems are not unique to water, and are not insoluble. A parallel problem in oil is solved by unitization. Very often a number of separate oil companies will be drilling into the same underground oil field, and each has an incentive to take as much as it can as fast as it can (for example by drilling more wells), for what it leaves in the ground will be taken by other companies. The oil-producing U.S. states authorize "compulsory unitization," whereby if two-thirds of the owners of the land above a common oil field vote to conduct their operations under common management, the rest are bound. (Requiring unanimity would created serious hold-out problems.) A similar regime might be feasible for the users of a lake or stream. This would eliminate the inefficiency of a possession- or use-based system of property along with the inefficiencies associated with joint ownership.
In short, the solution to water shortages is likely to be privatization and intelligently designed property rights, using the institutional framework of natural resources such as oil, gas, coal, and other mineral resources as a model. This solution seems, moreover, as apt to African nations facing acute water shortages as it is to the milder problems of U.S. water supply.
Posted by Richard Posner at 5:26 PM | Comments (45) | TrackBack
February 19, 2007
Should Genetic Testing Be Forbidden?--Posner
Congress is on the verge of passing a bill that will forbid employers to discriminate against employees (including applicants for employments) on the basis of the results of genetic tests, and forbid health insurers to deny insurance or charge higher premiums on the basis of such results. (Actually, the bill tightens up an existing law that was designed to do the same things but turned out to have loopholes.) The stated rationale of the bill is that it will encourage people to obtain such tests and use the results to seek treatment or make other decisions, such as deciding whether to have children. That rationale is dubious for several reasons. First, people who suspect they have a gene that causes or predisposes them to a serious disease have a strong incentive to be tested (especially if there are treatment options), an incentive that will often override the possible adverse effect of a positive test result on employment or insurance. Second, in the absence of the law, employers and insurers could make such testing a condition of employment or insurance. Third, persons who are confident that they do not have a genetic defect have an incentive to test voluntarily and disclose their negative results to employers or insurers--and some of these persons will be mistaken and discover that they indeed have such a defect.
So while some people are doubtless deterred from testing by concern with the effect on their employability or insurability, on balance it is unlikely that there will be more testing by virtue of the new law. In a strict efficiency analysis, moreover, even if more people who are likely to have genetic defects will test for them as a result of the law, this would not necessarily be an argument in favor of the law. There is no increase in efficiency when a person conceals information (or avoids obtaining information that he fears he would have to try conceal if he did obtain it) in order to obtain a benefit that he would not obtain if he disclosed it. This would be obvious if a person who knew he was deathly ill bought a huge life insurance policy, concealing his illness from the insurer. The situation is no different if the person knows he may be deathly ill and decides not to verify his suspicion lest the confirmation of it prevent him from obtaining the insurance policy. In either case he is shifting his own expected costs (whether reduced longevity or medical expenses) to unconsenting others.
Analysis is complicated, however, by the possibility that a failure to test brought about by fear of the consequences for insurance or employment would impose costs on other people. That would happen if a prompt diagnosis would enable treatment of a genetic defect at a lower cost, assuming that treatment expenses are paid for in part at least by third parties. Then those third parties would be better off if the person tested. Suppose for example that had the person tested positive, she would not have had a child; instead she had the child, and it is badly deformed, requiring enormous medical expenses paid largely by third parties.
That would be a genuine externality, whereas if the cost of a medical treatment is merely shifted from the individual to his employer or insurer (which means, of course, to the other insureds of this insurer), the externality would be merely pecuniary. That is, it would be merely a transfer of wealth rather than an avoidable investment of scarce resources, as in the example just given where a medical expense is incurred that would not have been incurred had it not been for the failure to test. But transfers often and here are likely to have such effects, and not merely to alter the distribution of wealth. The cost of health insurance will rise if the new law goes into effect, and that rise will increase the number of persons who do not have health insurance, and their lack of insurance coverage may cause them to forgo tests and treatments that may, just as when a genetic test is forgone, avoid costlier treatments and other adverse consequences later on. Employers' labor costs will rise too, resulting in lower net wages; and health is positively correlated with income, so again the transfer will have secondary effects in the form of more ill health.
So even if the new law led to more genetic testing--which probably it would not do, for the reasons stated at the outset--its social costs, from the standpoint of economic efficiency, would probably be negative.
The law might seem defensible on noneconomic grounds as a form of social insurance, since persons who test positive for genetic defects may be unable to obtain private health insurance. The broader point is that the more that science reduces uncertainty about individuals' health, the less risk pooling there will be and the greater, therefore, the demand for social insurance. In the limit, if everyone's health prospects were known with certainty, there would be no market for health insurance at all and this would exacerbate the effects of differential health on equality of wealth; no longer would the healthy be paying to insure the unhealthy.
If social insurance is desired, the question becomes whether to finance it through taxes or, as under the proposed law, to compel private industry to provide it. The major difference is the identity of the "taxpayers": it is federal taxpayers in the first case and the members of the private insurers' insurance pools in the second. The allocative effects of the social insurance "tax" will differ because higher income taxes do not have the same behavioral effects as higher health-insurance premiums. The higher premiums cause people to leave the insurance pool; given current political concerns with the number of people who do not have health insurance, placing the "tax" on those who do have such insurance is questionable.
Eighty percent of Americans tell pollsters that they do not think that health insurers should be allowed to deny coverage or charge higher premiums to people with genetic defects. This is an example of Americans' economic illiteracy.
Posted by Richard Posner at 10:20 PM | Comments (57) | TrackBack
Comment on Genetic Testing-BECKER
Genetic testing offers great hope for future progress in treating diseases since individuals can in many instances reduce the consequences of genetic defects if they find out about them sufficiently early. For example, a woman who discovers through a simple blood that she has a BRCA1 or BRCA 2 defect has an extremely high chance of getting breast cancer if she does nothing about it. However, she can greatly reduce her risk of breast cancer by having her ovaries removed, and by other more extreme surgeries.
On the other hand, if little can be done to combat the adverse health consequences from having serious genetic defects, individuals may not want to know about them. This would explain why many persons with a high chance of having a genetic mutation that guarantees they will eventually get Huntington's Disease never take the simple test to determine whether they have this mutation since nothing is known yet about how to moderate the deadly consequences of Huntington's.
Particularly where successful health interventions can reduce the medical consequences of a genetic defect, individuals would like to have health insurance prior to taking a test to determine whether they carry that defect. Insurance prior to testing is a viable form of insurance since persons with similar risks ex ante can be pooled in determining insurance rates. Companies would be willing to offer insurance on genetic defects prior to testing since at that stage they would generally be at least as well informed, and often would be better informed, than individuals are about the chances of their having genetic defects. The premium for coverage of any particular genetic defect would then be determined by the product of the probability of having that defect multiplied by the cost of treating it. The premium would vary across different pools of individuals who have different probabilities of testing positive, and different treatment costs. The added premium to cover this risk would be small if the defect was not common, or if treatment costs were not major.
One major problem arises when individuals get tested before seeking insurance, and only take the extra insurance coverage when they discover that they carry a serious genetic defect. Of course, insurance companies would ask applicants if they have already been tested, but applicants for insurance conceal information about their HIV status and other diseases that would raise the cost of coverage if they revealed positive test results. The fear of insurance companies that they would be less well informed about these risks than those applying for insurance because applicants conceal information about testing is what makes these companies want to test many applicants before offering them insurance. Unfortunately, there is nothing to insure after testing since those individuals who test negative do not want coverage, while in the absence of controls over premiums, individuals who test positive would have to pay the full cost of any treatment.
The looming Congressional law on testing would try to handle this problem by forbidding insurance companies to raise premiums to individuals with genetic defects. This only introduces one more regulation in insurance markets, and there are already too many of them. A better way is to penalize individuals who withhold information from insurance companies about the outcomes of genetic tests. If the penalties were set high enough to effectively deter lying about test outcomes on applications for insurance, individuals would then have an incentive to seek insurance against the risk of genetic defects prior to taking any genetic test. Under these conditions, companies would offer insurance that would reflect the expected costs prior to testing of insuring individuals with different risks of genetic defects. Companies might require testing of persons after they are insured if knowledge about whether they were carriers of defects would significantly reduce the cost of preventing or moderating the disease if it eventually occurred.
One major problem remains even if insurance companies tested everyone with a reasonable risk of having genetic defects after they had insurance. Individuals who test negative afterwards would not want to continue to pay the extra premium they had been initially charged when they had a higher than average risk of having a genetic defect. They would threaten to change insurance companies if their premiums were not lowered. Insurance companies would then be left in the initially high-risk pool only with those who tested positive, and they would force these persons to pay the higher premiums appropriate for their high risk revealed ex post. Companies would then again want to know prior to providing insurance whether individuals are positive or negative, and they would then adjust their premiums according to the results.
The fundamental problem here is the inability to write long-term individual health insurance contracts that commit both insurance companies and individuals to remain together for an extended time period. This contractual limitation distorts other risks in the insurance market as well. Individuals who are revealed to be healthier than average as they age will seek insurance rates that take account of this information even though initially they paid rates that were adjusted to their expected health status. Individuals who are revealed over time to have worse health than expected will either lose their insurance coverage or face much higher premiums.
Health insurance coverage through large employee groups helps mitigate the problem caused by genetic testing. Individuals who test negative are not likely to change employers in order to take advantage of this information to get lower premiums since this adjustment in premium would generally form a small part of their overall compensation. Similarly, employees who are revealed to have genetic defects do not impose large costs on employers or other employees unless they are a large fraction of total employment. Of course, employer based health insurance under present arrangements is defective because employees who change jobs may have trouble finding employment if they tested positive for a genetic defect. The solution to this problem is to encourage a move toward a system that allows health coverage portability, so that coverage moves with employees when they change jobs.
Posted by becker at 10:03 PM | Comments (7) | TrackBack
February 12, 2007
Is Sex Selection of Births Undesirable? BECKER
In China in 2005, 118 boys were born for every 100 girls born. This ratio is far above the normal biological ratio of about 106 boys to 100 girls. The sexual disparity in China has resulted from a combination of low birth rates, a preference in China for boys when parents only have one or two children, and the spread of ultrasound techniques in that country that allow the sex of fetuses to be identified and then aborted if parents do not like the sex. Similar trends have emerged in India and South Korea as well.
More sophisticated and expensive methods permit parents to raise their chances of a male baby even before a woman becomes pregnant. Considered most reliable is a method that involves in vitro fertilization, drugs to stimulate the mother’s ovaries, surgery, and other steps. The total cost can exceed $20,000, so this method clearly is only available to richer persons.
Are there good reasons to object to sex selection, either by abortion or more sophisticated methods? On Feb. 1 the Committee on Ethics of the American College of Obstetricians and Gynecologists (the ACOG) did issue an opinion objecting on the grounds that it is unethical for physicians to participate in sex selection by parents that was based not on potential for sex-linked genetic disorders, but solely on family balancing of personal preferences. This opinion about the ethics of sexual selection applied "regardless of the timing of the selection (i.e., preconception or post conception) or the stage of development of the embryo or fetus".
Such an opinion seems strange in light of the general support by physicians and the Supreme Court of abortions by parents "solely" to satisfy their personal preferences about timing or number of children. What is so different about sex-selected abortions that would lead the ACOG with its over 51,000 members who provide health care to women to oppose abortions to satisfy parental desires for additional boys or girls while supporting the general right to abortion? The ACOG tries to provide an answer by claiming that sex selection through any method may "ultimately support sexist practices."
It is not clear what the ACOG means by sexist practices, but all the evidence on sexual preferences in the United States and other richer countries indicates an overwhelming desire for variety-boys and girls- rather than a strong preference for either sex. So sex-selected abortions in these countries is unlikely to have much of an effect on the overall sex ratio, although it would affect the distribution of boys and girls in different families.
I concentrate my remaining discussion on the implications of sex-selected abortions in countries where it raises the number of boys relative to girls. China, South Korea, and other countries have tried to implement control over sex selection by making it illegal to use ultrasound techniques to select the sex of children. However, these regulations are notoriously difficult to implement since doctors may say "congratulations" when an ultrasound test reveals a boy, and remain silent when the fetus is a girl.
Abortions of girl fetuses would reduce average family size if parents who prefer boys would end up with larger families than they would like because they cannot control the sex of their offspring. The effect on family size could go the other way, however, if the fear of having girls discourages parents from having additional children. These effects on family size could be important, but I ignore them in the following discussion and concentrate on the effects of a lower number of girl babies relative to boys compared to the biological natural girl-boy ratio of a little below 50-50.
One might expect parents who abort fetuses of sexes they do not want to treat their children better than they would otherwise since they now are satisfied with the sexes of their children. In such cases, sex-selected abortions against girls would improve rather than worsen the average treatment of girls since parents would be happier with the girls they have than if they had girls who were not really wanted. It is no surprise, for example, that orphanages in China predominantly have girls (and some handicapped boys), given the preference for boys in the traditional Chinese culture.
What about the overall effects in a society of skewing the sex ratio of births toward boys? The fewer girls who are born presumably would be better off since they would be better educated, and in other ways better treated by parents who want them. This would be reinforced if the effect of sex selected abortions is to lower the overall birth rate since it is well established that families with fewer children invest more in each one, girls as well as boys.
As children become adults in cohorts with a high ratio of boys, the advantage of girls and women increases since they are scarcer. It is claimed that young women in China are already at a premium as potential mates because strong sex-selection has been going on ever since the one child policy was introduced in the early 1980's. Prior to the spread of ultrasound techniques, sex selection occurred through sending girls to orphanages, neglect, and in some case even engaging in female infanticide.
To be sure, if the value of girls as wives and girlfriends, and in other ways, rises because they are scarcer, then the value of boys as husbands and boyfriends tends to fall. However, it is not apparent why that should call for policies that prevent sex-selected techniques, unless the interests of men were motivating these policies. To use an analogy, a shift of demand in an economy toward services and away from manufacturing because of a shift in "preferences" toward services- as has occurred in the United States and other rich countries- benefits women relative to men since women are more likely to work in services than are men. Yet no one would claim that society should prevent such preferences because they help (indirectly) one sex over another.
The great statistician and biologist, R. A. Fisher, used a celebrated biological analysis to explain why the sex ratio remains close to 50-50 in non-human species. An economic analysis based on incentives gives results that are related to Fisher's result. An improvement in the position of women due to a decline in the number of girls relative to boys leads to some correction in the sex ratio as parental choices respond in the long run to the more favorable position of girls. If women are in greater demand as wives and in the economy when they are in scarcer supply, some parents will decide that having girls has advantages, possibly through receiving generous bride prices when daughters marry. This would shift "preferences" toward having girls. The long run outcome would not necessarily be the biological natural ratio of a little more boy births than girl births, but it should be closer to that ratio than the current ratios in some Asian countries.
Posted by becker at 6:59 AM | Comments (39) | TrackBack
February 11, 2007
Correction
The Branson-Gore Prize is of course $25 million, not $25! My apology for the mistake--Posner
Posted by Richard Posner at 10:58 PM | Comments (3) | TrackBack
Sex Selection--Posner's Comment
I have little to add to Becker's convincing discussion. One small point worth noting, however, is a new technology for sex selection, described in an interesting article by Denise Grady in the February 6 New York Times. It is called "sperm sorting" and enables male or female sperm to be concentrated in semen, greatly shifting the odds in favor of producing a child of one sex rather than the other. The cost is only $4,000 to $6,000, which is much less than in vitro fertilization, since the "enriched" sperm can simply be inseminated in the woman rather than requiring in vitro fertilization. Sex selection by sperm sorting may actually be cheaper than ultrasound plus abortion, the conventional method; if so, and it comes to dominate, the ethics of sex selection will be separable from the ethics of abortion motivated by sex selection.
The key points that Becker makes, both of which I agree with, are, first, that sex selection by U.S. couples is unlikely to result in an unbalanced sex ratio; and, second, that in countries such as China and India in which there is a strong preference for male offspring, girls will be treated better if sex selection is permitted, since there will be fewer girls born to couples who did not want them. Of course, as there will fewer girls, period, the net effect on total female utility is unclear: fewer reduces total utility but happier increases it. Since the net effect is uncertain, feminist opponents of sex selection should consider whether, if unwanted girls are born, there are feasible techniques for improving their treatment so that if sex selection is forbidden (assuming that that is feasible--Becker suggests that it is not), there can be reasonable confidence that net female utility will increase rather than decrease.
I also agree with Becker that there is a tendency to self-selection, since as the percentage of girls and women declines, men's demand for them rises, and observing this couples will tend to shift their reproductive selection in favor of girls. Since there is no reason why this tendency must overcome a preference for boys, an unbalanced sex ratio could persist indefinitely. But this is unlikely in rapidly developing countries such as China and India. A strong preference for male children tends to be found in societies in which there is a great deal of subsistence agriculture, a weak social insurance system, and a reliance on private violence (as in a revenge culture) to protect personal and property rights; all these factors increase the demand for male children. As these conditions (the first two of which are important in China and India, and all three of which are important in Iraq, for example) change, the preference diminishes, as we observe in the wealthy societies of Europe and North America, where there is no longer a net preference for having male rather than female children.
Apparently sex selection is actually more common in urban areas than in rural areas of India. But presumably the reason is that access to ultrasound for detecting the sex of a fetus, and to abortion, is greater in cities, and this effect could dominate the greater preference for sex selection in rural areas. Urban Indians might prefer boys because of a lag in the adaptation of traditional values to urban conditions.
The transition to a 50-50 sex ratio, even if inevitable, is likely to take a long time. Suppose at time 1 there is a large excess of male births, followed at time 2 by a dawning recognition that girls are more valuable than had been realized at time 1. Probably time 1 and time 2 will be separated by 20 or 30 years (or more, if there is a "values lag," as I suggested earlier), and so there will be at least one entire adult generation in which the sex ratio is skewed in favor of males. Should countries that face this imbalance worry about it to the extent of taking measures against it? We have a natural experiment, which can help us to answer the question, in societies that permit polygamy. The effect of polygamy (technically polygyny--multiple wives--but polyandry is virtually unknown) is to raise the effective ratio of men to women, since a number of women are removed from the pool available to the nonpolygamous men. In a society in which there are 100 men and 100 women, but 10 of the women are married to one of the men, the male-female sex ratio, so far as the rest of the society is concerned, is 99 to 90. The result is to raise the average age of marriage for men and reduce it for women, reduce the percentage of married men and increase the percentage of married women, reduce promiscuity by increasing women's bargaining power, and possibly increase male emigration and female immigration. None of these effects seem likely to harm society seriously as a whole.
In contrast, research that I discuss in my book Sex and Reason (1992) finds that the low effective male-female sex ratio of the black population in the United States (due largely to abnormally high rates of imprisonment and homicide of young black males) promotes promiscuity because there is more competition among women for men, and reduces the marriage rate and family formation.
In sum, sex selection, at least in favor of males, appears not to have negative external effects. It presumably confers net private benefits (like other preference satisfaction), or otherwise it would not be practiced. (There are no external effects in societies, such as that of the United States, in which sex selection is unbiased.) The case for forbidding it is therefore unconvincing (at least when sex selection is not implemented by abortion, to which there are independent objections) unless it can be shown to create a net decrease in female welfare.
Posted by Richard Posner at 9:54 PM | Comments (14) | TrackBack
Global Warming--Posner's Response to Comments
I cannot do justice to the 102 comments that my post evoked, but I will try to respond to the recurrent themes in them.
One comment suggests the use of the "minimax" (meaning, in this context, minimizing the maximum loss) decision rule to guide response to the risk of abrupt global warming, since no probability can be assigned to that risk. This raises the interesting and important question of how if at all to adapt cost-benefit analysis to risks that cannot be quantified. The problem with minimax is that it provides no definite guidance. I prefer, as argued in my book Catastrophe: Risk and Response (2004), to retain as much of the structure of cost-benefit analysis as possible in situations where the probability of a catastrophe cannot be quantified. In the case of abrupt global warming, this means trying to quantify the loss should such warming occur and the cost of averting the loss, and then see whether the probability implied by assuming that incurring the cost would be cost-justified is reasonable. So suppose a loss of $1 trillion could be averted at a cost of $100 billion. That cost would be worth incurring (ignoring a number of refinements and qualifications that would be necessary in a rigorous analysis) if the probability of the catastrophe were at least 10 percent. The question would then be whether 10 percent was in the probability ballpark--assuming we could estimate the ballpark, though not the location of the ball.
I agree with the suggestion that prizes are a good way of motivating research; recently Al Gore teamed with the British billionaire Richard Branson to offer a $25 prize for the development of a workable method of removing carbon dioxide from the atmosphere.
Most of the comments, as I expected, are in a state of denial about global warming. (Indeed, as I would have expected, one of them denies that cigarette smoking has been shown to have adverse health effects.) To many conservatives, global warming is a red flag.
The global warming skeptics point out that there are natural climate fluctuations, that anticapitalists are enthusiastic beaters of the drum for action against global warming, and that global warming would have good effects on agriculture in northern climes. These points are correct, but do not support the skeptical position. The existence of natural climate fluctuations increases the risk from human-caused global warming, because increased atmospheric concentrations of carbon dioxide increase the amplitude of the fluctuations. The fact that the motives of some of the people who are worried about global warming are political is irrelevant to the scientific issues, not only because scientists use apolitical methods of testing their hypotheses, but also because there are politics on both sides of the global warming debate: if leftwingers exaggerate the danger of global warming, rightwingers belittle them excessively. As for improving agricultural yields in northern climes, the transitional costs of relocating agriculture from (at present) tropical to arctic climes would be immense. Nor would improvements in agricultural yields respond to the effects of inundation of low-lying land areas, the migration of tropical diseases to temperate climates, the effects of increasingly violent weather, and the possible deflection of the Gulf Stream, causing Europe's climate to become Siberian.
It is also untrue that a 7 degree Fahrenheit increase in average global temperatures by the end of the century is a "worst case" prediction. That would imply a degree of certainty that we clearly do not have. And it is untrue that warming and cooling in millennia prior to the Industrial Revolution were unrelated to human activity. Substantial deforestation through burning, releasing large quantities of carbon dioxide into the atmosphere, began with the invention of agriculture some 8,000 years ago, and periods of reforestation (e.g., after the Black Death reduced the European population by a third) are correlated with global cooling. So at least the paleoclimatologist William Ruddiman argues, and I do not sense that the skeptics have read his work.
Some of the skeptics believe that Becker and I are part of a leftwing conspiracy to foist a false belief in global warming on the world. Anyone familiar with our work would know that we are conservatives. What is true and important is that there is considerable uncertainty about predictions of climate change. The climatologists' consensus may prove incorrect. What is striking however is the thinning of the ranks of the dissenters over time.
Many of the skeptical commenters appear to have visceral rather than a reasoned hostility to the idea that global warming is a problem that might require costly solutions. They and are not impartial readers of the scientific evidence. One commenter describes global warming as "another cult religion just like Marxism or Lysenkoism." But neither Marx nor Lysenko ever commanded a scientific consensus for their views. But I do agree with this otherwise rather intemperate commenter that Paul Ehrlich's The Population Bomb was total nonsense--and I have so said in my book Public Intellectuals.
One comment questions how heavy gasoline taxes could reduce our reliance on imported oil, since the cost of production of Middle Eastern oil is lower than that of oil produced in the United States. Depending on how stiff the taxes were, however, our total consumption of oil would fall, including consumption of foreign oil, though the mix would indeed shift (as I said in my post) toward imported oil. Another effect would therefore be to conserve our own oil--it would remain in the ground, available for future pumping, and a check on the behavior of foreign producers, such as threats by Iran to embargo oil. Our dependence on foreign oil would diminish in still another sense: the incomes of the foreign oil producers would fall, reducing those countries' geopolitical influence, including influence over us. We would be less dependent on their political whims.
Posted by Richard Posner at 2:01 PM | Comments (23) | TrackBack
February 4, 2007
Global Warming and Discount Rates--Posner
The latest report of the Intergovernmental Panel on Climate Change, issued on Friday, confirms the scientific consensus that the emission of carbon dioxide and other greenhouse gases, as a result of the combustion of fossil fuels such as oil and gas, and other human activities (such as deforestation by burning), is having significant and on the whole negative effects by causing global temperatures and sea levels to rise. See http//ipcc-wg1.ucar.edu/wg1/docs/WG1AR4_SPM_PlenaryApproved.pdf. I discussed global warming in my book Catastrophe: Risk and Response (2004), I considered the evidence that global warming was a serious problem for which man-made emissions were the principal cause altogether convincing--and since then more evidence has accumulated and the voices of the dissenters are growing weaker. The global-warming skeptics are beginning to sound like the people who for so many years, in the face of compelling evidence, denied that cigarette smoking had serious adverse effects on health.
What has changed since I wrote my book is that not only is the evidence that our activities (primarily the production of energy) are causing serious harm even more convincing, but also that the scientists are increasingly pessimistic. It is now thought likely that by the end of the century global temperatures will have risen by an average of 7 degrees Fahrenheit and that the sea level will have risen by almost 2 feet. Besides inundation of low-lying land areas, desertification of tropical farms, and migration of tropical diseases north, global warming is expected to produce ever more violent weather patterns--typhoons, cyclones, floods, and so forth.
There is much uncertainty in climate science, and climate scientists concede that their predictions may be off--but they may be off in either direction. Far worse consequences are possible than those thought highly likely by the authors of the report, including a temperature increase of 12 rather than 7 degrees Fahrenheit, higher sea levels that could force the migration inland of tens of millions of people (or more), the deflection of the path of the Gulf Stream, causing Europe's climate to become Siberian, and abrupt, catastrophic sea-level rises due to the sliding of the Antarctic ice shelf into the ocean. Not only has the consensus among scientists concerning the harmful anthropogenic (human-caused) character of global warming grown, but the scientific consensus is increasingly pessimistic: recent evidence indicates that the global-warming problem is more serious than scientists thought just a few years ago.
My own view, argued in the book, is that the risk of abrupt global warming--a catastrophe that could strike us at any time, with unknown though presumably low probability--is sufficiently costly in expected-cost terms (that is, multiplying the cost of the catastrophe by its probability) to warrant taking costly measures today to reduce emissions of carbon dioxide and other greenhouse gases. Both the scientists and the policymakers, however, are mainly focused on the long-term costs of global warming--costs that will unfold over the remainder of this century. That focus makes the choice of the discount rate important, and potentially decisive.
A discount rate is an interest rate used to equate a future cost or value to a present cost or value. As a simple illustration (and ignoring complications such as risk aversion), if the interest rate is 5 percent, the present value of $1.05 to be received in a year is $1, because if you are given $1 today you can invest it and have $1.05 in a year. That is financial discounting. But discounting is important even when financial considerations are not the only ones involved in a choice. If you have a very strong preference for spending money now rather than a year from now, you might prefer $1 today to $1.50 a year from now.
These approaches don't work well when the question is how much we should spend today to avert costs that global warming will impose in the year 2107. Suppose we estimated that those costs would be $1 trillion. Then at a discount rate of 5 percent, the present-value equivalent of the costs is only $7.6 billion, for that is the amount that, invested at 5 percent, would grow to $1 trillion in 100 years. At 10 percent, the present value shrinks to $73 million.
So it is possible to argue that, rather than spending a substantial amount of money today to try to prevent losses from global warming in the future, we should be setting aside a modest amount of money every year--$73 million this year to deal with global warming in 2007, the same amount next year to deal with global warming in 2008, and so on. Of course we would also want to spend money to prevent the lesser losses from global warming that we anticipate in earlier years. For example, suppose we estimate that the loss in the year 2057 will be $100 billion. Then at the same 10 percent interest rate, we would want to spend $852 million this year.
Thus two effects are being balanced in computing the present equivalent of future losses from global warming--the larger loss in the more distant future, and the greater shrinkage of the larger loss, because of its remoteness from today, by the operation of discounting. The latter effect will often dominate, as in the examples, but of course this depends critically on the choice of discount rate. At an interest rate of 3 percent, a $1 trillion loss in 2007 has a present value not of $73 million or $7.6 billion, but of $52 billion. However, when either of the latter two figures is added to figures representing the present value of losses in intermediate years, the sum will be formidable.
A very high discount rate, implying that optimal current expenditures to avert the future consequences of global warming are slight, could be defended on the ground that the march of science is likely to deliver us from the consequences of global warming long before the end of the century. Clean fuels for automobiles as well as for electrical plants (where already there is a clean substitute for oil or coal--nuclear power, though it is more expensive) will be developed, or carbon dioxide emissions from electrical plants will be piped underground, or artificial bacteria will be developed that "eat" atmospheric carbon dioxide. These are not certainties but they are likely, and so they provide a good argument for using a high discount rate, such as 10 percent--and perhaps for considering no losses after 2107, on the theory that the problem of global warming is almost certain to be completely solved by then.
Nevertheless there are at least three arguments for incurring hefty current expenditures on trying to reduce carbon dioxide emissions in the near term. The first is that global warming is already imposing costs, and these will probably increase steadily in the years ahead. Discounting does not much affect those costs. They may well be great enough to warrant remedial action now.
The second argument for incurring heavy expenditures today to reduce global warming is that there is a small risk of abrupt, catastrophic global warming at any time, and a small risk of a huge catastrophe can compute as a very large expected cost. "Any time" could of course be well into the future, and so there is still a role for discounting, but it is minimized when the focus is on imminent dangers.
The third argument is that reducing our consumption of energy by a heavy energy tax would confer national security benefits by reducing our dependence on imported oil. Our costly involvement in the Middle East is due in significant part to our economic interest in maintaining the flow of oil from there. It is true that because our own oil is costly to extract, a heavy energy tax would not cause much if any substitution of domestic for foreign oil. But that is fine; our oil would remain in the ground, available for consumption if we decide to take measures abroad, such as withdrawing from Iraq, that might reduce our oil imports.
Heavy U.S. energy taxes would induce greater expenditures by industry on developing clean fuels and techniques for carbon sequestration; might persuade other big emitters like China and India to follow suit; and by reducing emissions of carbon dioxide slow the increase in the atmospheric concentration of the gas. Drastic reductions might actually reduce that concentration, because carbon dioxide does eventually leach out of the atmosphere, though at a slower rate than it is built up by emissions.
Posted by Richard Posner at 3:31 PM | Comments (99) | TrackBack
Discounting Greenhouse Gas Effects in the Distant Future-BECKER
Under present scientific calculations, environmental damage from global warming at current rates of CO2 emissions will be large, especially during the latter half of this century and throughout the next few centuries. With such long delayed effects, uncertainty about magnitudes of the damages is enormous. And it is obvious that the size of the rate at which future effects are discounted, if they are discounted at all, will make an enormous difference to estimates of the total value of the damages.
The main concern expressed about discounting of future utilities in evaluating public policies is that it would give the welfare of future generations much less weight than the welfare of present generations. Even with the "small" discount rate typically used in policy analysis of 3 percent, the effects of global warming on the utility of generations fifty years from now will be weighted only a bit more than ¼ as much as the effects on the utility of the present generation. Generations 100 years in the future would be weighted a mere 1/16th as much as the present generation. With a 3 percent rate, the weights are cut in half every 24 years, or approximately every generation.
Is this fair to future generations? The well-publicized Stern Review on the Economics of Climate Change for the British government thinks not, which is why the calculations in the Report generally use a social discount rate close to zero. William Nordhaus of Yale University who has done substantial research on evaluating the costs of greenhouse warming uses about a 3 percent social discount rate. He shows that one should use a significant discount rate to match the discount rate to evidence on the long-term return on capital, the growth of consumption, and savings rates.
Suppose the utility damages from global warming to generations 50 years from now are equivalent to about $2 trillion of their welfare. At a 3 percent discount rate, this major damage would be valued today at about $500 billion, while any spending today that reduces the harm to future generations would be valued dollar for dollar. Then with a 3 percent discount rate it would not pay to eliminate these very harmful effects on future generations if the cost were $800 billion (or more generally at least $500 billion) to largely eliminate the future harm from greenhouse gas emissions through steep taxes on emission, carbon sequestration, and other methods. To be sure, benefits would exceed the present value of costs of greenhouse warming if damages were discounted only at 0 percent, 1 percent, or as high as almost 2 percent discount rate. When analyzing effects much further into the future, such as 150 years into the future, the discount rate used is even more crucial. The overwhelming reason why the Stern Review gets so much larger estimates of damages than work by Nordhaus and other is the use of a negligible discount rate in the Review.
To illustrate the advantage of using a discount rate that reflects the return on capital, assume that the long-term return on investments in physical capital is 3 percent. If instead of spending $800 billion on eliminating greenhouse gases, suppose it were invested by the present generation in physical capital, and that all the income yielded by the investment were also invested with a 3 percent return. Then the value of this amount saved to generations 50 years from now would be $800 billion (1.03)50 , or more than $3 trillion. Hence future generations would be better off if instead of the present generation investing the $800 billion in greenhouse gas-reducing technologies, they invested the same amount in capital that would be available to future generations.
One criticism of this argument is that if the resources were not invested in greenhouse gases, they would not be invested in other capital that would accrue to future generations. Perhaps not, but during the past 150 years, later generations in the United States and other developed and developing nations have been much better off than earlier generations when measured by income, health, education, and virtually all other important criteria. This rising standard of living across generations has been achieved mainly through advances in technology and generous savings and investments for children and grandchildren by parents and their elected representatives. Why should this fundamental aspect of family and public behavior be changed as a result of the accumulation of very harmful greenhouse gases in the atmosphere?
Put differently, later generations have benefited from large and continuing advances in technologies of all kinds during the past 150 years, including those related to the environment. The rate of technological advance has not slowed down, and may even have speeded up, during the past 20 years. Parents and governments have chosen not to offset the benefits to later generations of advances in technology by leaving descendants less education or capital than they have. Of course, just the opposite has occurred.
Parental behavior toward their children and grandchildren illustrates the importance of discounting future benefits and costs. Many parents like their children at least as much as they like themselves, and would be devastated if any serious harm came to their descendants. Yet in evaluating how much they want to give to their children in the form of education, bequests, or education, they recognize that savings and education have positive rates of return. If they invest say $40,000 in their children's education, the benefits to children would be much greater because of the high return on education-say it would be $80,000. By recognizing this, however, parents are in effect discounting the benefits they provide children since they would be costing the $80,000 benefit to children at $40,000.
Using a social discount rate of say 3 percent does not sweep away the greenhouse gas problem. The latest climate report cited by Posner strongly suggests that the problem is quite serious, perhaps even starting 50 or fewer years from now. However, it does imply that low weight be given to effects on the utility of generations 150 years from now, and even more so 400 years from now. Common sense also dictates that one recognizes that technologies will be much improved in the future, including technologies related to improving health, income, and the environment. A positive and non-negligible discount rate is the formal way to recognize the importance of these and related considerations.
Posted by becker at 2:45 PM | Comments (20) | TrackBack
