In light of several comments on a recent post, it seems as though a more complete discussion of cost-benefit analysis might be useful. It is a process that is useful in many aspects of biology, from resource management to health issues.

The basic premise is that to make decisions, you need to estimate both qualitatively and quantitatively the potential costs and benefits of the possible choices, and use that information to make the best choice. The magnitudes of both cost and benefits are important, because balancing a large cost against a small benefit will result in a different choice than when the cost is small but the benefit is large.

The mistake most people make when making choices is to consider only the potential benefits, or the costs, but not both simultaneously. For example, the anti-vaccine movement exists mainly because of fears of side effects, specifically autism (a link which has not been established). Yet even if all the potential side effects do occur, they are extremely rare, relative to the benefit received in resistance to disease, many of which can be fatal. True, if only a few school children are unvaccinated they may get by given that disease is less likely to travel through a group that is mostly vaccinated. But this cheating can be harmful even for some vaccinated children, for vaccines that are not 100% effective (such as whooping cough).

The point is that to focus on a vanishingly small cost to vaccination which confers a huge benefit in protection from common disease is a completely irrational choice.

Another context where cost-benefit analysis applies is in the area of climate change. Here, the problem is a bit tougher, because the costs and benefits of trying to do something about it, versus not doing anything, are harder to estimate. One major consideration in this case, of course, is that we only get one chance to do something (and the opportunity to do it may already be vanishing rapidly). We don't get to figure out what we did wrong this time and fix it the next. So what do we do? We first must acknowledge the possibility that climate change could be catastrophic, no matter how small. This is a potentially huge cost to ignoring the issue. The benefit to ignoring it is easier to grasp - short term economic pains in readjusting our energy usage around the world, which is clearly a monumental task, would be avoided.

The benefit to doing all we can to avert a possible worldwide catastrophe is two-fold; first, we potentially save a lot of the planet, and second, many of the measures taken could have positive geopolitical results as well, e.g. reduction in demand for oil, and spurring economic growth in new alternative-energy industries. The cost mirrors the benefit for not doing anything - it is the difficult inertia needed to radically change the way we produce and use energy. The biggest part of the problem in looking at these costs and benefits is that if we choose to do something, the costs are biggest here and now, while the benefit seems far down the road. Most of the people setting policy in the powerful industrial countries that could take a stronger lead on this will likely be dead before the jury comes in on the outcome.

This video goes into more detail about these trade-offs, and convincingly makes the argument that the eventual benefits of doing something now outweigh the costs.

A similar case involves the control of invasive species. Even though most of the time the benefit in controlling them early far outweighs the potential cost of doing nothing, and having to control them later, we still tend to ignore them until they are too late to control. The reason for this is that our political system for government (which is responsible for making and acting on these decisions) overly discounts future benefits. So, time after time, we wait to see whether an introduced species gets out of control before we do anything to control it, and end up spending millions more than it would have cost to control it early on.

Another health example is cancer treatment. With all the progress that has been made, we still know very little about what we are doing in this area. In this case, people tend to focus on hoping for a strong benefit, and accept all sorts of hellish treatment (a significant cost) that may or may not benefit them. But this is one case in which it is very difficult to be objective, because we are dealing with our own mortality, and we buy into the idea that anything that can possibly help is worth doing. Is it possible to make a rational decision? For some people it is, but they are in the minority.

And come to think of it, it is way too much to ask the multi-headed government beast to be rational too. At least it is easy to make the rational choice about anti-bacterial soap.

Labels: economics, environment, health, invasive species

Time to start getting your omega-3's from plants. We are long past the golden age of fish production and quickly approaching a complete crash of most fisheries, in case you had not noticed. Probably it was inevitable, but over a decade ago, a couple of biologists figured it was worth a shot to point out that policy changes actually taking the future into account, rather than simply pretending to, needed to be made. (Roughgarden J, Smith F, 1996. Why fisheries collapse and what to do about it. Proceedings of the National Academy of Science U S A. 93(10):5078-83 [open access].)

Apparently no one making the regulations even tried to implement their idea, which admittedly would probably not go over well in the real world, because it involved taxing, rather than subsidizing, fishermen.

To make their point, the authors first list some of the various rationalizations for the collapse of the Newfoundland cod industry:

Many causes have been cited for this collapse, including a lack of political will to impose adequate quotas, overoptimistic stock assessments by fishery scientists, poaching from foreign fleets, exceptional mortality from natural predators, climate change, subsidies to fishers, and overcapitalization...

Do any of these sound familiar to those reading a recent NY Times article about chinook salmon?

Of course this problem with the salmon fishery is not an isolated crisis in which we cannot possibly imagine the causes, despite such mind bogglingly out-of-touch utterances as this: "It's unprecedented that this fishery is in this kind of shape," said Donald McIsaac, executive director of the [Pacific Fisheries Management] council, which is organized under the auspices of the Commerce Department.

Perhaps it is unprecedented for that particular fishery, but why would anyone expect an outcome different from nearly every other heavily exploited fish species? For example, consider the crashed Newfoundland cod - historically it was one of the most abundant fisheries. No one could imagine the possibility of depleting it. There are now also warnings about tuna, another historically abundant species.

Ultiimately the issues cropping up are probably the tip of an iceberg that has repercussions not just for mere fisheries, but for the health of the entire planet, which remember is mostly ocean. This leads some to pin the blame on climate change for crashing fisheries. But they are missing the point. The problem specific to fisheries remains one of overexploitation - it just has not been correctly defined.

We now must face up to admitting that fishing limits, even those that have been faithfully adhered to, have been based at best on significant lack of ecological information, and at worst, on mostly short-term economic criteria.

As Roughgarden and Smith point out:

May et al. (May, R. M., J. R. Beddington, J. W. Horwood, and J. G. Shepherd. 1978. Exploiting natural populations in an uncertain world. Mathematical Biosciences 42:219-252) concluded that "What seems really needed is not further mathematical refinement, but rather robustly self-correcting strategies that can operate with only fuzzy knowledge about stock levels and recruitment curves."

For thirty years at least, it has been clear that fishery management has needed to focus on how to incorporate ecological complexity (compounded by complexity introduced by detrimental environmental impacts by all sorts of human activity), rather than crunch numbers based on the last available year of data for catch. Is there truly anyone in this business who can possibly be surprised that any fishery is collapsing now?

Of course, Roughgarden and Smith's analysis is naive in its economic assumptions such as this, when they state that after a crash "...the industry must contract anyway, and by managing for ecological stability the prospects of subsequent collapses are minimized." Unfortunately, for most natural resources, long-term gain is completely overshadowed by short-term profit, to an irrational degree, which will not emerge out of traditional economic models.

Still, the authors have a proposal that makes a little more sense for helping fisheries last a little longer:

(i) Establish a target stock at 3/4 of the average unharvested abundance [i.e., harvest much less than what appears to be ecologically sustainable].
(ii) Tax the revenues from any fish caught when the stock is below target.

As they discuss it, condition (1) essentially builds in insurance for fisheries, which only makes sense given our deep and continuing lack of understanding of the complex interactions of habitat loss and climate change, combined with only vague estimates for rates of increase, habitat carrying capacity, amount of predation, etc. And yet current practice ignores the environmental factors, and pretends that our numbers for the rest are accurate.

Condition (2) makes sense too, but seems unlikely to be successfully implemented. The point of it is to make it more costly, rather than more profitable, to fish when stocks are depleted below a sustainable level. Unfortunately, the current situation is that the harder it becomes to catch a certain species of fish, i.e. as it becomes depleted, the more rare it becomes, and thus more expensive. A tax would have to be severe indeed to cut into the profits of fishers catching the rarest fish, and thus politically probably impossible. If implemented it would surely increase poaching and the black market even beyond what it already is.

The damage is done. Fishing limits have been set historically (when they were set at all, usually belatedly) based on faulty ecological assumptions influenced by strong economic pressures, while ignoring the continuing fluctuations (many with unknown cause, such as in the case of the chinook salmon) that change the sustainable catch - and thus can crash a seemingly healthy fishery quickly after a series of below-normal population years. The mistake is similar to that made by authorities making Western water allocations during an unusually wet period there, and steadfastedly sticking by them even when a fraction of that water is now available. Perhaps moratoriums on fishing some populations such as the Newfoundland cod will give us a second chance to make saner policy. But it would be a foolish bet to make.

Labels: ecology, economics

There is a fallacious argument commonly held and cited by pro-private-property advocates. The argument goes that interested parties having private property results in the reverse of the "tragedy of the commons," which holds that public resources are over-exploited because they belong to nobody, and thus are not worth protecting; if I do not grab the resource now, someone else will. The reverse argument is thus that if I alone hold the resources and their future value is also mine alone, then it is worth my while to protect them and not overexploit them.

Of course the main problem with this argument is that it assumes rational economic behavior by human beings, which over the last decade or so has been increasingly shown to be a false assumption. Economic models thus have to be rewritten to take into account that most of us do not act in our best interest, a lot of the time.

This is true in many arenas. There are many versions of the following experiment:

...the ultimatum game. You are given $100 to split between yourself and your game partner. Whatever division of the money you propose, if your partner accepts it, you each get to keep your share. If, however, your partner rejects it, neither of you gets any money.

How much should you offer? Why not suggest a $90-$10 split? If your game partner is a rational, self-interested money-maximizer -- the very embodiment of Homo economicus -- he isn't going to turn down a free 10 bucks, is he? He is. Research shows that proposals that offer much less than a $70-$30 split are usually rejected.

Meaning: humans are a social species, and no one lives in a bubble. Context is everything, even when it comes to financial gain.

Land-use is a different matter however. Private-property enthusiasts will assert that a rancher will happily overgraze public land he is leasing. But if his ranch is all private, he will manage it to ensure a healthier ecosystem, because this makes sense for the long term, right?

In practice this is not so. Certainly, the tragedy of the commons does hold here; public land is routinely overgrazed. But the opposite is not true, because ranchers routinely overgraze their own land, too, even though that is clearly bad for ranch productivity in the long term. Why does this happen?

It happens because decisions regarding land-use are much more complex than a simple formula for maximizing profits over the long term. First of all, ranchers behave as if their leased public land is private anyway; usually these leases have been in place for generations, and are essentially giveaways (often $1/acre), and thus the ranchers have a strong sense of entitlement to the land. Any attempt by the feds to change anything about how the leases currently work is met with outrage because the government is going to "ruin" the rancher. Nowhere is there any publicly stated acknowledgment that the rancher is getting a great deal.

Second, ranching practices (at least in the northwest) have been handed down for generations after being developed in a much wetter era. Economic theory predicting rational behavior makes the enormous assumption that the knowledge is available to make rational decisions. A few progressive ranchers in this area are waking up to the fact that the "drought" the west is suffering is here to stay, and are learning how to change their methods to keep the land healthy in the current environment. For many ranches, this can be as simple as changing grazing practices from using fences to using herders. But for those who do not have the cultural knowledge, this can be a daunting shift.

On top of this, any subsistence ranching or farming is concerned much more with maximizing profits in the immediate future, without worrying about the long term. The most obvious example of this is farms in the deforested tropics. Everyone knows the soil in tropical forests is extremely poor, and after just a couple years of farming, the nutrients are fully depleted and the farms are abandoned. Does this keep people from cutting down forests for subsistence farms? No, because when you are living hand-to-mouth, you are focused on getting through the current year. Economists call this "discounting" the long term effects of decisions, so that a benefit obtained years from now is worth much less than one obtained now. This is a rational position, but it is arguable that for most people (such as those who obtained adjustable-rate mortgages in the last few years) the future is discounted much more highly than is mathematically "rational."

Although the threats facing ranchers are not equally severe, the idea of having to quit production on a family ranch that has been working for generations is nothing less than disaster to those who face it. Their culture and tradition, and thus their entire sense of self, is wrapped up in that ranch. In Texas, for example, it is common for a "rancher" to keep a few cows on an overgrazed piece of family-owned land at a loss, while working a full time job in the city to actually make a living. It makes no financial sense to keep the ranch going, but it saves cultural face which is obviously much more important.

Finally, there is the obvious difference between individuals trying to make a living and corporations which need to maximize short-term profits at all costs. Our financial system seems to reward this corporate strategy, because the actual individual making a decision can jump ship before it is time to pay the piper for a bad one. They themselves do not own the resources they are exploiting, so making the resources privately owned (by the corporation) makes no difference to their protection. It is much easier for a corporation to run a ranch into the ground and then sell it off in parcels for development (although many private ranch owners do the same thing eventually) because a corporation has no cultural connection to the land.

The value of federal lands is that although they can be overexploited, there are mechanisms in place, such as regulation and public comment, to put a halt to their destruction. A hundred years ago, certainly the attitude was that the National Forests were there precisely for maximizing exploitation - after all, some private landowners might not want their land to be logged. Today, though, the ethic is different. Ecosystems have an inherent value to many more people than they once did, and this has changed forest service policy to include preservation as a mandate. Though the inertia to bring it about might be extreme, there is at least the possibility that public pressure can change federal land-use policy to better reflect the majority's conservation values. Naturally, those who make a living exploiting federal land view such policy changes as a "taking." But it is really a taking-back for the taxpayers who supplied that land for free in the first place.

Labels: economics, environment, humans

There is a tendency or those on the political right to invoke economic theory when developing or critiquing environmental policy. This can make sense or not, depending on the context. For example, a cap-and-trade system for dealing with the emissions causing acid rain (sulfur dioxide and nitrogen oxides) has contributed to significant reductions (though of course not elimination) of these pollutants, and as a result acid rain is currently less of a threat to northeastern U.S. ecosystems than it once was. So, many advocate a similar system to control carbon dioxide, which has recently become recognized as a pollutant for its role in exacerbating global climate change.

The basic premise of cap-and-trade is that government - such as the E.P.A. in the U.S., or state government - sets a total cap on allowed emissions for the whole country or region within it. They then issue a set number of licenses totaling that cap. These licenses can then be traded on the open market, so that companies emitting CO2 can either spend money reducing their emissions, or buying more licenses - whichever makes more financial sense. If the cost of reducing emissions (through special technology or alternative energy production, for example) is low for most companies, the price of the licenses will drop. If, however, the cost is high, licenses will go up too. because of the increased demand. Advocates of the approach support its reliance on the free market rather than excessive top-down regulation.

There are problems as well. For the system to accomplish its intended purpose, the cap must be set using the most objective scientific means possible, which seems an unlikely prospect, especially given the current political climate. But even if science is given a chance, CO2 is a global pollutant. That is, everyone's CO2 emissions affect everyone else. By contrast, acid rain in the northeastern U.S. was easily traceable mainly to coal-burning power plants in the east and Midwest, and thus the emissions were a local problem solvable by local policy. The harm done by carbon dioxide is genuine, but much less tangible and not at all direct. This is used by those opposed to emissions caps to insist that capping our own country's CO2 would be meaningless if other countries do not do the same, and it would somehow destroy our economy to do so. (This is despite the obvious counter argument that a genuine government mandate to develop alternative energy sources would spur a whole new economy for the U.S. However, the tangible economic benefits would not be immediate, but long term, which does not play well in capitalist societies.)

Of course, this is the point of the Kyoto treaty - to get as many countries on board as possible. Kyoto is a necessary first step because in practicality countries do have different levels of wealth and technological ability to control emissions, so to expect them to do so equally off the bat is absurd. The idea is that asking more of the fully technological countries will motivate the development of alternatives to greenhouse-gas-producing energy, that could then be implemented in other countries as well. But without the world's biggest emitter on board, it all breaks down completely.

We all know that getting the world to agree on scientifically reasonable global carbon dioxide limits is somewhat less likely than the proverbial snowball in hell. More recent coverage will give cap opponents more ammunition to argue there is no point in even trying. Should we really use the problems to excuse a mentality of "winner take all, and who gives a damn what the world is like in a few decades, after I am gone?" What if instead, the U.S. (as suggested often by Thomas Friedman) made a conscious decision to be a world leader in alternative technologies? (Mandating ethanol production from corn to justify huge taxpayer giveaways to corporate agriculture does not count.) What if the U.S.'s mantra turned into, "this is a great opportunity to show the world's people, most of whom hate our guts right now for our arrogance, greed, and imperialism, that we are the leader for remaking our planet's future." Even the cynics who only care about money surely see the benefits of replacing foreign oil, the defense of which has cost enormous amounts of resources and lives over the years, with foreign good will, which is a benefit?

There are times in history when what we really need is a little more government in select areas, not less. Since the "anti-government" crowd happily uses fear to justify the invasion of personal privacy, why isn't there, in vocal opposition, an actively pro-government voice that uses hope to stop the sub-prime mortgaging of our future? Probably because bringing up difficult truths doesn't win elections.

Labels: economics, environment, politics