In this post, I will pose some questions that I know that I don’t know the answers to. If you can answer these questions, then you will become an important environmental economist. I want more nerds to devote their scarce time to studying the micro economics of climate change adaptation so permit me to point you in some productive directions.
1. What new capitalist innovations will be most useful in helping us to adapt to climate change? Is it the old reliable of the air conditioner? Or will it be innovations that increase our water supply such as desalinization? How do we conduct event studies to quantify the adaptation benefits of such new products? One possible answer is that we will return to Simon vs. Ehrlich, using market prices to determine whether we are facing increased “scarcity” as the world’s footprint continues to grow.
2. If information technologies ranging from Tsunami Alerts to text messages to Smart Meters, provide us with real time information about new shocks, price spikes, and environmental alerts, will all of the population gain from such info or are there stubborn people who even when nudged do not respond? Do you treat those people as adults or do the benevolent paternalists step in and make decisions for this group?
3. Does competition in the insurance industry lead insurers to engage in “rational expectations” and updating their insurance premium policies to reflect evolving actuarial risk in flood zones and other places that climate change is shocking in new ways?
4. Across countries in the developing world, do farmers have rational expectations over climate conditions or do many of them have cobweb expectations such that they expect climate conditions tomorrow to be like yesterday? For those farmers with the skills to adapt to the new conditions, will their governments allow them to grow and capture the market? Is there any reason to believe that superior information will allow the “knowing farmers” to grow rich and thus have strong incentives to weed out the Homer Simpsons?
5. If international trade liberalization continues in food products, financial markets and labor migration, how much will such “free trade” help to reduce the social costs of climate shocks to any one region?
6. If onerous restrictions on the supply of housing can be limited, where are the best places in the U.S to be investing in real estate in terms of climate amenities in the year 2075 and the low probability nasty fat tail shocks? By this I mean, in terms of relative risk — which geographic areas are relatively safe? Where is the higher ground? When will real estate developers identify these areas?
7. Will activist federal government policy (think of New Orleans’ new sea walls) slow down climate change adaptation by encouraging people to remain in risky areas? How important is “moral hazard”? How large are the implicit spatial subsidies built into the federal government transfer system and FEMA? Should national tax revenue be used to protect specific cities? Why shouldn’t local tax revenue be used for this purpose?
8. How will Midwest farmers cope with climate change? What inputs can they introduce to offset Mother Nature? What adaptations can they engage in to reduce their exposure to climate risk? If they can hedge through futures contracts, how does this affect their risk?
9. What can coastal areas learn from nations such as Holland that already experience flood risk? How quickly will designs from such nations be imported and used in U.S architecture?
10. For existing coastal cities, how costly is it to retrofit infrastructure? Will officials use expected benefits and expected costs as their framework for deciding what are cost-effective investments?
11. How responsive is U.S R&D to anticipated future risks? Why did Mark Zuckerberg focus his efforts on Social Networks? Will future young nerds focus on climate adaptation solutions? How large a market is there for such solutions? Do we take the endogenous innovation hypothesis seriously or not?
12. In a nation with hundreds of cities, can shocks to any subset of cities significantly lower the nation’s overall economic growth rate? For nations that are less diversified in terms of not having an open system of cities, what investments can they make to increase diversification? Will we see smaller adjacent nations merge into a larger geographic entities to increase migration opportunities?
13. Given that adaptation solutions often require new purchases, will the world’s poor have the purchasing power to purchase them? What share of the world’s population does not have the purchasing power to enable adaptation?
14. Does the invisible hand hold for climate change adaptation? Do we need activist government policy to accelerate adaptation or do we merely need a commitment to free markets and industry competition?
For young scholars who choose to work on these questions, I will help you to make progress here.
Cross-posted with modifications from the Environmental and Urban Economics blog.