Blowing in the Wind

Today in the NY Times this article discusses some of the problems with wind energy. Particularly that it produces less power when it is hot and on hotter days people use more energy. So in order to insure that power is maintained backup generators are needed.

Electricity does not fit a conventional intro to economics model. Typically electric companies are regulated monopolies. Would we be willing to sacrifice a guarantee of electricity for lower pollution? One way to combat the problem of low production during peak demand is to alter electricity prices depending on the time of day or the amount of wind produced. I wonder if it would be feasible or if our demand for electricity is that influenced by price? In the short run probably not much, but in the long run people might find ways to adjust to these price spikes.

A bit about my work

Abhijit Banerjee provides a good overview (in this article) of the difficulties of finding what works in development economics. He describes work by Paul Glewwe and others that found schools with certain science education materials showed greater learning. Was it the materials that caused the learning? It appears it was not after they selected a group of similar schools and gave half the materials and left half as a control group, they found no difference in learning between those with and without charts. This led them to conclude that those communities with charts before their experiment, were ones that had a good environment for schooling already.

In my own work I have been studying a program that gives money to families if they send their children to school, often referred to as a conditional cash transfer. The program I study in Nicaragua had a randomized component that is the program was given to half the communities (a treatment group), which is compared to a similar control group. The program increased elementary school enrollment from 70% to 95%. Unrelated to this program many communities, in both control and treament groups offered a free meal at school, these programs were not randomized. The number of communities offering food at school dramatically increased from 25% to 60% from the year 2000 to 2001. We might expect that it had something to do with the cash transfer program, which started in 2001, but treatment communities and control communities were equally likely to offer food at school. Interestingly in 2001 communities with school feeding programs had school enrollment rates about 20% higher then those that did not. However, further inspection shows that those communities that added a school feeding program in 2001 after not having one in 2000, had enrollment rates 20% higher in 2000 compared to those that did not have one in either year. So it turns out that offering a food program is related to how many children attend school. When initial enrollment rates are controlled for the impact of the program on school enrollment disappears. Without the 2000 data we might think that food programs are just as effective as cash transfers, when they are likely not.

This is why experiments in economics work so nicely at determining causation.

Circumcision, HPV, or STD

A recent study shows that circumcision cuts in half the rate of HIV infection in Uganda and similar results are expected in a study in South Africa. The cost of a circumcision in South Africa is about $55 per procedure. Jim Kahn of the University of San Francisco estimates that it takes about 10 ($550) procedures to prevent one infection. This article also goes on to say that 99% of men reported their partners were “very satisfied” with their circumcision and that 80% of men in Africa would get circumcised if it prevented HIV. The total predicted decrease in HIV infections would be on the order of 1.4 million people in Sub Saharan Africa, if circumcision reduced HIV infection by 50%.

Another breakthrough in preventing the ill effects of sexually transmitted diseases is the HPV vaccine that was recently approved by the FDA. The vaccine currently costs about $300. I have not found similar numbers for projected HPV prevention, but I will try to create my own here. 270,000 women each year die of cervical cancer, most deaths take place in developing countries. Lets assume 90% take place in the developing world, which I believe I saw quoted, so that’s 243,00 death in the developing world. But the vaccine only prevents 70% of cancers. That’s 170,000 a year in the whole developing world. From an economics stand point the HPV vaccine reduces the total deaths in the whole developing world is about one-tenth of the number of HIV infections prevented by circumcision in Sub Saharan Africa alone. In addition the procedure is almost 6 times as expensive. Now I’m comparing cancer deaths with HIV infections, but still the numbers suggest circumcision is more effective.

While these two stories may be getting the press, perhaps we should return to the recent work of Emily Oster. She found (here) that treating sexually transmitted diseases leads to decreased transmission of HIV in Africa. Her work suggests that to prevent one HIV infection through treatment of STDs it would cost about $78 or about 1/8 the cost of the 10 circumcisions needed to prevent an HIV infection.

So in conclusion. First we send the anti-biotics, then we send the mohels, then we start to worry about HPV.

Credit Card Arbitrage

In my Principles of Economics class today we discussed the possibility for credit card arbitrage. Many credit card companies offer 0% financing for borrowers with high credit ratings. This blogger made several thousand dollars using cash advances and balance transfers to purchase CDs or put money in a bank account. The author could then make 1% or 2% guaranteed return (Bank Interest – Credit Card Fees – Taxes on Interest). However, as he notes he ruined his credit score which would cost him much more by raising his interest rates on loans in the future (if he wanted them) and the offers dried up. This article also misses the opportunity cost of dealing with all these issues. So in the end I do not think it is worth it, on the other the hand I have a low risk tolerance.

One final thought if this was such a great money making opportunity wouldn't the banks know about it.

Advice for Young People; Buy Renters Insurance

For the last few years I have been posting random musings on a system of blogs that was only accessible to Grinnell College community, well perhaps its time to move on since instead of being a student I am now a Professor. Actually I will still post there, but this will be different. Unlike my Grinnell postings this will be written in my professor persona. However, one thing I always liked about Professors at Grinnell is that they shared great examples from everyday life to teach students their subjects.

With that in mind, here was the subject of my Economics 199 lecture yesterday. In economics we use a term called risk aversion. That means that sometimes some people will be willing to pay money to avoid a risk, these people are called risk averse. I asked my students today how many people in the class would be willing to play a lottery where for $1 they would have a (1/1000) chance to win $1000. Many students wanted to play the lottery. However, when I asked how many students would run a lottery where you get a $1, but you have 1/1000 chance of losing $1000, most students did not want to run such a lottery. Yet in either game the average amount won is $0. This simple example teaches us that my students want to avoid risk.

Now imagine someone knocks on your door one day. They tell you that they want to play a game with you. They will pick a number from 1/20,000 if they guess correctly they win all of your possessions if they guess incorrectly they will give you $200. Say all your possessions are worth 10,000 (clothes, furniture, and electronics). Now the expected payoff of this game is greater than zero in fact it is really close to $200. However, if we were unwilling to run the $1000 lottery game we would probably be unlikely to play this game either. (Plus who takes bets with someone who knocks on their door.)

Basically by not purchasing renters insurance you are playing the game. You could not give the insurance company $200 for a policy (that is like the $200 the stranger gives you), but you take the chance of losing all your possessions in a fire or being robbed.

Yet only 30% of renters carry insurance. Are people less risk averse than me (I have renters insurance)? Do people not realize that their landlord doesn’t cover their possessions in case of fire, flood, or robbery. I don’t know, but it seems again sometimes economic theory might not explaining what is going on in life.