Some Microeconomics of Adapting to Wildfires in the American West Framed as a Gary Becker Problem Set Question

 Consider a University of Chicago Econ 301 homework assignment situated in Summer 2021 in the American West.

“You own a $500,000 home in a fire zone in the American West.  You owe $X on your mortgage.  It is common knowledge that your property now faces greater air pollution exposure and a higher probability of burning down.   You are not alone.  You have Z neighbors who live near you who face the same challenge.  You have access to the following adaptation strategies;

1.  You can invest in private adaptation strategies such as vegetation trimming and buying a PM2.5 air filter for your home and spending less time in your home during the fire season.

2.  You can invest in private club goods with your neighbors (such as a private fire protection service).  Note that Kim Kardashian invested in this.  

3.  You can lobby State officials for subsidies to enhance public fire protection of your area.  (this includes stricter building codes).

4.  You can sell your home and move away.

The Econ 301 Question

Use the Becker Household production function framework to write out a microfounded model based on equivalent variation of which of these strategies will yield you the lowest present discounted value expenditure on adaptation to give you a given level of utility over the remainder of your life.

Explicitly discuss the extensive and intensive margins.   How do the different factors listed above influence how many people seek to live in the fire zone (extensive margin) versus the protective actions they take once in the fire zone?  In a dynamic programming sense, how are these two margins related?

Remarks

(the perceptive reader will see that one will need to be explicit about the health and survival functions. How much does PM2.5 lower a specific person’s health and lower the probability of survival?).  The Becker approach immediately highlights that this is almost an infinite dimensional problem with many , many adaptation strategies.   

My claim in my 2021 Yale Press book is that the lost $ to the affected household is shrinking over time because #1 is getting cheaper and cheaper and the transaction costs for the Coasian #2 are also shrinking.  When one thinks hard about the microeconomics of the climate change challenge, one realizes that the social cost of carbon is shrinking over time as we improve in our ability to adapt.   The mechanical SCC macro models (see Nordhaus) miss all of this because of their aggregation assumptions.  

As I discuss in a later chapter of the book, if we change land use zoning to up zone close to productive, high amenity cities then fewer people would live in the fire zones and this would further reduce the social cost of carbon induced fires.