Can economics explain the blackouts in California?

Power companies in California have cut off customers in an effort to prevent forest fires.  Typically we see power outages in places like Iraq or Venezuela, so why is this happening in a state with a relatively high standard of living.  I have seen five explanations that make some sense to me (see Tyler Cowan's recent column for another perspective):

1.  Climate change has increased the number and severity of forest fires:  I am no climate scientist, but this makes some sense.
2.  More people are living in housing that was built in areas with high fire risk: And if the risk is not priced properly by insurance markets, we could have a classic case of an externality where the true costs of building in these areas are underestimated.  Result: too many homes in places where they should not be.
3.  California has imposed so many constraints on utilities that they lack the resources to deal with fire prevention:  WSJ points out a number of green energy mandates along with difficulties in raising electricity prices (which are already among the highest in the nation, perhaps due in some part to the green energy mandates).
4.  A whole lot of trees would have to be cut down to mitigate the fire risk: This raises additional regulatory constraints, not to mention the cost.
5.  Liability for fires has shifted to power companies: This means they compare the cost of fire liability to the lost revenue from customers; guess which these numbers is a lot bigger than the other?

A sixth explanation cannot be totally discounted: executives at PG&E may very well be cut from the same cloth as those at Boeing, Facebook and Volkswagen in terms of the weight they have given to social responsibility.  NYT seems to think so and provides provocative evidence.

What's the way out?  Something will have to be done to spread the cost of updating PG&E equipment and cutting down gazillions of trees across a broad customer base, including areas not served by PG&E and areas not in any danger of fire risk.  I predict some combination of a rate increase and state-guaranteed bonds, but I would not be surprised if the state of California takes over PG&E.

Gore on sustainable capitalism

This week WSJ provided beaucoup op-ed space with Al Gore where he provides his perspective on the societal changes that will be needed to make capitalism consistent with sustainability.  Whatever you think of Al Gore (always beware when an author talks about "We are once again facing one of those rare turning points in history," whether its Newt or Al), this piece is well worth reading to see the underpinnings of his arguments. 

Gore focuses on two main issues: externalities and short termism.  He argues that we need policies to establish a fair price on externalities.  An example would be a carbon tax to account for the environmental and national defense costs generated by our use of certain forms of energy.  Gore would make sweeping changes in business practices: expand corporate recruiting to include the full triple bottom line, dump quarterly earnings reports and realign incentives for top executives so that they are focused on the long term. 

My take: I see eye-to-eye with Gore in terms of needed changes in executive pay.  I also believe in taxing goods that impose negative externalities on society, but I am not sure how one would determine a "fair" price.  Economic research has not converged to a single, simple answer.  I also was puzzled as to why Gore wants corporations to produce more information about societal and environmental impact in their annual reports but he then wants them to reveal less information by ditching quarterly reports.  Let's keep the quarterlies, but make sure they are not driving CEO pay. 

Externalities

Great post by my NC State colleague Richard Warr on energy economics.   Key point: although federal subsidies for wind, solar and other nontraditional forms of energy are well known, the popular press and the average person tends to forget how much carbon-based fuels are supported by federal policies.  Warr emphasizes the fact that carbon-based fuels impose significant amounts of pollution on the rest of society, costs that are not reflected in the price at the pump.  Other subsidies include government-build and maintained roads and highways (sorry, gasoline taxes do not fully pay the bill here) and military actions in the Middle East.  And guess what?  We cover externalities tomorrow night in MBA 505.