nonmonetary effects of the financial crisis in propagation of the great depression this paper examines the effects of the financial crisis of the 1930s onthe path of aggregate output during that period our approach is complementary to that of friedman and schwartz who emphasized the monetary impact of the bank failures we focus on non monetary primarily credit related aspects of the financial sector output link and consider the problems of debtors as well as those of the banking system we argue that the financial disruptions of 1930 33 reduced the efficiency of the credit allocation process and that the resulting higher cost and reduced availability of credit acted to depress aggregate demand evidence suggests that effects of this type can help explain the unusual length and depth of the great depression this abstract was borrowed from another version of this item

efficient methods of measuring welfare change and compensated income in terms of ordinary demand functions a utility maximizing consumer with a completely known system of ordinary demand functions q h p c is considered let p qo and p q be two arbitrary equilibrium situations the problem is to evaluate in which of the situations the utility is higher without knowing the utility function revealed preference theory tells that the ordinary demand functions which are in principle observable contain enough information to solve the problem remaining difficulties are therefore mainly computational we present how the compensated income c i c p qo and the compensated demand h p cl1 are calculated with arbitrary accuracy using only the ordinary demand system our two efficient algorithms also have interesting interpretations in terms of index numbers and consumer surplus measures

green price indices abstract this paper suggests two theoretically consistent and empirically tractable ways that a cost of living index can be expanded to include the environment and other public goods in addition it presents an empirical illustration of such an index for los angeles california incorporating air quality and other spatially varying public goods using a hedonic model the results indicate that the required information can be recovered and that including public goods can make a substantial difference in the index

empirical strategies for incorporating weak complementarity into consumer demand models abstract this article appraises existing empirical strategies for incorporating weak complementarity into consumer demand models the repackaging integrating back and discontinuity approaches are evaluated in terms of their behavioral implications and potential usefulness for applied research the appraisal suggests that the repackaging approach offers the most flexibility and tractability in the multi good demand system framework but the integrating back approach holds considerable promise in the single good context a multi good empirical comparison suggests that qualitatively similar policy inference arises from different repackaging approaches

public goods as characteristics of non market commodities in benefit cost analysis it is useful to model public goods as the quality of privately consumed nonmarketed goods this strategy is often pursued in valuing environmental amenities the theoretical foundations of this model have not been fully developed in this paper comparative statics results are derived for quality changes of nonmarket goods the results reveal some common misconceptions about welfare measurement of quality changes conditions are presented for a quality induced change in the marshallian consumer surplus of the nonmarket good to approximate the true compensated welfare measure the conditions are equally necessary for obtaining exact welfare measures copyright 1993 by royal economic society

road pricing with optimal mass transit abstract this paper considers the second best policy problem that arises when auto travel is priced below its marginal cost and there is a substitute mass transit mode using analytical methods a global comparison is made between the second best levels of transit service and the fare and their first best levels the fact that the results are global permits an application to road pricing not possible with the local results of kraus 2003

the value of value pricing of roads second best pricing and product differentiation abstract some road pricing demonstrations use value pricing in which travelers can choose between a free but congested roadway and a priced roadway recent research has uncovered a potentially serious problem for such demonstrations second best tolls may be far lower than those typically charged and from a welfare perspective the latter may be worse than not pricing at all that research however assumes that all travelers are identical and it therefore neglects the benefits of product differentiation using a model with two user groups we find that accounting for heterogeneity in value of time is important in evaluating constrained policies and improves the relative performance of policies that offer differential prices

the drawbacks and opportunities of carbon charges in metropolitan areas a spatial general equilibrium approach in cities there is a variety of economic and spatial forces that may influence to what extent a travel related co2 emission pricing can be an effective instrument to contribute to the achievement of co2 reduction goals therefore we examine the effectiveness and impact of co2 emission charges using a spatial general equilibrium model of an urban economy calibrated according to an average german city our analyses suggest that the imposition of a pigouvian type co2 emission charge on urban passenger travel may be able to reduce emissions by about 1 11 depending on the estimated social damage cost of carbon dioxide such a policy increases urban welfare mainly on account of a reduction of congestion costs however pricing congestion directly not only provides higher urban welfare but also higher emission reductions pricing congestion and co2 emissions simultaneously allows to achieve a wide range of emission reduction goals if however the reduction goal is very ambitious the emission charge must be raised to higher levels then distortions in the urban markets and in spatial travel decisions lower labor supply and thus urban production income of city residents federal tax revenue income of landowners outside the city all together implying losses in welfare

should congestion tolls be set by the government or by the private sector the knight pigou debate revisited this paper clarifies issues debated by a c pigou and frank knight about correcting inefficient use of congestible resources focusing for concreteness on their original example of road congestion instead of government imposed pigouvian access fees knight favoured access fees set by private toll setters we consider the case of n 2 congestible roads and an uncongestible road of arbitrary speed knight argued that in the case of a single congestible road a private toll setter would always choose the toll that pigou recommended hence the allocation would minimize aggregate commute time without government meddling we find instead that two or more toll setters would never choose pigouvian tolls except in the special case of a sufficiently fast uncongestible road moreover for uncongestible roads of slower speed the allocation of motorists under knight s proposal is almost never efficient whenever it is inefficient motorists are strictly worse off when they pay tolls set by private firms instead of paying government imposed tolls and aggregate toll revenue is also lower nevertheless if the private sector does set tolls then the full cost to motorists can be limited if the government provides an uncongestible alternative such as a train to offer potential competition along the same route

productivity under the 1997 2010 labour government what was the productivity record under the labour government of 1997 2010 i show that productivity growth and economic performance in general was good when the uk is compared with its main international peers only the us had stronger productivity growth and the uk did better than the us in terms of the jobs market much of this improved performance was a continuation of the pattern since 1979 which broke a century of relative decline some part of the improvement is directly linked to policies especially over human capital innovation and competition we discuss the recent productivity puzzle the disappointing productivity figures since the onset of the great recession in 2008 and argue that our conclusions are unchanged as most other oecd countries have also experienced poor measured productivity

sustainability impacts of car road pricing a computable general equilibrium analysis for austria abstract nationwide car road pricing schemes are discussed across europe we analyse the impacts of such schemes with respect to environmental economic and social indicators of sustainability also quantifying the trade offs among these three dimensions under different charging principles and revenue recycling options in our analysis we employ a computable general equilibrium cge approach develop a modelling structure for private transport and provide detailed empirical analysis for the case of austria regarding the social dimension it has often been argued that poorer households and commuters would have to bear a disproportionate share of the road pricing burden we find the contrary i e a stronger negative policy impact on richer households and on a small group of intensive car users the choice of revenue recycling is able to ameliorate the negative social and economic effects of road pricing without reversing the desired positive environmental effects for political feasibility questions of distributional impacts are most urgent and therefore we address them systematically within a quantitative framework

revenue recycling within transport networks abstract in this paper we analyse second best pricing and investment policy for transport networks with a revenue recycling mechanism in which the toll revenue is used for transport investments or subsidies as in london s congestion charging scheme the results of this paper demonstrate that the way toll revenue is used modifies the usual results significantly which are typically based on assuming a lump sum transfer first recycling revenue as investment increases the second best toll when the benefits from the investment exceed the costs and when demand is inelastic with respect to the toll recycling revenue as a subsidy has no such effect second partial cost benefit analysis that focuses only on the targeted transport mode would usually lead to erroneous conclusions about whether toll revenues should be used for transport investment subsidies or general tax revenues thus full cost benefit analysis which accounts for changes in consumer and producer surpluses in all transport modes is necessary

a diagrammatic exposition of weak complementarity and the willig condition this article provides a graphical explanation for one of the most important restrictions to utility functions used in revealed preference approaches for measuring the demand for public goods and product quality weak complementarity it also describes how the willig condition is an important element along with weak complementarity in measuring hicksian consumer surplus for changes in public goods or quality using marshallian demand curves

is meta analysis a noah s ark for non market valuation this paper describes meta analytical methods as they have been applied to non market valuation research these studies have been used to review and synthesize literature and more recently in benefit transfer this second use imposes a higher standard on the consistency in economic concepts being summarized and in the resources included in a meta analysis to meet this need the paper proposes and illustrates a structural framework using a generalized method of moments estimator to estimate the parameters of a preference function with the benefits estimates usually encountered in meta analytic summaries

krutilla s legacy twenty first century challenges for environmental economics we all need heroes in academic life their ideas capture our imaginations convincing us that a set of problems is important often they are role models and mentors to young scholars certainly the academic enterprise would be less exciting and less productive without them this past year environmental economics lost john krutilla one of its founding fathers and a person i have always regarded as an academic hero few people have influenced environmental economics more than john it has now been fifteen years since his last major book was published bowes and krutilla and nearly forty years since the article conservation reconsidered that most environmental economists associate with him appeared in the aer a short recognition of his work prepared by resources for the future includes a comment by nobel laureate robert solow that captures the impact of this paper he observed that

second best energy policies for heterogeneous firms this paper investigates second best issues in the regulation of external costs of energy use by heterogeneous firms the efficiency of regulatory energy policies depends in general on the policy incentives given for both output reduction and input substitution the resulting endogeneity of firms supply functions appears to lead to complicated policy rules in contrast to earlier efforts the analysis considers an arbitrarily large number of non identical price taking firms in a joint market a large variety of possible production functions including varying levels of economies of scale and possibilities for input substitution and elasticities of market demand which may vary from completely elastic to completely inelastic two second best instruments are considered namely output taxes and energy efficiency standards and are compared to the benchmark of first best energy taxes the underlying market factors determining the relative efficiency of these second best instruments when used optimally are identified

private roads competition and incentives to adopt time based congestion tolling abstract this paper investigates whether time based congestion tolling is profitable for a private toll road operator when competing for traffic with another road despite the fact that congestion tolling boosts revenue by reducing congestion delay it can be unprofitable if it induces a private or public toll road rival to reduce its toll severely the size of the rival s response depends on the price elasticity of travel demand and on whether the rival also employs congestion tolling in a private duopoly adoption may be unilaterally profitable but parallel adoption unprofitable so that a prisoner s dilemma obtains

the international transmission of financial shocks the case of japan one of the more dramatic financial events of the late 1980s and early 1990s was the surge in japanese stock prices that was immediately followed by a very sharp decline of more than 50 percent while the unprecedented fluctuations in japanese stock prices were domestic financial shocks the unique institutional characteristics of the japanese economy produce a framework that is particularly suited to the transmission of such shocks to other countries through the behavior of the japanese banking system the large size of japanese bank lending operations in the united states enables us to use u s banking data to investigate the extent to which this domestic japanese financial shock was transmitted to the united states as well as to identify a supply shock to u s bank lending that is independent of u s loan demand we find that binding risk based capital requirements associated with the decline in the japanese stock market resulted in a decline in commercial lending by japanese banks in the united states that was both economically and statistically significant this finding has added importance given the severe real estate loan problems currently faced by japanese banks how japanese bank regulators decide to resolve these problems will have significant implications for credit availability in the united states as well as in other countries with a significant japanese bank presence

valuing environmental resources through demand for related commodities we examine the revealed preference theory underlying the welfare analysis of public goods e g environmental quality by observing the consumption of related commodities inspired by larson 1991 and ebert 1998 and extended from eom and larson 2006 an empirical strategy is formulated consistent with the theory of uniquely deriving use and nonuse values for a change in the public good we show that the weak complementarity assumption and the willig condition the common preference assumptions used to support the revealed preference methods for non market valuation may be tested as parameter restrictions a study of water quality valuation is presented to illustrate the proposed empirical strategy results show that the weak complementarity assumption and the willig condition generally do not hold in the case study and the consumer surplus derived from the indirect valuation method deviates largely from the exact welfare measures

can weak substitution be rehabilitated this paper develops a graphical analysis and an analytical model that demonstrate how weak substitution can be used for non market valuation weak complementarity and weak substitution represent preference restrictions that allow us to develop equivalent price changes to describe quantity or quality changes in non market goods the price changes are hicksian equivalents in that they yield the same utility changes as would the quantity or quality changes after discussion of several potential applications of weak substitution the paper develops the parallel between the restriction and recent strategies from modeling differentiated goods

on revenue recycling and the welfare effects of second best congestion pricing in a monocentric city abstract this paper examines congestion taxes in a monocentric city with pre existing labor taxation when road toll revenue is used to finance labor tax cuts 35 of the optimal road tax in our numerical model does not reflect marginal external congestion costs but rather functions as a ramsey mirrlees tax i e an efficiency enhancing mechanism allowing for an indirect spatial differentiation of the labor tax this adds a quite different motivation to road pricing since welfare gains can be produced even in absence of congestion we find that the optimal road tax is non monotonic across space reflecting the different impacts of labor supply elasticity and marginal utility of income which both vary over space the relative efficiencies of some archetype second best pricing schemes cordon toll flat kilometer tax are high 84 and 70 respectively when road toll revenue is recycled lump sum the optimal toll lies below its pigouvian level extensions in a bimodal framework show that the optimality of using road toll revenue to subsidize public transport depends on the initial inefficiency in public transport pricing

why bank governance is different this paper reviews the pattern of bank failures during the financial crisis and asks whether there was a link with corporate governance it revisits the theory of bank governance and suggests a multi constituency approach that emphasizes the role of weak creditors the empirical evidence suggests that on average banks with stronger risk officers less independent boards and executives with less variable remuneration incurred fewer losses there is no evidence that institutional shareholders opposed aggressive risk taking the financial stability board published principles for sound compensation practices in 2009 and the basel committee on banking supervision issued principles for enhancing corporate governance in 1999 2006 and 2010 the reports have in common that shareholders retain residual control and executive pay continues to be aligned with shareholder interests however we argue that bank governance is different and requires more radical departures from traditional governance for non financial firms

second best congestion pricing the case of an untolled alternative abstract this paper deals with second best one route congestion pricing in case of an untolled alternative using a two link network simulation model the effects of various demand and cost parameters on the relative efficiency of one route tolling are analyzed it is investigated whether the existence of costs of congestion charging may be a reason for one route tolling to be more overall efficient than two route tolling finally the efficiency of revenue maximizing one route and two route tolling is discussed

a political economy model of road pricing abstract in this paper we use a simple majority voting model to study the introduction of urban congestion tolls the model allows for different types of uncertainty and considers different uses of the toll revenues the following results are obtained first we show that individual uncertainty with respect to modal substitution costs may imply that a majority votes against road pricing ex ante although a majority would have been in favor after its introduction ex post moreover if a majority is against road pricing ex ante there will also be no majority for organizing an experiment that would take away the individual uncertainty second political uncertainty with respect to the use of the revenues corroborates the finding that ex ante more voters will be against the introduction of tolls third both types of uncertainty suggest that fewer voters are against road pricing when toll revenues are used to subsidize public transport than when they are redistributed to all voters importantly the results of this paper are consistent with a number of recent empirical observations on efforts to introduce road pricing including the systematic rejection of road pricing in referenda the more favorable attitudes towards road pricing after than before its introduction and tying the toll revenues to support public transport

optimal tax and public investment rules for congestion type of externalities optimal government policy is considered in a second best framework where consumers and producers cause an externality of the congestion type and income distribution issues are taken into account the theoretical results of the optimal tax literature are adapted using the concept of the net social pigouvian tax an illustrative age model uncovers the relative importance of its components the model demonstrates that the level of the externality tax does not depend strongly on distribution concerns as reoptimization of the other taxes ensures that the income distribution objective is reached the model also allows us to study the interaction between externality taxes and public abatement

reflections on northern rock the bank run that heralded the global financial crisis in september 2007 television viewers and newspaper readers around the world saw pictures of what looked like an old fashioned bank run that is depositors waiting in line outside the branch offices of a united kingdom bank called northern rock to withdraw their money the previous u k bank run before northern rock was in 1866 at overend gurney a london bank that overreached itself in the railway and docks boom of the 1860s bank runs were not uncommon in the united states up through the 1930s but they have been rare since the start of deposit insurance backed by the federal deposit insurance corporation in contrast deposit insurance in the united kingdom was a partial affair funded by the banking industry itself and insuring only a part of the deposits at the time of the run u k bank deposits were fully insured only up to 2 000 pounds and then only 90 percent of the deposits up to an upper limit of 35 000 pounds when faced with a run the incentive to withdraw one s deposits from a u k bank was therefore very strong for economists the run on northern rock at first seemed to offer a rare opportunity to study at close quarters all the elements involved in their theoretical models of bank runs the futility of public statements of reassurance the mutually reinforcing anxiety of depositors as well as the power of the media in galvanizing and channeling that anxiety through the power of television images however the storyline of the northern rock bank run does not fit the conventional narrative on september 13 2007 the bbc s evening television news broadcast first broke the news that northern rock had sought the bank of england s support the next morning the bank of england announced that it would provide emergency liquidity support it was only after that announcement that is after the

exact consumer s surplus and deadweight loss consumer s surplus is a widely used tool in applied welfare economics both economic theorists and cost benefit analysis often use consumer s surplus despite its somewhat dubious reputation the basic idea is to evaluate the value to a consumer or his willingness to pay for a change in price of a good from say pricep to pricep because price changes affect consumer welfare an evaluation of this effect is often a key input to public policy decisions yet consumer s surplus is probably the most controversial of widely used economic concepts both paul samuelson and ian little conclude that the economics profession would be better off without it it is my feeling of the situation that substantial agreement exists on the correct quantities to be measured the amount the consumer would pay or would need to be paid to be just as well off after the price change as he was before the price change the quantities correspond to john hicks compensating variation measures an alternative measure which takes ex post price change utility as the basis of comparison is hicks equivalent variation the controversy arises in the measurement of these quantities the usual measurement procedure is to use the area to the left of the marshallian market demand curve between two price levels jules dupuit originated this measure of welfare change and alfred marshall and hicks derived appropriate conditions for its use the primary condition for the area to the left of the demand curve to correspond to the compensating variation is to have constant marginal utility of income marshall gave this condition and if it holds the same quantity will be derived as the area to the left of the compensated hicksian demand curve this area to the left of the compensated demand curve is exactly what the compensating variation and equivalent variation measure thus the constant marginal utility of income is a sufficient condition for marshallian consumer s surplus to be equal to hicks consumer s surplus in this case arnold harberger s plea to use the welfare triangle as one half times the product of the price change times the quantity change to measure deadweight loss corresponds to the correct theoretical amount of welfare change in a recent paper robert willig derives bounds for the percentage difference between the correct measure of either the compensating or equivalent variation and the marshallian measure derived form the market demand curve his bounds which depend on the income elasticity of demand for the single good in the region of price change being considered as well as the proportion of the consumer s income spent on the good demonstrate that the marshallian consumer s surplus is often a good approximation to hicks consumer s surplus the fact that the proportion of the consumer s income spent matters as well as the income elasticity was first pointed out by harold hotelling willig contends that the approximation error will be less than the errors involved in estimating the demand curve thus he hopes to remove the need for apology that applied economists often need to give to theorists who remark on the inappropriateness of using marshallian consumer s surplus to measure welfare change however in this paper i show that for the case primarily considered by willig of a single price change which is also the situation in which consumer s surplus is often used in applied work no approximation is necessary professor of economics massachusetts institute of technology and research associate national bureau of economic research i would like to thank peter diamond erwin diewert daniel mcfadden robert merton robert solow hal varian joel yellin and the referees for help and comments research support from the national science foundation is acknowledged the reason that we still have two rather than one of samuelson s six measures of consumer s surplus arises from an index number problem of the correct basis for the welfare comparison i will give both measures but plan to concentrate on the compensating variation

conceptual developments in the economics of transportation an interpretive survey the objective in this paper is to survey the literature in transportation economics exploring two basic themes first the conceptual developments in the analysis of supply and demand which recognizes noteworthy aggregation biases in the empirical work on aggregate data and indicate that a correct analysis of the issues should take place at a highly disaggregated level second the use of these conceptual developments to evaluate efficiency aspects of transportation pricing investment and the impact of government regulation on resource allocation and distribution in the transportation sector it is important to acknowledge that the survey is based on research throughout the world but our institutional perspective and to some extent the topics that are covered is based largely on the u s experience author

interjurisdictional housing prices in locational equilibrium abstract in this study we discuss how to construct interjurisdictional housing price indexes that are consistent with locational equilibrium theory in theoretical models housing is assumed to be homogeneous which provides problems in empirical analysis we provide conditions that allow us to treat heterogeneous housing as if it were homogeneous the same conditions that allow us to develop a quantity index for housing also imply that we can estimate interjurisdictional housing price indexes using hedonic price regressions locational equilibrium models impose a number of restrictions regarding the co movement of housing price indexes local public goods and mean income levels we propose to use these properties of locational equilibrium models to evaluate the different price index estimates we estimate a variety of price indexes using a unique panel data set of housing transactions in southern california our empirical results by and large support our approach

comparing the efficiency of alternative policies for reducing traffic congestion abstract this paper compares the efficiency of a single lane toll a uniform congestion tax across freeway lanes a gasoline tax and a transit fare subsidy at reducing congestion there are three conditions for an efficient outcome relating to travel across modes across peak and off peak periods and sorting out drivers with high and low time costs across faster and slower freeway lanes each policy involves some inefficiency indeed the single lane toll gasoline tax and transit subsidy forego at least two thirds of the efficiency gains under an ideal congestion tax that varies across lanes however the uniform congestion tax achieves over 90 of these gains

second best road taxes in polycentric networks with distorted labor markets this paper examines the interaction of road taxes with spatially invariant labor taxation in a polycentric network it derives analytical expressions for the network counterparts of the traditional double dividend effects i e pigouvian tax interaction and revenue recycling effects and computes them under different policy regimes the analysis reveals a series of conditions under which a system of cordons around the major nodes of a network might be more efficient than marginal external cost pricing with a high elasticity of labor supply and limited public transport coverage it is shown that the pigouvian tax rule might reduce welfare even when the generated revenue is used to finance labor tax cuts

a nonparametric revealed preference approach to measuring the value of environmental quality we develop an approach to valuing non market goods using nonparametric revealed preference analysis we show how nonparametric methods can also be used to bound the welfare effects of changes in the provision of a non market good our main context is one in which the non market good affects the marginal utility of consuming a related market good this can also be framed as a shift in the taste for or quality of the market good a systematic approach for incorporating quality taste variation into a revealed preference framework for heterogeneous consumers is developed this enables the recovery of the minimal variation in quality required to rationalise observed choices of related market goods the variation in quality appears as a adjustment to the price for related market goods which then allows a revealed preference approach to bounding compensation measures of welfare effects to be applied

regulation by prices quantities or both a review of instrument choice choosing appropriate policy instruments is an important part of successful regulation once objectives are agreed and suitable targets adopted policy makers can employ command and control regulation and or economic instruments and choose between fixing a price or a quantity this paper examines the relative advantages of price quantity and hybrid instruments according to their efficiency under uncertainty the trade off between credible commitment and flexibility implementation international considerations and political economy various illustrations of the theory are provided with two detailed applications to climate change and transport policy specifically congestion and safety pricing

systemic risks and the too big to fail problem the financial crisis of 2007 9 resulted in state intervention in financial markets around the world and the state became a major shareholder in many banks while state bailouts were politically sensitive policy makers had little alternative but to supply funds to financial institutions that were viewed as too big to fail or tbtf in this paper i review the history of and the rationale for the tbtf policy i argue that from a policy perspective the most important costs of the tbtf problem are incurred ex ante in the form of distorted incentives that arise as a consequence of distortions to the capital markets and to the choice of banks scale and scope i argue that it is impossible credibly to withdraw the tbtf policy and hence that it should be managed so as to minimize the costs of these distortions in this context i discuss the role of policy in institutional design in the restriction of bank scope and in designing appropriate capital regulations

a note on dynamic monopoly pricing under consumption externalities we analyze dynamic monopoly pricing under consumption externalities focusing on pricing under negative externalities we also attempt to generalize models in the previous literature which encompass both negative and positive externalities by incorporating a consumer s discount factor for past sales as a parameter analyzing our model reveals oscillation as the optimal price path in the presence of negative externalities

what s the use welfare estimates from revealed preference models when weak complementarity does not hold abstract in this paper we consider the theoretical and empirical ramifications of welfare measurement in revealed preference models when weak complementarity does not hold in the context of a kuhn tucker model of recreation demand we show that while it is possible to estimate preferences that do not appear to exhibit weak complementarity the calculation of welfare measurements from these models requires a cardinal interpretation of preferences that cannot be tested furthermore we reiterate the under appreciated fact that even traditional use value estimates require a cardinal restriction on preferences that while often intuitive also cannot be tested we demonstrate empirically that the choice of restrictions can have significant ramifications as use value estimates can vary based on the assumed preference structure

emerging problems with the basel capital accord regulatory capital arbitrage and related issues in recent years securitization and other financial innovations have provided unprecedented opportunities for banks to reduce substantially their regulatory capital requirements with little or no corresponding reduction in their overall economic risks a process termed regulatory capital arbitrage these methods are used routinely to lower the eaective risk based capital requirements against certain portfolios to levels well below the basel capital accord s nominal 8 total risk based capital standard this paper discusses the principal techniques used to undertake capital arbitrage and the diaculties faced by bank supervisors in attempting to deal with these activities under the current capital framework 2000 elsevier science b v all rights reserved

a macroprudential approach to financial regulation many observers have argued that the regulatory framework in place prior to the global financial crisis was deficient because it was largely microprudential in nature a microprudential approach is one in which regulation is partial equilibrium in its conception and aimed at preventing the costly failure of individual financial institutions by contrast a macroprudential approach recognizes the importance of general equilibrium effects and seeks to safeguard the financial system as a whole in the aftermath of the crisis there seems to be agreement among both academics and policymakers that financial regulation needs to move in a macroprudential direction in this paper we offer a detailed vision for how a macroprudential regime might be designed our prescriptions follow from a specific theory of how modern financial crises unfold and why both an unregulated financial system as well as one based on capital rules that only apply to traditional banks is likely to be fragile we begin by identifying the key market failures at work why individual financial firms acting in their own interests deviate from what a social planner would have them do next we discuss a number of concrete steps to remedy these market failures we conclude the paper by comparing our proposals to recent regulatory reforms in the united states and to proposed global banking reforms

when should drivers be encouraged to carpool in hov lanes policies to encourage carpooling in high occupancy vehicle hov lanes have been adopted in the united states to lower congestion and reduce air pollution we analytically model highway congestion and other vehicle related externalities encouraging carpooling decreases total costs when congestion relief in mainline lanes outweighs increased hov lane congestion importantly entry of new drivers via induced demand can negate the benefits of increased carpooling using 10 years of traffic data from los angeles we estimate time and route specific marginal external costs because costs vary substantially across routes hours and days current policies to promote carpooling will often increase social costs jel r41 r48 q53

recovering hicksian consumer surplus within a collective model hausman s method for the household the purpose of this paper is to describe the implications of the collective model of household behavior for the methods used to estimate the economic value of non marketed environmental resources after demonstrating how the separability restrictions inherent in the collective model allow individual preference and household income allocation choices to be distinguished the paper demonstrates how the framework can be used to recover hicksian consumer surplus an algebraic example is used to illustrate how the framework can be used in valuing environmental resources

the value of scarce water measuring the inefficiency of municipal regulations abstract rather than allowing urban water prices to reflect scarcity rents during periods of drought induced excess demand policy makers have mandated command and control approaches primarily rationing the use of water outdoors while such policies are ubiquitous and likely inefficient economists have not had access to sufficient data to estimate their economic impact using unique panel data on residential end uses of water in 11 north american cities we examine the welfare implications of urban water rationing in response to drought using estimates of expected marginal prices that vary both across and within markets we estimate price elasticities specific to indoor and outdoor water use our results suggest that current policies do target water uses that households themselves are most willing to forgo nevertheless we find that rationing outdoor water in cities has costly welfare implications primarily due to household heterogeneity in willingness to pay for scarce water we find that replacing rationing policies with a market clearing drought price would result in welfare gains of more than 29 of what households in the sample spend each year on water

financial intermediation and delegated monitoring this paper develops a theory of financial intermediation based on minimizing the cost of monitoring information which is useful for resolving incentive problems between borrowers and lenders it presents a characterization of the costs of providing incentives for delegated monitoring by a financial intermediary diversification within an intermediary serves to reduce these costs even in a risk neutral economy the paper presents some more general analysis of the effect of diversification on resolving incentive problems in the environment assumed in the model debt contracts with costly bankruptcy are shown to be optimal the analysis has implications for the portfolio structure and capital structure of intermediaries

estimating the welfare effect of congestion taxes the critical importance of other distortions within the transport system abstract this paper extends the first best analysis of peak period congestion pricing to account for interactions with other distortions within the transport system including congestion on unpriced routes accident and pollution externalities suboptimal transit pricing and gasoline taxes we illustrate how the presence of each of these distortions changes the welfare effect of a congestion tax over a wide range of parameter scenarios in all cases the welfare changes are potentially significant implying that these distortions are important to consider in an economic evaluation of congestion taxes

when is increasing consumption of common property optimal sorting congestion and entry in the commons abstract first best pricing or assignment of property rights for rival and non excludable goods is often infeasible in a setting where the social planner cannot limit total use we show that common property resources can be over or under consumed this depends on whether the external benefits of reallocating users to less congested resources outweigh the additional costs imposed by new entrants importantly we show that it may be optimal to encourage consumption of some common property resources our results have important implications for settings ranging from fisheries and forestry to recreational demand and transportation

optimal cordon pricing abstract this paper presents a simple spatial model of traffic congestion for a monocentric city to investigate the effects of cordon pricing on trip making and congestion level in each location optimal cordon pricing is obtained as a combination of the cordon location i e distance of the cordon from the cbd and the amount of toll charged there that maximizes the total social surplus in a city under optimal cordon pricing trips originating from locations inside the cordon are under priced those just outside the cordon are over priced and those near the urban fringe are under priced numerical simulations using the parameter values based on japanese data suggest that cordon pricing attains an economic welfare level very close to the first best optimum

on measuring the value of a nonmarket good using market data we use line integral theory to lay out in a more general theoretical framework the conditions under which it is possible to measure with market data the welfare effects of a change in a nonmarket good we present in detail a numerical method of measuring the value of nonmarket goods using market data under either weak neutrality or weak complementarity our numerical method is more flexible than the existing analytical method because it can be used with any well behaved marshallian demand function and can be used even when the willig condition does not hold

sources of bias and solutions to bias in the consumer price index four sources of bias in the consumer prices index cpi have been identified the most discussed is substitution bias which creates a second order bias in the cpi three other changes besides prices changes create first order effects on a correctly measured cost of living index coli i explain in this paper that a pure price based approach of surveying prices to estimate a coli cannot succeed in solving the 3 problems of first order bias i discuss economic and econometric approaches to measuring the first order bias effects as well as the availability of scanner data that would permit implementation of the techniques

quality adjusted price indexes and the willig condition abstract this paper provides a graphical explanation of willig s condition for developing consistent price indexes for quality change the framework also describes how the single crossing condition generalizes the willig condition

weak complementarity path independence and the intuition of the willig condition abstract weak complementarity is usually invoked for valuing public goods using information on private goods however using uncompensated demands requires a second condition the willig condition this paper present an intuitive explanation of the willig condition and shows that the alternative versions are equivalent to a path independence condition for line integrals this condition is fulfilled for compensated demands but not uncompensated demands except in restrictive special cases it is shown that this is a type of quasi homotheticity and requires that the income flexibility of quality must equal the income elasticity of the weak complement the importance and restrictiveness of the willig condition are shown using three alternative functional forms

general equilibrium benefits for environmental improvements projected ozone reductions under epa s prospective analysis for the los angeles air basin abstract this research demonstrates how locational equilibrium models can be used for benefit measurement with the detail required to match epa s benefit analysis for the first prospective analysis using the projected changes in ozone concentrations for 2000 and 2010 together with the sieg et al int econ rev forthcoming estimates for household preferences for housing education and air quality this paper measures general equilibrium willingness to pay for the policy scenarios developed for the prospective study as they relate to households in the los angeles area benefits are evaluated taking account at the household level of initial air quality conditions relocation based on changes in ozone and price changes the framework generalizes the partial equilibrium general equilibrium comparisons available with conventional computable general equilibrium and property capitalization models estimated general equilibrium gains from the policy range from 33 to 2400 annually at a household level in 1990 dollars

efficient congestion tolls in the presence of unpriced congestion a peak and off peak simulation model abstract this paper develops a congestion pricing model to examine efficient congestion tolls for an urban highway facility that resembles california state route 91 the highway that has been subject to congestion tolls since december 27 1995 two lanes out of six each way are subject to congestion tolls and the other four lanes are not the simulation model combines the economic theories of second best pricing of transportation facilities and peak load pricing and considers both welfare maximizing and profit maximizing cases the simulation results show that the second best peak period toll is quite low and that the welfare gains from the toll are modest compared to a regime in which all lanes are subject to tolls

peak load pricing of a transportation route with an unpriced substitute abstract this paper considers two routes to work which could be two bridges a freeway and a tollroad or roadway travel and subway travel both routes are subject to pure bottleneck and queue congestion if peak load pricing can be imposed on both routes the first best solution is attained however if one route is unpriced then the other route should have a second best time varying toll that is negative at the tails of the rush hour positive near the peak of the rush hour and zero on average if the two routes have the same capacities and if the parameter g is 1 then two thirds of the total traffic should use the priced route and the efficiency gain of second best pricing is two thirds of the efficiency gain of first best pricing

prices capacities and service levels in a congestible bertrand duopoly we study the duopolistic interaction between congestible facilities that supply perfect substitutes and that make sequential decisions on capacities and prices the consumers time cost of accessing or using a facility is determined by the volume capacity ratio we analyze duopoly prices capacities and service quality defined as the inverse of time costs of using the facility and compare the results to monopoly and first best outcomes findings include the following first while price competition between duopolists is beneficial for consumers introducing capacity competition is harmful the duopolist offers lower service quality than the monopolist who does provide the socially optimal quality level second higher marginal costs of capacity may increase profits third asymmetric nash equilibria may result even when firms are ex ante identical more specifically when capacity is cheap or demand is relatively inelastic the only stable equilibria are asymmetric in such an equilibrium the large facility provides high quality at a high price and the smaller facility offers lower quality at lower prices in other words there is endogenous product differentiation by ex ante identical firms

recovering weakly complementary preferences abstract this paper demonstrates a method for recovering weakly complementary expenditure and indirect utility functions while integrating back from marshallian demand specifications that do not intrinsically embody weak complementarity weak complementarity of a good with quality provides information about how the constant of integration over price must behave with respect to quality and this information can be incorporated into the process of recovering preferences the weakly complementary expenditure and indirect utility functions are recovered for the linear demand specification and for the stone geary utility function with any value of the subsistence parameter

evaluating policy interventions with general equilibrium externalities abstract we report on the results of analytical and numerical models that describe the effects of non separable externalities or public goods on public policies with important general equilibrium consequences in the numerical exercise we calibrate a general equilibrium model with non separable air quality benefits in order to measure the excess burden and total net benefits of transportation and energy taxes in the 1995 u s economy the change in the physical level and the economic value in air quality associated with a given policy is a function of the substitution patterns between air quality and market goods that we assume the size of the deadweight loss due to pre existing distortions such as a tax on labor income is substantially affected by these substitution patterns

carpooling and driver responses to fuel price changes evidence from traffic flows in los angeles abstract we examine carpooling and driver responses to fuel price changes using a simple theoretical model we show that traffic flows in mainline lanes unambiguously decrease when fuel prices increase and this effect is stronger when the presence of a carpool lane provides a substitute to driving alone in contrast in carpool hov lanes flow can either increase or decrease these predictions are tested using 8 years of traffic flow data for 1700 locations in los angeles in our preferred specification the mean elasticity of flow with respect to fuel price is 0 136 for hov lanes for a 10 increase in fuel price this implies 10 additional carpools per hour 8 8 million per year in additional congestion costs for carpoolers and 11 3 million lower costs for mainline drivers for mainline lanes flow elasticities are 0 083 and 0 050 for highways with and without an hov lane these estimates imply that the mean highway with an hov lane experiences a 30 larger decrease in hourly flow compared to the mean highway without an hov lane flows in hov lanes show an immediate decrease following a price increase but respond positively to price increases over time which suggests time is an important input to carpool formation

buying greenhouse insurance the economic costs of carbon dioxide emission limits in recent years a growing concern that the increasing accumulation of greenhouse gases will lead to undesirable changes in global climate has resulted in a number of proposals both in the united states and internationally to set physical targets for reducing greenhouse gas emissions but what will these proposals cost based on the authors earlier ground breaking work buying greenhouse insurance outlines a way to think about greenhouse effect decisions under uncertainty it describes an insightful model for determining the economic costs of limiting carbon dioxide emissions produced by burning fossil fuels and provides a solid analytical base for rethinking public policy on the farreaching issue of global warming manne and richels present region by region estimates of the costs that would underlie an international agreement using a computer model known as global 2100 they analyze the economic impacts of limiting c02 emissions under alternative supply and conservation scenarios the results clearly indicate that a reduction in emissions is not the sole policy response to potential climate change following a summary of the greenhouse effect its likely causes and possible consequences manne and richels take up issues that concern the public at large they provide an overview of global 2100 look at how the u s energy sector is likely to evolve under businessas usual conditions and under carbon constraints and describe the concept of greenhouse insurance they consider possible global agreements including an estimate of benefits that might result from trading in an international market in emission rights they conclude with a technical description directed toward modeling specialists alan manne is professor of operations research at stanford university richard richels is director of the energy analysis and planning department at the electric power research institute

the economic record of the 1997 2010 labour government an assessment we consider the economic record of the 1997 2010 labour government in the uk following a brief review of the government s inheritance from its predecessor we review the assessments made in the other papers in this issue of the oxford review of economic policy the change in the macroeconomic policy framework which apparently worked well for a decade but was then struck by the global financial crisis labour market social security and education policies and inequality public investment and public service delivery especially health and corporate taxation we discuss the constraints under which the government operated how much it broke with the past and the new frameworks it introduced we identify strengths and weaknesses and draw lessons from the government s record about the need to remain receptive to other and critical ideas on the one hand and the need for labour to spell out the kind of economy and society it wants to see develop on the other copyright 2013 oxford university press

consumer s surplus without apology the purpose of this paper is to settle the controversy surrounding consumer s surplus and by so doing to validate its use as a tool of welfare economics i will show that observed consumer s surplus can be rigorously utilized to estimate the unobservable compensating and equivalent variations the correct theoretical measures of the welfare impact of changes in prices and income on an individual i derive precise upper and lower bounds on the percentage errors of approximating the compensating and equivalent variations with consumer s surplus these bounds can be explicitly calculated from observable demand data and it is clear that in most applications the error of approximation will be very small in fact the error will often be overshadowed by the errors involved in estimating the demand curve the results in no way depend upon arguments about the constancy of the marginal utility of income consequently this paper supplies specific empirical criteria which can replace the apologetic caveats frequently employed by those who presently apply consumer s surplus moreover the results imply that consumer s surplus is usually a very good approximation to the appropriate welfare measures to preview below i establish the validity of these rules of thumb for a

labour s record on financial regulation in 1997 the new labour government launched major initiatives in the area of financial regulation setting up the financial services authority as a comprehensive regulatory body supported by the legislative framework of the financial services and markets act 2000 we evaluate the labour government s record on financial regulation in terms of its achievements and failures especially in dealing with the global financial crisis that started in 2007 while we identify some clear flaws in regulatory design and enforcement our evaluation highlights some inherent difficulties of financial regulation

congestion and tax competition in a parallel network the purpose of this paper is to study the effects of tolling road use on a parallel road network where each link can be tolled by a different government using both theoreticaland numericalmo dels the paper analyses the potential tax competition between countries that each maximise the surplus of local users plus tax revenues in controlling local and transit transport three types of tolling systems are considered i toll discrimination between local traffic and transit ii only uniform tolls on local and transit transport are acceptable iii tolls on local users only the results suggest that the welfare effects of introducing transit tolls are large but that differentiation of tolls between local and transit transport as compared to uniform tolls does not yield large welfare differences also the welfare effects of toll cooperation between countries are relatively small in comparison with the welfare gains of non cooperative tolling of transit the numerical model further illustrates the effects of different transit shares and explicitly considers the role of asymmetries between countries higher transit shares strongly raise the transit toll and slightly decrease local tolls with asymmetric demands the welfare gains of introducing differentiated tolling rise strongly for the country with lower local demand

a dual approach to modeling corner solutions in recreation demand abstract the dual approach of lee and pitt to estimating demand systems for which individuals often choose not to consume one or more of the available goods provides a utility consistent framework for estimating preferences over visits to recreation sites because of the complexity of the model however this approach has not been applied in the recreation demand literature this paper provides the first application of the model to recreation demand and develops a methodology for conducting welfare analysis relying on monte carlo integration to derive estimates of compensating variation the methods are applied to the demand for fishing in the wisconsin great lakes region

funding transportation spending in metropolitan washington dc the costs of alternative revenue sources abstract this paper develops and implements an analytical framework for estimating the efficiency costs of raising additional revenue from taxes on labor property gasoline peak road use and higher transit fares for the washington dc area the model incorporates driving externalities and interactions between the different policies an economic case can be made for using congestion taxes and possibly gasoline and property taxes to raise extra revenue though it should be qualified for example the inelastic demand for driving limits the congestion benefits per dollar of revenue raised and these taxes have adverse employment effects in the same way that a tax on labor income does

the economics of crowding in rail transit abstract we model trip timing decisions of rail transit users who trade off crowding costs and disutility from traveling early or late with no fare or a uniform fare ridership is too concentrated on timely trains marginal cost pricing calls for time dependent fares that smooth train loads and generate more revenue than an optimal uniform fare the welfare gains from time dependent fares are unlikely to increase as ridership grows however imposing time dependent fares raises the benefits of expanding capacity by either adding trains or increasing train capacity we illustrate these results by calibrating the model to the paris rer a transit system

traffic externalities in cities the economics of speed bumps low emission zones and city bypasses abstract this paper considers various policy measures that governments can use to reduce traffic externalities in cities unlike much of the available literature that emphasized congestion we focus on measures that reduce pollution noise and some accident risks these measures include noise barriers speed bumps traffic lights tolls emission standards low emission zones and bypass capacity to guide traffic around the city center using a simple model that distinguishes local and through traffic we study the optimal use of these instruments by an urban government that cares for the welfare of its residents and we compare the results with those preferred by a federal authority that also takes into account the welfare of road users from outside the city our results include the following first compared to the federal social optimum we show that the city government will over invest in externality reducing infrastructure whenever this infrastructure increases the generalized cost of through traffic we can therefore expect an excessive number of speed bumps and traffic lights but the right investment in noise barriers second when implementing low emission zones the urban government will set both the fee for non compliance and the emission standard at a more stringent level than the federal government moreover at sufficiently high levels of through traffic the urban government will prefer imposing a toll instead of implementing a low emission zone third whatever the tolling instruments in place the city will always underinvest in bypass capacity finally if it can toll all roads but is forced to invest all bypass toll revenue in the bypass it will never invest in bypass capacity although the paper focuses on non congestion externalities most insights also hold in the presence of congestion

consumer financial protection the recent financial crisis has led many to question how well businesses deliver services and how well regulatory institutions address problems in consumer financial markets this paper discusses consumer financial regulation emphasizing the full range of arguments for regulation that derive from market failure and from limited consumer rationality in financial decision making we present three case studies of mortgage markets payday lending and financing retirement consumption to illustrate the need for and limits of regulation we argue that if regulation is to be beneficial it must be tailored to specific problems and must be accompanied by research to measure the effectiveness of regulatory interventions

revenue recycling and the welfare effects of road pricing the authors explore the interaction between taxes on work related traffic congestion and preexisting distortionary taxes in the labor market a congestion tax raises the overall costs of commuting to work and discourages labor force participation at the margin when revenues are returned in lump sum transfers the resulting efficiency loss in the labor market can be larger that the pigouvian efficiency gains from internalizing the congestion externality by contrast if congestion tax revenues are used to reduce labor taxes the net impact on the labor supply is positive and the efficiency gain in the labor market can raise the overall welfare gains of the congestion tax by as much as 100 percent recycling congestion tax revenues in public transit subsidies produces a positive but smaller impact on the labor supply in short the authors results indicate that the presence of preexisting tax distortions and the form of revenue recycling can crucially affect the size and possibly even the sign of the welfare effect of road pricing schemes the efficiency gains from recycling congestion tax revenues in other tax reductions can amount to several times the pigouvian welfare gains from congestion reduction

governance choice on a serial network this paper analyzes governance choice in a two level federation in providing road infrastructure across jurisdictions two models are proposed to predict the choice of centralized or decentralized spending structure on a serial road network shared by two districts while the first model considers simple pigouvian behavior of governments the second explicitly models political forces at both a local and central level both models led to the conclusions that the spending structure is chosen based on a satisfactory comprise between benefits and costs associated with alternative decision making processes and that governance choice may spontaneously shift as the infrastructure improves temporally

regulation of road accident externalities when insurance companies have market power abstract accident externalities that individual drivers impose on one another via their presence on the road are among the most important external costs of road transport we study the regulation of these externalities when insurance companies have market power some of the results we derive have close resemblance to the earlier literature on externality regulation with market power in aviation and private roads but there are important differences too using analytical models we compare the first best public welfare maximizing outcome with a private profit maximizing monopoly and oligopoly we find that insurance companies will internalize some of the externalities depending on their degree of market power we derive optimal insurance premiums and regular parametric taxes as well as manipulable ones that make the companies set socially optimal premiums the latter take into account that the firm tries to exploit knowledge of the tax rule applied by the government finally we also study the taxation of road users rather than that of firms

the environmental impact of highway congestion pricing abstract this article simulates the effects of congestion pricing on emissions of carbon monoxide nitrogen oxide and hydrocarbons for an actual metropolitan highway network traffic is assigned to the network assuming elastic travel demand and endogenous route selection to minimize private or social travel costs simulations price all or part of the network delaware s household travel demand and highway traffic count data calibrate the simulations epa s mobile 5a model predicts that vehicle emissions decrease as much as 10 in aggregate and 30 in highly congested areas benefits from reduced emissions are 15 30 of those from reduced congestion