Total Economic Welfare Research Articles

An integrated theory of dispatch and hedging in wholesale electric power markets

The literature on optimal dispatch of wholesale power systems implicitly assumes that market participants are risk-neutral. But, in practice, most wholesale electricity market participants behave as though they are risk averse, seeking to insulate themselves from the market risks they face. In this context, achieving the overall social-welfare maximum requires simultaneously finding both the optimal dispatch and optimal hedging arrangements. Assuming that market participants have mean–variance preferences, we show that the dispatch task can be separated from the hedging task. We show how market participants can achieve a perfect hedge by forming a portfolio of inter-temporal hedge contracts. Departing from the previous literature, we assume the system operator is risk averse. We show how the system operator can achieve a perfect hedge using a portfolio of inter-nodal hedging instruments which we refer to as generalised Financial Transmission Rights. The total risk experienced by market participants when optimally hedged is equal to the variation in the total surplus or total economic welfare. This approach therefore leads naturally to a form of merchant transmission investment where network upgrade decisions are carried out by a coalition of risk-bearers in the market. In addition, we propose a natural extension in which transmission network operators provide a form of insurance against network outages, and face the correct social incentive for avoiding network outages. This approach resolves a number of outstanding issues in the economic analysis of power markets.

Exploring strategies to control the cost of food security: Evidence from Bangladesh

CONTEXTA classical challenge in the search for principles and guidelines to protect food security affordably in the developing world comes from the well-known dilemma faced by farmers who incur economic losses from low prices brought on by excess production combined with poorly developed policies to anticipate, adapt to, and manage production and price fluctuations. This challenge is elevated in the face of growing evidence of climate change. OBJECTIVEThis work performs a series of policy experiments to discover an affordable set of measures to protect food grain security as well as assure profitability of high valued crops in Bangladesh. METHODSThis work uses primary and secondary data from Bangladesh agriculture to develop an empirical mathematical programming economic optimization model to achieve each of four alternative food policy objectives. RESULTS AND CONCLUSIONSResults show total economic welfare achievable under each policy objectives: protecting baseline observed farm sector outcomes, minimum protection of food grain security, protection of farm income from producing high value crops, and unconstrained food welfare optimization. The application is to an important farming region of northwest Bangladesh. We find that policymakers can achieve both food grain security and farm income from high value crops at a minimum cost of economic welfare displaced. SIGNIFICANCEThe use of empirical models that describe and predict farm economic optimization behavior can provide guidance in the search for affordable policies for protecting food grain security while protecting farm income in the developing world.

Is protecting sunk investments an economic rationale for antitrust law?

Abstract In recent years, the economic foundation of antitrust law is increasingly being called into question. The hypothesis that antitrust law seeks to promote consumer welfare has historically been extremely popular but in recent years has come under attack. In part, this is due to the fact that neither the law, nor the decisions of competition law enforcers, can be fully explained as consistent with a strict consumer welfare standard. Neither do competition laws promote a textbook concept of total economic welfare, neither in their wording, nor in the way they are enforced. Some commentators argue that competition law should protect the competitive process, but this approach lacks a foundation in welfare economics and therefore lacks the ability to make basic trade-offs between desirable goals. This article puts forward an alternative hypothesis, which focuses on the sunk, relationship-specific investments made by market participants. We propose that an important, and overlooked, role of competition law is to protect trading partners from the threat of hold-up, where it is unreasonable for the parties to use conventional mechanisms to protect those sunk investments themselves. This approach can help to explain features of competition law and law enforcement that cannot be explained by the traditional consumer welfare or total welfare frameworks. We suggest that this approach offers promise as providing a consistent, comprehensive, economic foundation for competition law.

Innovation In Spectrum Repurposing: The C-Band As A Principal-Agent Problem

A consortium of satellite service providers have proposed to repurpose by private sale a large portion of a 500 MHz swath of mid-band spectrum known as the C-Band. As is common, the plan faces some resistance, with much of the opposition preferring a public auction rather than a private sale. In this BULLETIN, we evaluate the competing methods for repurposing the band by appealing to principal-agent theory where the government is the principal and the consortium of satellite incumbents is the agent. Our analysis demonstrates the following: First, given the private information available to the satellite industry, it makes sense for the government to allow the consortium to serve as an agent in conducting the sale, thereby ensuring the rapid and efficacious repurposing of the band. Second, compensation to the agent for its private information is efficient and not “unjust enrichment.” Third, considering the possibility that the principal may demand compensation from the agent, any such compensation (i.e., a regulatory payment) should take the form of a fixed payment rather than a share of auction proceeds. Fourth, while a public auction may be used to increase the government’s proceeds from repurposing the band, such enrichment is more than matched by a reduction in total economic welfare. Finally, our use of the C-Band as a case study in this paper does not restrict our analysis to the C-Band. If the CBA implements a private sale to repurpose large blocks of mid-band spectrum, then the Commission may use other incumbents as agents to efficiently repurpose other spectrum bands. Just as spectrum auctions were an important innovation in U.S. spectrum policy, conducting auctions or other similar transactions through private agents may be a sensible next step in the efficient allocation and assignment of spectrum rights.

Defining economic welfare in fisheries

Fishery economists often define economic welfare inconsistently because the resource rent or profit is maximized even when a producer and/or consumer surplus exists. In this paper, we propose a solution to this problem by departing from general economic concepts such as resource rent, producer surplus and consumer surplus. We argue that the rents and surpluses, which ought to be included in economic welfare, depends upon whether: a. fishing effort is heterogeneous or homogeneous; and b. the output price is constant or non-constant. To investigate which assumptions that are most reasonable, we have conducted reviews of the existing fishery economic literature. Based on these reviews, we conclude that the total resource rent, producer surplus and consumer surplus are significant, implying that the sum of these rents and surpluses is the most appropriate definition of total economic welfare. We also argue that the resource rent (opportunity cost) rather than the profit (actual cost) ought to be included in a welfare function for fisheries. Based on our own simple calculations, we show that the actual cost is greater than the opportunity cost, implying that the resource rent is greater than the profit.

The Economic Consequences Of Mortality Amenable To High-Quality Health Care In Low- And Middle-Income Countries.

We estimated deaths amenable to high-quality health care globally and then modeled the macroeconomic impact in low- and middle-income countries using two macroeconomic perspectives: a value-of-lost-output approach to project gross domestic product (GDP) losses annually for the period 2015-30, and a value-of-lost-welfare approach to estimate the present value of total economic welfare losses in 2015. We estimated that eight million amenable deaths occurred in 2015, 96percent of them in low- and middle-income countries. The value of lost output resulted in a projected cumulative loss of $11.2trillion in these countries during 2015-30, with a potential economic output loss of up to 2.6percent of GDP in low-income countries by 2030, compared to 0.9percent in upper-middle-income countries. The value-of-lost-welfare approach estimated welfare losses of $6.0trillion in 2015. Inadequate access to high-quality health care results in significant mortality and imposes a macroeconomic burden that is inequitably distributed, with the largest relative burden falling on low-income countries. Given that these deaths are unnecessary and the projected GDP losses are avoidable, there is a strong ethical and economic case for promoting high-quality health care as an essential component of universal health coverage.

Licensing and innovation with imperfect contract enforcement

AbstractLicensing promotes technology transfer and innovation, but enforcement of licensing contracts is often imperfect. We model contract enforcement as a game with perfect information but probabilistic enforcement and explore the implications of weak enforcement on the design of licensing contracts, the conduct of firms, and market performance. An upstream firm develops a technology that it can license to downstream firms using a fixed fee and a per‐unit royalty. Strictly positive per‐unit royalties maximize the licensor's profit if competition among licensees limits joint profits. With imperfect enforcement, the licensor lowers variable royalties to avoid cheating. Although imperfect contract enforcement reduces the profits of the licensor, weak enforcement lowers prices, increases downstream innovation, and in some circumstances can increase total economic welfare.

Protecting food security when facing uncertain climate: Opportunities for Afghan communities

Climate change, population growth, and weakly developed water management institutions in many of the world’s dry communities have raised the importance of designing innovative water allocation methods that adapt to water supply fluctuations while respecting cultural sensitivities. For example, Afghanistan faces an ancient history of water supply fluctuations that have contributed to periodic food shortage and famine. Poorly designed and weakly enforced water allocation methods continue to result in agriculture sector underperformance and periodic food shortages when water shortfalls occur. To date, little research has examined alternative water sharing rules on a multi-basin scale to protect food security for a subsistence irrigation society when the community faces water shortage. This paper’s contribution examines the economic performance of three water-sharing mechanisms for three basins in Afghanistan with the goal of protecting food security for crop irrigation under ongoing threats of drought, while meeting growing demands for food in the face of anticipated population growth. We achieved this by formulating an integrated empirical optimization model to identify water-sharing measures that minimize economic losses while protecting food security when water shortages occur. Findings show that implementation of either a water trading policy or a proportional shortage policy that respects cultural sensitivities has the potential to raise economic welfare in each basin. Such a policy can reduce food insecurity risks for all trading provinces within each basin, thus being a productive institution for adapting to water shortage when it occurs. Total economic welfare gains are highest when drought is the most severe for which suffering would otherwise be greatest. Gains would be considerably higher if water storage reservoirs were built to store wet year flows for use in dry years. Our results light a path for policy makers, donors, water administrators, and farm managers, who shoulder the burden of protecting food security and rural livelihoods in the world’s poor dry communities.

An approach for analyzing the spatial welfare and distributional effects of ocean wind power siting: The Rhode Island/Massachusetts area of mutual interest

Coastal and marine spatial planning (CMSP) involves characterizing the potential socioeconomic consequences of locating one or more human uses in place of others in the coastal ocean. Most commonly, the focus of CMSP is on the siting of alternative uses across ocean space. This article examines the broader economic and distributional effects of the potential siting of a renewable energy facility (wind power) in a southern New England offshore area that also is used intensively for commercial fishing. For a leading siting alternative, a counterfactual involving the complete displacement of commercial fishing would result in estimated direct output impacts to the regional economy of $5 million, leading to $11 million in direct, indirect, and induced impacts and a corresponding loss of about 150 jobs. Total economic welfare losses were estimated at $14 million, reflecting not only output reductions but also the effects of price increases in the relevant markets. The welfare losses would be progressively distributed, such that households in mid- to high-income categories would likely bear the most significant impacts. Adjusting these welfare losses for society׳s aversion to income inequality, inequality-adjusted impacts would be more pronounced in areas that are not necessarily located in close proximity to the coastline. Individual low-income households located in five non-coastal census tracts would bear estimated median impacts (≥$140/year), which would be an order of magnitude larger than those borne by the next group of impacted households. When implementing CMSP, it is critically important to characterize not only the distribution of effects over the coastal ocean but also the distribution of impacts on coupled human communities onshore, including those communities that may not be considered strictly coastal.

Head and neck cancer in South Asia: macroeconomic consequences and the role of surgery

BackgroundHead and neck cancer, for which the diagnosis and treatment are often surgical, comprises a substantial proportion of the burden of disease in South Asia. Further, estimates of surgical volume suggest this region faces a critical shortage of surgical capacity. We aimed to estimate the total economic welfare losses due to the morbidity and mortality of head and neck cancer in India, Pakistan, and Bangladesh for 1 year (2010). MethodsWe used publicly available estimates from the Institute for Health Metrics and Evaluation regarding the morbidity and mortality of head and neck cancer in India, Pakistan, and Bangladesh, along with an economic concept termed the value of a statistical life, to estimate total economic welfare losses due to head and neck cancer in the aforementioned countries in the year 2010. The counterfactual scenario is absence of disease. Sensitivity analyses were done with regard to how the value of a statistical life changes with income. FindingsIn 2010, the most conservative estimate of economic welfare losses due to head and neck cancer in the three studied countries is US$16·9 billion (2010 USD, PPP), equivalent to 0·26% of their combined gross domestic product (GDP). The welfare losses experienced by the population younger than 70 years of age accounted for US$15·2 billion (90% of the total losses). When adjusted for the size of their respective economies, Bangladesh, the poorest of the three countries, incurred the greatest loss (US$930 million), equivalent to 0·29% of its GDP. India and Pakistan experienced welfare losses of US$14·1 billion and US$1·9 billion, respectively. These figures are equivalent to 0·26% of the GDP for both countries. Oropharyngeal and hypopharyngeal cancer made up the largest share of the total burden at 39% (US$6·6 billion), followed closely by oral cavity cancer at 34% (US$5·7 billion). InterpretationThe burden of non-communicable diseases, to which cancer contributes greatly, is growing at a rapid pace in South Asia. Head and neck cancer is a leading cause of cancer-related mortality in this region, and this study suggests that the associated economic welfare losses, estimated to be US$16·9 billion in 2010 alone, are substantial. A number of strategies are available to address this burden. Surgery, as part of a multidisciplinary approach that includes radiation therapy and chemotherapy, plays a central part in the diagnosis and treatment of head and neck cancer, and building surgical capacity, which offers large economies of scope and scale, can not only address the burden of head and neck cancer, but also create a platform for beginning to confront the rising tide of non-communicable diseases. FundingNone.

Irrigation infrastructure and water appropriation rules for food security

In the developing world’s irrigated areas, water management and planning is often motivated by the need for lasting food security. Two important policy measures to address this need are improving the flexibility of water appropriation rules and developing irrigation storage infrastructure. Little research to date has investigated the performance of these two policy measures in a single analysis while maintaining a basin wide water balance. This paper examines impacts of storage capacity and water appropriation rules on total economic welfare in irrigated agriculture, while maintaining a water balance. The application is to a river basin in northern Afghanistan. A constrained optimization framework is developed to examine economic consequences on food security and farm income resulting from each policy measure. Results show that significant improvements in both policy aims can be achieved through expanding existing storage capacity to capture up to 150 percent of long-term average annual water supplies when added capacity is combined with either a proportional sharing of water shortages or unrestricted water trading. An important contribution of the paper is to show how the benefits of storage and a changed water appropriation system operate under a variable climate. Results show that the hardship of droughts can be substantially lessened, with the largest rewards taking place in the most difficult periods. Findings provide a comprehensive framework for addressing future water scarcity, rural livelihoods, and food security in the developing world’s irrigated regions.

Economic Welfare Impacts of Foot‐and‐Mouth Disease in the Canadian Beef Cattle Sector

A foot‐and‐mouth disease outbreak, although having a low probability of occurrence, results in losses of export markets and introduces considerable potential disease management and eradication costs. We develop a dynamic model that integrates beef cattle production, disease dissemination, domestic consumption, and international trade and captures the intertemporal economic welfare impacts of mitigation measures. The model is applied to the case of a hypothetical outbreak in Canada to capture changes in producer profits, consumer price, and government costs due to the outbreak and sums these to measure changes in total economic welfare of the beef industry. Mitigation scenarios are reported for stamping‐out, movement controls, vaccination, and preemptive slaughter.

Water, Food, and Energy Security: An Elusive Search for Balance in Central Asia

The development and use of water resources in the Amu Darya Basin remain under debate in the face of increasing population and associated scarcities in water, food, and energy. The upstream riparian, the mountain nation of Tajikistan, wishes to develop its hydropower potential. Three downstream states wish to sustain or increase their economic benefits from water used for irrigation. Growing tensions among the riparian countries on the Vakhsh River, a tributary of Amu Darya, have halted development of Tajikistan’s proposed Rogun Dam. This paper examines the potential for mutually beneficial water development and allocation of water resources to sustain demands for water, food, and energy. Using long-term data on the Basin’s energy potential, water supplies, irrigated land, and crop water demands, this paper analyzes total economic welfare for a future 20-year time horizon. Two water supply scenarios for each of two policy choices are examined. Results show that a constrained economic optimization operation of the Dam has the potential to increase farm income for each riparian country, while producing considerable benefits in hydropower for Tajikistan. Political negotiation among the riparian states and much better data will be needed to discover and implement potential gains indicated by this study.

The failure of the ISEW and GPI to fully account for changes in human-health capital — A methodological shortcoming not a theoretical weakness

Andrew Brennan (Ecological Economics, 2013--this issue) has argued that the Index of Sustainable Economic Welfare (ISEW) and Genuine Progress Indicator (GPI) are theoretically flawed because, as indicators designed to capture the net psychic income generated by economic activity, they fail to incorporate net changes in human-health capital. To a lesser extent, Brennan is also critical of the fact that the ISEW and GPI are unable to reflect both economic welfare and sustainability. Whilst I'm happy to concede that the two indicators fail to fully account for changes in human-health capital, it is my contention that this failure represents, at most, a methodological shortcoming. It does not amount to a theoretical weakness. Despite Brennan's best efforts, the ISEW and GPI remain soundly based on Irving Fisher's distinction between income and capital. Indeed, Brennan's suggested modifications to the ISEW and GPI do nothing but conflate income and capital, which, if taken on board, would lead to misleading indicators of total economic welfare. As for not reflecting both economic welfare and sustainability, I have long argued that the ISEW and GPI merely reflect the former and need to be supplemented by biophysical indicators to determine whether the economic welfare being enjoyed by a nation is sustainable. The fact that the ISEW and GPI only reflect economic welfare is not a weakness, since no indicator can or should attempt to reflect both conditions. The use of strong sustainability approaches to calculate the environment costs incorporated in the ISEW and GPI is not an exercise designed to measure sustainability. It is an exercise in good economic accounting.

Bundling, Entry Deterrence, and Specialist Innovators*

We examine a mechanism by which bundling may inefficiently deter entry into the market. The model considers an incumbent monopolist in two complementary components that faces a series of entry attempts by rivals. It is shown that the incumbent can practice bundling to buttress its monopoly position by keeping specialist innovators out of the market. Bundling prevents specialist rivals from coordinating in the dynamic entry process, reducing the probability of an eventual displacement of the incumbent. The specialization decisions of rivals are also distorted. Bundling may lead to lower customer and total economic welfare.

Economic and welfare impacts of commercializing a herbicide-tolerant, biotech wheat

A transgenic variety of spring wheat was proposed for deregulation in North America in 2002. (More recently, the developer shelved this plan.) In this paper, a quantitative model is used to analyze the possible economic impact of commercializing a crop for which there may be sizable consumer resistance. At issue is whether, and under what conditions, the economic benefits from biotech wheat could be outweighed by economic costs. The analysis also addresses the distribution of costs and benefits among stakeholders: producers, consumers, and US taxpayers. Specific attention is given to the impacts on consumers in non-biotech and biotech market segments, and those in the United States and foreign countries. Under base-case assumptions, the analysis suggests that commercialization of biotech wheat could lead to a small net loss of total economic welfare. Results depend critically on several model parameters: the rate of biotech adoption; unit cost savings for biotech producers; the share of the non-biotech market segment; and extra costs associated with a ‘dual marketing system’ for wheat.

Sunk Costs and Antitrust Barriers to Entry

US antitrust policy takes as its objective consumer welfare, not total economic welfare. With that objective, Joe Bain's definition of entry barriers is more useful than George Stigler's or definitions based on economic welfare. It follows that economies of scale that involve sunk costs may create antitrust barriers to entry. A simple model shows that sunk costs without scale economies may discourage entry without creating an antitrust entry barrier.(This abstract was borrowed from another version of this item.)

Sunk Costs and Antitrust Barriers to Entry

US antitrust policy takes as its objective consumer welfare, not total economic welfare. With that objective, Joe Bain's definition of entry barriers is more useful than George Stigler's or definitions based on economic welfare. It follows that economies of scale that involve sunk costs may create antitrust barriers to entry. A simple model shows that sunk costs without scale economies may discourage entry without creating an antitrust entry barrier.

The Effects of Integration on R&D Incentives in Systems Markets

We consider a systems market where two complementary components must be used in combination to provide valuable services. The market for the first component is monopolized whereas the market for the second is potentially served by multiple firms. We show that integration of the monopolist into the competitive complementary market may distort incentives for R&D, reducing total economic welfare.

Tying, Investment, and the Dynamic Leverage Theory

The idea that an incumbent supplier may tie two complementary products to fend off potential entrants is popular among practitioners yet is not fully understood in formal economic theory. This article makes sense of the argument by formally deriving a dynamic version of the old leverage doctrine. We show that when an incumbent monopolist faces the threat of entry in all complementary components, tying may make the prospects of successful entry less certain, discouraging rivals from investing and innovating. Tie-in sales may reduce consumer and total economic welfare. Copyright 2001 by the RAND Corporation.