Three essays in economics

This dissertation is comprised of three economics research papers that contain insights that governments can use to make more effective public policy decisions plus an appendix describing a software tool to help policymakers, regulators, market participants, and students improve their understanding of how energy and environmental markets work. Chapter 2 (Greener on the Other Side: Estimating the Determinants of Consumer Sensitivity to Local Sales Tax Changes) was an outgrowth of the work I did during an 18-month graduate internship in the Decision Sciences group at Visa, Inc. which I wrote with my co-authors Dan Knoepfle, Stephen Teng, and Sun Constantine Yannelis. We study the price sensitivity of consumption using policy discontinuities in sales tax rates at state borders using a novel national credit and debit card dataset. We estimate the impact on retail revenues, number of customers, and number of merchants due to changes in sales taxes as well as a price elasticity of demand for traditional brick-and-mortar retail and internet retail. Our approach generalizes the case study approach by exploiting a new nationally representative dataset and all sales tax changes between 2008 and 2010. We find a price elasticity of 2.6 for brick-and-mortar retail in ZIP codes on state borders, and a price elasticity of 1.8 for internet retail. We find that the effect of sales taxation on consumption is largest in geographic areas close to a state border and that sales taxes in neighboring states have no effect on activity in geographic areas more than 100 miles away from a state border. The effect is largest for food, beverages and liquor, and motor vehicles and parts. We find that merchants are more likely to operate in low tax regions. We derive an expression for the revenue-maximizing tax rate, and show that some US states in financial distress have little room to raise additional revenue through sales taxation. The remaining two chapters were an outgrowth of the work I did as a Graduate Research Assistant at the Program on Energy and Sustainable Development at Stanford (PESD) and were aided by the use of the Energy Market Game software tool I programmed. Appendix A (The Energy Market Game) contains a detailed description of the Energy Market Game developed by PESD to help policymakers, regulators, market participants, and students improve their understanding of how energy and environmental markets work. The Energy Market Game simulates wholesale electricity markets and allows players to take on the role of generating companies, retail customers, vertically-integrated utilities, and (financial instrument) traders. The Energy Market Game can incorporate environmental policies that are found in real markets, such as a carbon tax or a cap-and-trade system for greenhouse gas emissions as well as a renewable portfolio standard to incentivize the development of wind and solar facilities. When these additional elements are added to the basic features described above the game becomes a sophisticated simulation of an electricity market subject to overlapping environmental regulations. These kinds of complex markets have significant scope for strategic behavior and can be difficult to analyze theoretically. The game has been used in several classes, conferences, and workshops and our experience shows that it allows policymakers, regulators, market participants, and students to attain a higher level of comfort with these markets, as well as an improved sense of how markets may respond to different policies. Chapter 3 (Carbon Pricing Schemes and Upstream and Downstream Market Outcomes: An Experimental Analysis) describes an experiment involving 160 games with potentially imperfectly competitive wholesale electricity markets under various "equivalent" carbon pricing mechanisms found that the cap-and-trade mechanism (relative to the "equivalent" carbon tax) delivered much higher electricity spot market prices (38.5% to 52.6% higher) and lower total electrical generation (2.5% to 4.0% lower) without a correspondingly significant decrease in carbon emissions partly because there was a significant increase (15.2% to 33.0%) in emissions from the dirtiest power generation units (Coal and Gas Peakers). This suggests a carbon-tax is a lower-cost approach to reducing greenhouse gas emissions compared to cap-and-trade market due to the problem of carbon price discoverability under conditions of uncertainty. Chapter 4 (Carbon Allowance Allocation Schemes and Upstream and Downstream Market Outcomes: An Experimental Analysis) describes an experiment with a wholesale electricity market that allows for a number of features of actual offer-based wholesale electricity markets with a cap-and-trade market for greenhouse gas (GHG) emissions that can cause the independence property to fail. Market participants are electricity suppliers that own a mix of generation units that produce CO 2 at different rates per megawatt-hour and who were assigned carbon allowances by three different allocation mechanisms: each participant receiving an equal number of allowances (by construction in our experiment the efficient allocation mechanism), an (exogenously) unequal number of allowances, or an amount determined by a uniform-price auction. Average electricity prices are significantly higher for the unequal and auction allocations relative to the equal allocation case. Aggregate supplier profits (net of carbon costs) are also higher for both the unequal and auction allocations. The average variable cost (excluding carbon costs) plus the fixed-costs of serving electricity demand per ton of emissions are also higher for the unequal and auction allocations. Finally, total emissions tend to be slightly higher, between 1 and 2 percent, under the equal allocation relative to the unequal and auction allocations. The results of the experiment are consistent with the existence of compliance cost savings from initial allocations of emissions allowances "close" to the efficient allocation.

Keywords: Economics.
Advisor: Wolak Frank A. 
Kolstad Charles D. 
Thurber Mark C.