Topics Today 3/19/13)  No discussion this week  No homework  Finish up BCA  Return to slide 22 of Lecture 16  CBA issues/pitfalls  More on economics of endangered species 1 In ex ante BCA, the decision may hinge on good representations of anticipated scenarios  What would be the net benefits of a new dam? What would be the net benefits of new fuel economy standards for automobiles?  In ex-post BCA, one of the scenarios is observed, the other—the counterfactual (baseline)—is what would have happened in the absence of the public policy or decision being evaluated  The counterfactual is often the primary consideration in ex-post BCA, often called “program evaluation”  Clearly, doing an ex-post BCA requires correctly casting the counterfactual  Example: BCA of SO2 Allowance Program (Acid Rain Program; see lecture 15)  Example: Energy efficiency programs  Example: Cash for clunkers BCA final issue: correctly specifying alternative scenarios (ex ante); getting the “counterfactual” right (ex post)BCA: Getting the counterfactual right  Example 1: Energy efficiency programs 3 192123252729313335Jul-09Aug-09Sep-09Oct-09Nov-09Dec-09Jan-10Feb-10Mar-10Apr-10May-10Jun-10Jul-10Aug-10Sep-10Oct-10Nov-10Dec-10Jan-11Feb-11Mar-11Apr-11May-11Jun-11Avg Daily kWh Energize Matches Energize ParticipantsBCA: Getting the counterfactual right  Example 1: Energy efficiency programs 4 -1.5-1-0.500.511.52Feb-08Apr-08Jun-08Aug-08Oct-08Dec-08Feb-09Apr-09Jun-09Aug-09Oct-09Dec-09Feb-10Apr-10Jun-10Aug-10Oct-10Dec-10Feb-11Apr-11Jun-11Aug-11Oct-11Dec-11Feb-12Apr-12Jun-12Aug-12kWh/day Difference Pre-ProgramDifference Post-ProgramFigure 6. Difference between participants and matches in average kWh/day (DPM), Energize customers, 24-month matches (Participants-Matches)BCA: Getting the counterfactual right  Example 2: Cash for Clunkers 5  Federal “Consumer Assistance to Recycle and Save Act” (CARS, commonly known as “Cash for Clunkers”)  Summer 2009  Car owners were given federal rebates of $3500-$4500 for trading in older, less fuel efficient “clunkers” (< 18 mpg for cars) and purchasing from a set of approved “clean” vehicles (>22 mpg for cars)  Difference between the new vehicle and clunker must be >4 mpg for $3500 rebate, >10 mpg for $4500)  678,000 transactions at a budgetary cost of $2.85 billion  Market failure? Emissions (criteria pollutants,CO2); also a stimulus benefit  But what was the actual net effect of the program? Example 2: Cash for Clunkers, con’t  “We implement the difference-in-differences (DID) method in a regression framework where the Canadian auto market is used as the control group for the U.S. market” --Li, Linn, and Spiller, RFF August 2010  678,000 vehicle transactions under the program, but only 360,000 net vehicle purchases during the program period  Over the period June-December, net vehicle purchases near zero (no stimulus effect)  MPG for vehicles sold in July/August 2009 increased by 0.6; for the June-December period the increase was only 0.2 Getting the counterfactual right: Cash-for-ClunkersMore on Economics of Endangered Species 7 SMS: “As a collective choice rule, the SMS approach is to preserve some minimum level or safe standard of a renewable resource unless the social costs of doing so are somehow ‘intolerable’, ‘unacceptable’, or ‘excessive.’ “  From Barrens et al.: “Randall and Farmer (1995, 41) conclude that, if the argument is based on moral principles, intolerable costs could be defined as "extreme deprivation" for society.”  Endangered Species Act (as amended) is an application of the SMS (?)  ESA Committee essentially considers exemptions if “it finds there are no reasonable and prudent alternatives to the agency action, the benefits of such action clearly outweigh the benefits of alternative courses of action consistent with conserving the species or its critical habitat…” Economic of Endangered Species: Safe Minimum Standard 8Economics of Endangered Species: Why Economics Matters  Shogren et al., Conservation Biology 1999  Reason I: Economics has something to say about why species become endangered (positive aspect)  Example: North American Pleistocene extinction 9 Reason I con’t: Economics has something to say about why species become endangered (positive aspect)  Passenger pigeon  “John James Audubon watched a flock pass overhead for three days and estimated that at times more than 300 million pigeons flew by him each hour. Elongated nesting colonies several miles wide could reach a length of forty miles. In these colonies, droppings were thick enough to kill the forest understory.”  http://www.stanford.edu/group/stanfordbirds/text/essays/Passenger_Pigeon.html  So what happened? 10 Economics of Endangered Species: Why Economics Matters Reason I con’t: Economics has something to say about why species become endangered (positive aspect)  Whales  1846: Peak year for American whaling industry: 735 vessels (80% of world fleet); 70,000 employed; $70,000,000 in property; 10,000 whales caught 11 Economics of Endangered Species: Why Economics Matters Reason II: Economics emphasizes opportunity costs of species preservation  Calculation of opportunity cost occurs implicitly or explicitly  We should be thinking about habitat conservation at the margin  The question is not, “Do we save the species”, but rather “How much more critical habitat should we designate”  “How do we get the biggest bang for the buck, given a limited budget for species preservation?” Economics of Endangered Species: Why Economics Matters 12 Reason II, con’t: Economics emphasizes opportunity costs of species preservation  Example I: Montgomery et al. (JEEM 1994): The cost of improving the odds of survival of the Northern Spotted Owl from 91% to 92% is $3.8 billion. Economics of Endangered Species: Why Economics Matters 13 Reason II, con’t: Economics emphasizes opportunity costs of species preservation  Example: Increasingly scientists argue for the protection of ecosystems rather than individual species  “Reserve Site Selection Problem”: How do you choose which areas to reserve for biodiversity preservation?  Usual approach for protection: rank areas according to a biodiversity index (BI), and then attempt to place these lands in