Welfare Economics Framework Research Articles

The Impact of COVID-19 on World Oil Producers: Time is Important

Abstract The COVID-19 crisis had a significant impact on world oil producers. Within a welfare economic framework, Schmitz, A., C. B. Moss, and T. G. Schmitz. 2020. “The Economic Effects of COVID-19 on the Producers of Ethanol, Corn, Gasoline, and Oil.” Journal of Agricultural & Food Industrial Organization 18 (2): 1–18, estimated that the minimum cost of COVID-19 in 2020 to world oil producers was roughly US$ 1 trillion. They used actual oil production data for January 1st, 2020, through June 30th, 2020, and forecast world oil production and prices from July 1st to December 31st, 2020. This paper extends the 2020 analysis using actual production and price data for 2020 and 2021 to calculate the change in producer economic rents during the COVID-19 pandemic for global oil producers (U.S., Russia, Saudi Arabia, and the Rest of the World). Despite losses in 2020 to world oil producers due to the COVID-19 pandemic, world oil producers saw significant gains in 2021, which more than offset losses in 2020. At a minimum, world oil producers realized a net gain of $US 829 billion over the two periods.

Value of power-to-gas as a flexibility option in integrated electricity and hydrogen markets

This paper analyzes the economic potential of Power-to-Gas (PtG) as a source of flexibility in electricity markets with both high shares of renewables and high external demand for hydrogen. The contribution of this paper is that it develops and applies a short-term (hourly) partial equilibrium model of integrated electricity and hydrogen markets, including markets for green certificates, while using a welfare-economic framework to assess the market outcomes. We find that strongly increasing the share of renewable electricity makes electricity prices much more volatile, while the presence of PtG reduces this price volatility. However, a large demand for hydrogen from outside the electricity sector reduces the impact of PtG on the volatility of electricity prices. In a scenario with a high external hydrogen demand, PtG can deliver positive benefits for some groups as it can provide hydrogen at lower costs than Steam Methane Reforming (SMR) during hours when electricity prices are low, but these positive welfare effects are outweighed by the fixed costs of PtG assets plus the costs of replacing a less expensive energy carrier (natural gas) with a more expensive one (hydrogen). Investments in PtG are profitable from a social-welfare perspective when the induced reduction in carbon emissions is valued at 150–750 euro/ton. Hence, at lower carbon prices, PtG can only become a valuable provider of flexibility when installation costs are significantly reduced and conversion efficiencies of electrolysers increased.

Participatory value evaluation for the evaluation of flood protection schemes

Participatory Value Evaluation (PVE) is a new survey method which elicits citizens' preferences over the allocation of public budgets as well as their private income. In a PVE, citizens are asked to choose the best portfolio of projects given a governmental and a private budget constraint. First, this paper aligns PVE with the traditional Kaldor-Hicks welfare economics framework underlying many Cost-Benefit Analyses. Second, this paper positions PVE against other valuation methods. Third, this paper applies the PVE method to evaluate the impacts of projects mitigating flood risks in the Netherlands. This empirical application reveals that Dutch citizens indicate a preference for projects that combine strengthening dikes and give space to the river to flood safely, particularly when such projects positively influence biodiversity and recreational opportunities.

Estimation of the potential economic welfare to be gained by the South African Customs Union from trade facilitation

Background: Trade facilitation is important for the South African Customs Union (SACU) countries because the expansion of international trade is a priority to enhance their economic growth. Unfortunately, the high trade compliance costs facing importers and exporters operating in SACU are in conflict with this objective.Aim: This article aims to quantify the annual economic welfare gains that the member countries of SACU could realise from reforms that would reduce the documentary and border compliance time and costs.Methods: We use a partial equilibrium welfare economics framework of up-to-date sets of general equilibrium estimates of the import demand and the export supply elasticity in a country. The impact on the volume of trade flow and economic welfare is quantified to reduce documentary and border compliance time and trade compliance costs.Results: The economic welfare changes from reducing the documentary and border compliance time and costs for imports and exports would be between US$2.2 billion and US$3.7 billion (2018 prices), or between 0.54% and 0.90% of GDP of the SACU countries. The economic welfare gains from reducing the excess administrative costs in imports and exports of SACU members would be between US$2.2 billion and US$3.7 billion (2018 prices), or between 0.54% and 0.90% of the GDP of the SACU.Conclusion: The most important reforms needed to realise these cost savings include a single window administrative structure. In this case, both customs, health, welfare, and controls, as well as the payment of all duties, taxes, and licenses are handled by a single administrative office. Failure to move fast regarding such changes would have a negative impact on the well-being of SACU members.

Values in Welfare economics

This chapter focuses on the inner rationale and consequences of four different archetypal positions regarding how ethical and political values are tackled in welfare economics. Welfare economics is standardly associated with the welfarist framework, for which social welfare is based on individual utility only. Beyond this, we distinguish the value-neutrality claim – for which ethical values should be and are out of the scope of welfare economics –, the value confinement ideal – for which ethical values are acceptable if they are minimal and consensual–, the transparency requirement – for which any ethical values may be acceptable in the welfare economics framework if explicit and formalized –, and the entanglement claim – which challenges the very possibility of demarcation between facts and values.

Trade Facilitation and Its Impacts on the Economic Welfare and Sustainable Development of the ECOWAS Region

The facilitation of trade is a principal objective in the context of increasing regional trade integration for the achievement of sustainable development goals. The purpose of this study is to estimate the potential annual economic gain to be had from trade facilitation by the coastal countries of the Economic Community of West African States (ECOWAS). These measures would decrease border and documentary compliance time and costs of the administration of international trade. A partial equilibrium welfare economics framework is used that employs sets of export supply and import demand elasticities for each country that are derived using a general equilibrium estimation method. The annual economic welfare gains resulting from the reduction of excessive trade compliance costs for the region are estimated to between US$1.6 billion to US$2.7 billion (2019 prices). This is between 0.24% and 0.42% of the combined GDPs of these countries. The welfare gain is between 6% and 10% of the combined governments’ budgets assigned for education, and is between 33% and 58% of their budgets allocated for health. In the absence of reform, these inefficient practices waste an amount equal to between 15% and 26% of the annual net official development assistance these countries receive.

The Economic Effects of COVID-19 on the Producers of Ethanol, Corn, Gasoline, and Oil

Abstract The COVID-19 crisis created large economic losses for corn, ethanol, gasoline, and oil producers and refineries both in the United States and worldwide. We extend the theory used by Schmitz, A., C. B. Moss, and T. G. Schmitz. 2007. “Ethanol: No Free Lunch.” Journal of Agricultural & Food Industrial Organization 5 (2): 1–28 as a basis for empirical estimation of the effect of COVID-19. We estimate, within a welfare economic cost-benefit framework that, at a minimum, the producer cost in the United States for these four sectors totals $176.8 billion for 2020. For U.S. oil producers alone, the cost was $151 billion. When world oil is added, the costs are much higher, at $1055.8 billion. The total oil producer cost is $1.03 trillion, which is roughly 40 times the effect on U.S. corn, ethanol, and gasoline producers, and refineries. If the assumed unemployment effects from COVID-19 are taken into account, the total effect, including both producers and unemployed workers, is $212.2 billion, bringing the world total to $1266.9 billion.

Producer’s Preference for Price Instability: Revisited

In the debate over producer preference for price instability, Oi argues that producers prefer price instability to stability using only the case where demand shocks generate instability. In this case, storage hurts producers. We use the classic welfare economic framework to consider the more likely scenario where instability is generated by supply shocks and, in the absence of storage, producers prefer production and price instability. However, producers can increase their profits by storing part of the production in the low-price period and releasing stocks in the high-price period. The strong conclusion is that producers prefer, on net, price stability to instability when the possibility for storage exists. Under profit maximization, producers, not governments, engage in storage. Producers prefer to produce under unstable prices, but to sell at stable prices. On net, producers prefer price stability.

Economic accounting of ethiopian forests: A natural capital approach

Ethiopia has experienced a long-term deforestation with broad implications for human life and economic activities, but conventional frameworks of economic accounting are not able to assess the country's economic and environmental sustainability in the face of such deforestation problem. In this study, we attempt an economic accounting of Ethiopian forests based on a welfare-economic framework, which assesses changes in the value of forests as natural capital. Our estimates suggest that the recent government re-greening efforts are yet to increase forest assets in the value term, although they have expanded the land areas covered by trees in the country.

The Corporate Social Responsibility of Hydropower Companies in Alpine Regions—Theory and Policy Recommendations

Hydropower activities must increasingly be evaluated from a sustainable development perspective. Corporate social responsibility (CSR) is the principle frequently applied to evaluate corporate contributions in this regard, though there exists no conceptual and theoretical basis that is common to the various approaches. With the present work, we fill this gap and provide a generic model that formally integrates the corporate and societal perspectives of hydropower activities within a welfare-economic framework that encompasses both externalities and distributional concerns. Building on this background and focusing on the current situation in Switzerland, the water tower of Western Europe, we particularly address the issues of water rights, resource rents and governance. This is crucial when analyzing investment projects of hydropower companies with shared private and public ownership; i.e., if external stakeholders are also sensitive shareholders who grant, at the same time, the company the right to operate. Altogether, this contribution shall support better informed decision making on both corporate and policy levels, especially regarding new and retrofitting investments in hydropower when social concerns are at stake.

The market, utilitarianism and the corruption argument

Some philosophers argue that if market reasoning exceeds certain limits, it may ‘corrupt’ certain cherished values; and the tendency of modern economics to encourage such ‘corruption’ has its roots in its normative foundations. Michael Sandel goes further and suggests that this tendency can be traced to utilitarian reasoning. I argue that the desire to restrict the scope of economics can be found in the utilitarian origins of neoclassical economics. The argument that market reasoning may ‘corrupt’ various values has gained credence from the work of market enthusiasts like Gary Becker but does not apply to the traditional framework of welfare economics. Furthermore, if economists adopt the informed desire or preference view of welfare endorsed by some utilitarians, certain arguments advanced by these philosophers can be rebutted.

Producers’ Preference for Price Instability?

The debate over whether producers prefer price instability to price stability continues, especially where policies are often endorsed that aim at generating stability. Such policies include the holding of agriculture commodity stocks by government to bring about price stability. But why would producers support such a policy given that producers prefer price instability, or do they? Oi argues that producers prefer price instability, which is opposite to the conclusion reached by Massell. In this paper, we take up the issue as to producers’ preference for price instability using the classic welfare economic framework used by Massell and Just et al. We develop a producer price expectation model that brings about price stability, which is possible without storage. We use this as the basis upon which to compare price stability to price instability. Our conclusion is that producers prefer price instability regardless of whether it is due to demand or supply shocks.

A Welfare Economic Interpretation of FRAND

Setting an industry-wide standard is crucial for information and communication technologies for interoperability, compatibility and efficiency. To minimize holdup problems, patent holders are often required to ex-ante commit to licensing their technologies under Fair, Reasonable and Non-Discriminatory (FRAND) terms. Yet, there is little consensus, in both courtrooms and industries, on the exact meaning of FRAND. We propose a welfare economic framework that enables a precise distinction: fairness in the distribution of royalty payments among patent users, and reasonableness in setting the size of the compensation to the patent holder, where both the size and the distribution of payments are determined in a non-discriminatory way making sure that similar firms are treated similarly. We illustrate our approach in various classic models from industrial organization, and discuss further potential applications.

Phillips curve in welfare economics and game theory

Phillips curve as the interdependence between inflation and unemployment has become a very powerful analytical tool of economic policy and macroeconomic theory. Created in the famous article by A. Phillips in the late 50s, it has been increasingly implemented in macroeconomic models and practical choices of economic policy, dealing with the two most important forms of macro imbalance: inflation and unemployment. Therefore, it has become obvious that it can be used in the context of Pareto-optimum and social welfare function, as well as in the game theory and international economic policy coordination. The paper analyzes Phillips curves in the game theory and welfare economics framework (as a choice between the different inflation and unemployment rates), and aims to demonstrate theoretically and practically that it is possible to connect this powerful instrument of economic policy with important theoretical concepts in economics and recent intellectual achievements of the game theory.

Challenges in applying the paradigm of welfare economics to climate change

Abstract: This paper discusses the challenges inherent in developing benefit-cost analysis (BCAs) of climate change. Challenges are explored from three perspectives: meeting the foundational premises for conducting BCA within the framework of welfare economics, methodological considerations that affect the application of the tools and techniques of BCA, and practical limitations that arise out of resource constraints and the nature of the question, project, or policy being evaluated. Although economic analysts frequently face – and overcome – conceptual and practical complications in developing BCAs, climate change presents difficulties beyond those posed by more conventional environmental problems. Five characteristics of the climate system and associated impacts on human and natural systems are identified that pose particular challenges to BCA of climate change, including ubiquity of impacts, intangibility, non-marginal changes, long timeframes, and uncertainty. These characteristics interact with traditional economic challenges, such as valuing non-market impact, addressing non-marginal changes, accounting for low-probability but high-impact events, and the eternal issue of appropriately discounting the future. A mapping between the characteristics of climate change and traditional economic challenges highlights the difficulties analysts are likely to encounter in conducting BCA. Despite these challenges, the paper argues that the fundamental ability of economic analysis to evaluate alternatives and tradeoffs is vital to decision making. Climate-related decisions span a wide range in terms of their scope, complexity, and depth, and for many applications of economic analyses the issues associated with climate change are tractable. In other cases it may require improved economic techniques or taking steps to ensure uncertainty is more fully addressed. Augmenting economic analysis with distribution analysis or an account of physical effects, and exploring how economic benefit and cost estimates can be incorporated into broader decision making frameworks have also been suggested. The paper concludes that there are opportunities for BCA to play a key role in informing climate change decision-making.

The distributional consequences of a fiscal food policy: evidence from the UK

The literature on fiscal food policies focuses on their effectiveness in altering diets and improving health, while this paper focuses on their welfare costs. A formal welfare economics framework is developed to calculate the combined individualistic and distributional impacts of a tax-subsidy. Distributional characteristics of foods targeted by a tax tend to be concentrated in lower-income households. Further, consumption of fruit and vegetables tends to be concentrated in higher-income households; therefore, a subsidy on such foods increases regressivity. Aggregate welfare changes that result from a fiscal food policy are found to range from an increase of 1.41 per cent to a reduction of 2.06 per cent according to whether a subsidy is included, the degree of inequality aversion, and whether substitution among foods is allowed.

Why Wind is Not Coal: On the Economics of Electricity

The economics of electricity is shaped by its physics. A well know example is the non-storability of electricity that causes its price to fluctuate widely. More generally, physical constraints cause electricity to be a heterogeneous good along three dimensions - time, space, and lead-time. Consequently, different generation technologies, such as coal and wind power, produce different economic goods that have a different marginal economic value. Welfare maximization or competitiveness analyses that ignore heterogeneity deliver biased estimates. This paper provides an analytical welfare-economic framework that accounts for heterogeneity for unbiased assessments of power generators. The framework offers a rigorous interpretation of commonly used cost indicators such as ‘levelized electricity costs’ and ‘grid parity’. Heterogeneity is relevant for all generators, but especially for variable renewables such as wind and solar power. We propose a definition of ‘variability’, derive the opportunity costs of variability, and link that concept to the ‘integration cost’ literature. A literature review shows that variability can reduce the value of wind power by 20-50%. Thus it is crucial that economic analysis accounts for the physics of electricity.

The U.S. Tobacco Buyout: A Partial and General Equilibrium Analysis

This article analyzes the impact of removing the U.S. tobacco program in both a partial and general welfare economics framework. In a partial-equilibrium framework, a consumer tax-funded quota buyout can result in producer gains, consumer losses, net losses resulting from higher prices, and deadweight losses. In a general-equilibrium framework, society can gain from the buyout resulting from considerable potential savings from reduced healthcare costs attributable to a reduction in smoking. Additionally, we present a model that addresses the addictive qualities of tobacco while considering the effects of the quota buyout. We also conclude that another possible effect of the buyout is an increase in worker productivity because employees who are able to quit smoking reduce the amount of smoking-related sick days taken.

A universal preference for equality in health? Reasons to reconsider properties of applied social welfare functions

The literature on how to combine efficiency and equity considerations in the social valuation of health allocations has borrowed extensively from applied welfare economics, including the literature on inequality measurement. By so doing, it has adopted normative assumptions that have been applied for evaluating the allocation of welfare (or income) rather than the allocation of health, including the assumption of a monotonically declining social marginal value of welfare/income/health. At the same time, empirical studies that have elicited social preferences for allocation of health have reported results that are seemingly incompatible with this assumption. There are two ways of addressing this inconsistency; we may censor the stated preferences by arguing that they cannot be supported by normative arguments, or we may reject or modify the analytical framework in order to accommodate the stated preferences. We argue that the stated preferences can be supported by normative reasoning and therefore conclude that one should be cautious in applying the standard welfare economic framework to the allocation of health.

Discounting the Standard Model: Why the Ramsey Model Does Not Adequately Explain Climate Change Policy

The costs of action or inaction on climate change pose difficulties in terms of analysis in the framework of intergenerational welfare economics. Evaluation of mitigation policy is characterized by either immediate costs with delayed benefits or, when considering a policy of inaction, delayed costs. Sunstein (2007) contends that the delayed benefits of climate change mitigation policy result in a lack of willingness to undertake mitigation measures whereas more immediate benefits of counterterrorism measures results in greater public support of such policy.* Differing assumptions regarding discount rates for future costs and benefits contribute in large measure to the high degree of uncertainty surrounding specific estimates of the net economic impact of climate change. For example, the social cost of carbon, or the equivalent Pigouvian tax on carbon emissions to correct for market failure due to externalities from the effects of high greenhouse gas concentrations, varies at the mean from 232 dollars per tonne carbon with a 0 percent discount rate to 18 dollars per tonne carbon with a 3 percent discount rate as reported in Tol (2009, p. 41). While appropriate methods and rates of discounting can be inferred via observable macroeconomic indicators, such methodology may exhibit imperfections even with refinements as outlined by Dasgupta (2008). His findings will be addressed in greater detail in the following sections. #e intergenerational welfare implications within the Ramsey model—henceforth known as the standard model due