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Behavioral Economics and Public Policy

David Just and Andrew Hanks have a new paper forthcoming in the American Journal of Agricultural Economics entitled: The Hidden Cost of Regulation (I noticed Marc Bellemare beat me to the punch in discussing his views on the paper).  

This is an important paper in many respects.  As I see it, one of the general problems with the behavioral economics literature is that the findings of behavioral biases (e.g., status quo bias, overweighting low probability risks, loss aversion, present, etc.) are almost always put forth as motivation for more government regulation.  Yet, it is easy to imagine many behavioral economic findings suggesting just the opposite - though that is rarely the conclusion drawn by the authors.

Here's an  example I used in the Food Police

“Here is the irony. The behavioral economists have told us for years that humans make mistakes by exaggerating the importance of low-probability risks. Yet, I have not seen a single behavioral economist use this insight to tell the food police to relax and put their fears over growth hormones, genetically modified food, or pesticides into perspective. Instead, we see the behavioral economists partner with the food police to advocate policies they want even if it means ignoring the implications of their own research. ”

Now, enter the paper by Just and Hanks.  They show that if consumers have a positive emotional attachment to a good that a government policy that attempts to restrict consumption of that good may cause a backlash by causing people to want it even more.

 Think of the Bloomberg large soda ban.  The very action of telling people "you can't have large sodas" makes them want large sodas even more, which makes banning large sodas even more costly in terms of foregone consumer welfare.  They argue that the reverse  may also be true: subsidizing something like healthy food that people feel like they should be consuming more of makes  them want it all the more.  

The general story here is that people's preferences (what they want) may not be independent of the policies government officials pursue.  It is an issue I've studied on a couple of occasions (here and here) with regard to the effects of mandatory labels on genetically engineered food. If people see a mandatory label as information about the risks of genetic engineering, the very presence of a label could make them even more averse to genetically engineered food.  

All this makes the normal sort of "welfare economics" we economists normally do a bit tricky.    Normally we look at the choices (and prices) before a policy is in place and the choices (and prices) after a policy is in place to determine whether consumers are better off with the policy or not.  How do we determine better off?  With a mathematical function derived from the choices people make.  Think of it like: happiness = f(prices, # of options).   But, if a policy changes preferences, then it is hard to know whether the consumer is happier or sadder because, in a sense, they're now a different person that has different tastes and wants.  Not only have prices and number of options changed but the function relating happiness to these factors has changed too.

While the Just and Hanks paper is largely a theoretical paper, I'm please to see a framework put forward for people to seriously evaluate public policies in a fully consistent behavioral economics framework rather than the ad hoc way it's normally done.  I also hinted as this sort of thing in a paper with Bailey Norwood and Stephan Marette where we ran some experiments where people could either choose for themselves or where other's made choices for them (we called the choosers the "paternalist" and the recipients of the choices (or children as Stephan calls them) the "paternalee)".  

“One interpretation of these results is that paternalees place an intrinsic value on freedom of choice. This does not necessarily imply that the paternalees’ choices are in any sense “optimal” or that, should paternalees suffer from time-inconsistent preferences, their long-term well-being couldn’t be enhanced by restricting current choices. Nevertheless, if this interpretation is correct, the results suggest that any long-term benefits that might arise from paternalism must be weighed against the loss of freedom of choice.”

Moo

If you're looking for some light reading for summer vacation, I highly recommend the book Moo by Jane Smiley.  It's an older fiction book - published in 1995 - that I only recently became aware of when it was recommended to me by my friend Keith Coble.  Anyone who went to school or worked at one of the many land grant universities around the country will almost certainly relate to the tales of intrigue and jealousy among professors, students, and school administrators.  What will also ring true is the secretary who basically run the place and the villainous economics professor whose main interest in life seems to be gaining fame and lining his pocketbook.   Oh, and of course there is the secret pig that an animal science professor keeps on campus to test his own pet theories. 

Here was one of my favorite passages about campus politics:

“It was well known to all members of the campus population that other, unnamed groups reaped unimagined monetary advantages in comparison to the monetary disadvantages of one’s own group, and that if funds were distributed fairly, according to real merit, for once, some people would have another think coming.”

Environmental Impacts of Vegetarianism

Given the latest report from the new dietary guidelines committee that recommends less meat eating (see some of my previous discussion on that here), I found this study just published in Ecological Economics by Janina Grabs quite interesting.

Grabs ask an important question that is rarely asked.  If people stop spending money on meat, what will they spend their money on instead?  And, what are the environmental impacts of those other non-meat expenditures?  Using data based on Swedish consumers, she calculates that, at first blush, a vegetarian diet does indeed appear to have slightly smaller energy use and carbon impacts, BUT if you take into consideration what the vegetarians do with the extra money they used to spend on meat, those environmental gains become dramatically smaller.  She calls this the rebound effect.

Here's the abstract:

“Sustainable diets, in particular vegetarianism, are often promoted as effective measures to reduce our environmental footprint. Yet, few conclusions take full-scale behavioral changes into consideration. This can be achieved by calculating the indirect environmental rebound effect related to the re-spending of expenditure saved during the initial behavioral shift. This study aims to quantify the potential energy use and greenhouse gas emission savings, and most likely rebound effects, related to an average Swedish consumer’s shift to vegetarianism. Using household budget survey data, it estimates Engel curves of 117 consumption goods, derives marginal expenditure shares, and links these values to environmental intensity indicators. Results indicate that switching to vegetarianism could save consumers 16% of the energy use and 20% of the greenhouse gas emissions related to their dietary consumption. However, if they re-spend the saved income according to their current preferences, they would forego 96% of potential energy savings and 49% of greenhouse gas emission savings. These rebound effects are even higher for lower-income consumers who tend to re-spend on more environmentally intensive goods. Yet, the adverse effect could be tempered by purchasing organic goods or re-spending the money on services. In order to reduce the environmental impact of consumption, it could thus be recommended to not only focus on dietary shifts, but rather on the full range of consumer expenditure.”

A couple caveats.  First, it is important to notice an important clause to sentence claiming a 16% reduction in energy use and 20% reduction in greenhouse gas emissions - this is the reduction related only to their diet.  In terms of overall impact, I believe these only translate to 1.8% and 4.15% reductions, quite simply because food only makes up a small part of the consumers overall energy use and carbon impact.  Of course, all this relates to the "first round" impacts and ignores the rebound effect, which is the main point of this study.

Second, the later part of the abstract, which suggests that the, "adverse effect could be tempered by purchasing organic goods" is mainly due (if I'm understanding the study correctly) to an income effect NOT because organics have substantively less energy/carbon impacts.  Because organics cost more, that leaves less money for the consumer to spend on other things that would require energy.  You could create the exact same kind of result by simulating a person who bought and ate less food, and then took all the dollar bills that were saved, and burned them.  This little thought experiment ought to reveal that the goal in life is not to minimize energy use per se, only to reduce it to the extent that you're not taking into account the impacts on others that are not already reflected in the market price.

None of that should distract from the overall important message of this study: that we need to look at all the effects (even unintended ones) when trying to look at policies that encourage people to change dietary habits.  

The Local Trap

It seems other disciplines are waking up to the fact that "local foods" are not the panacea they're often made out to be.  Here is an interesting article by Born and Purcell in Journal of Planning Education and Research aimed at city planners.  An excerpt:

“The local trap refers to the tendency of food activists and researchers to assume something
inherent about the local scale. The local is assumed to be desirable; it is preferred
a priori to larger scales. What is desired varies and can include ecological sustainability,
social justice, democracy, better nutrition, and food security, freshness, and quality. For
example, the local trap assumes that a local-scale food system will be inherently more
socially just than a national-scale or global-scale food system. This article argues that the
local trap is misguided and poses significant intellectual and political dangers to foodsystems
research. To be clear, the concept of the local trap is not an argument against
the local scale per se. We are not suggesting that the local scale is inherently undesirable.
Rather, the local trap is the assumption that local is inherently good. Far from
claiming that the local is inherently bad, the article argues that there is nothing inherent
about any scale. Local-scale food systems are equally likely to be just or unjust, sustainable
or unsustainable, secure or insecure.”