 My name is Andrew Cleed. I'm Professor of Energy and Environmental Economics here at Penn State. And I'm also Program Officer for the Energy Business and Finance Program. I'm previously working here. I worked at Louisiana State University and for the Federal Trade Commission in Washington, D.C. and I have a PhD in economics from Yale University. From my point of view, teaching is interesting because you can teach students things that will be helpful for them and understanding the world around us. And particularly in this class, understand some basic economic concepts and how they apply to society and really help understand what drives environmental policy and why it fails and why it succeeds. In particular, you focus on relevant events and problem-solving issues and how to focus on people's different incentives in the environmental arena. So for instance, this summer, summer of 2009, there are big arguments coming out of Washington D.C. about a cap-and-trade bill for carbon emissions to deal with the problems of climate control, of climate change. And there are an awful lot of economic issues around here. How to set up a program to reduce carbon emissions at the lowest cost, who to hand out the rights to admit carbon to, but also there's a lot of political issues. You might think that people who are in support of carbon restraints are good guys and people opposed are bad guys, but actually any policy has a variety of mixes. And you can be sure about one thing in Washington D.C. that there might be some people interested in the public interest, but there are a lot of people interested in their own private interest. For me, economics is a way to understand what goes on in the outside world. When I sit here at Penn State, the institution I've worked for for the last decade, you might think of it as a university, but I think of it as an economic machine that resounds to various incentives and reacts in certain ways. And so whatever business you work in or whatever organization you work in, it's going to be an economic creature, whether or not it's a for-profit like a typical business, or not-for-profit like a university. They're all governed in large ways by economics. And so I think with the type of economics we talk about in this class, we're able to better understand how these institutions operate and how best to place ourselves in these groups. In 1991, I was a civil servant, or you might call a bureaucrat at the Federal Trade Commission in Washington, and I decided that I really wanted to be an academic and teach at a university. And so to be an academic, you have to get some teaching experience of which I had none. So I started calling around local colleges in Washington D.C. trying to get a job as an economics instructor. And at all of them, they were all full because there are lots of economists in Washington who think they're going to be professors, and I was no different than any other of them. So finally, my wife said, who worked at the Department of Agriculture, she said, you know at the Department of Agriculture, we have a graduate school. Maybe you could teach there. Well, I had never heard of this thing, so my wife arranged for me to have an interview with the director of the school. And so I walked over to the Agriculture Department. I said, hi to my wife. And we were just married then, so she pretended to be happy to see me. And I walked in and talked to the director. And I said, hello, I'm Andy Cleat. I'd like to teach a class. And we went round and round. He said, well, could you teach macroeconomics? I said, well, I don't really know anything about macroeconomics. He said, what do you know something about it? I said, well, I work for the Detroit Commission. I know a lot about antitrust economics. And they said, no, we don't want that. So what about taxation economics? No, we don't want that. What about labor economics? Well, this went round and round for about a half an hour. I was out of desperation. I said, what about environmental economics? The director went, ooh, that's great. And I was off. And I remember I taught a class over the summer at the Department of Agriculture Graduate School, and I got paid $782. And that was the best effort I ever spent because that was the way I got into teaching. Well, the first thing you have to understand about economics is most people think that the most important part of economics is what we call macroeconomics, which is whether or not the economy is going to go through a period, the kind of discussions that you see on, say, CNBC or Fox Business Report or anything like that. And so that's what you see on TV. And so I have to report to you two things. First of all, this isn't what economists generally focus on, that macroeconomics over the last 40 years has really been a declining field. And the second is what you see on TV is complete nonsense. So if you see anybody predicting, say, where the stock market is going to go, they're so smart, why are they telling you? Why don't they just invest a lot of money in the market, take their profits, get out, go retire to Tahiti? Well, they don't. So what we're going to talk about in this class is the nuts and bolts of economics, microeconomics, how markets work, supply curves, and demand curves. In particular environmental economics, we're going to talk about how markets don't work because what happened is firms create externalities, which generally you thought of as pollution. And these are what are called market failures. And so the idea in this class is to talk about what constitutes a market failure and then what you can do to solve this problem. We're going to talk about what's under the hood, how markets actually work, and how you can use markets in a policy sense to reach towards society's goals. Many people view environmental issues as black and white, good and bad. But from an economic point of view, it's simply people and firms responding to their incentives, often in ways that are bad for society. So I don't think of polluting firms as bad and clean firms as good. I think of polluting firms as firms who are interested in making money but who have been given the wrong incentives by society. And it's society's challenge to address those firms in a way that stops them from harming society in ways to improving society. And so that's the real challenge from society's point of view, to use the forces of the market to help keep society clean and to keep society rich. Microeconomics is based on the free market paradigm of supply and demand and the interaction which results in market prices and the amount sold. And this market system in the idealized state that we'll talk about in this class generates the perfect, the optimal, the best world there is ideal situation. Of course no market is ideal no market is perfect. Some markets work pretty well and we can with them and we're happy to they've what's brought about a very rich society here in the United States. Other markets don't work so well and those are the markets that public policy needs to focus on to bring about a richer society in the environmental context, a cleaner society and even perhaps, should I say it, a greener society. Many, many firms try to portray themselves as green as environmentally friendly. Why do they try to do this? Well, I suppose they're trying to convince consumers that they're good stewards of the environment. For me, this phrase good stewards of the environment is sort of loaded with morality. The kind of economics we're going to discuss is what we call amoral. It's simply not interested in morality. Firms, people are greedy. They like to make money. They like to be rich. You give them some incentives and they'll react. So today we see firms that want to be known as environmentally friendly because in this country now in our society, people do not want to buy from polluting firms from firms they think that are destroying the environment. And so that naturally gives incentives to firms to be cleaner, to clean up the environment to be more concerned about their surroundings. The course starts out with the basics of supply and demand. What constitutes a demand curve? What constitutes a supply curve? How they interact and how their interaction creates wealth for society. And by the way, to do that we have experiments where we have you act as market actors. There's jokes about psychologists use rats for their experiments. And of course, economists use freshmen because, well, we were going to attach to the rats. And so it'll be your turn to act as the rats and be in simulated markets where you too will have economic decisions. And so hopefully through those experiments you will understand how at least our idealized markets work and how markets create wealth. Of course, many of you already partake in markets. You sell your labor. You buy various goods. You buy cars. You buy bread. You may buy stocks. You probably don't buy oil and gas commodities on the New York Mercantile Exchange, but those are similar markets. The second issue we talked about, which is crucial to environmental economics, is how markets fail. How they fail to create the perfect market. And there are several basic market failures that we're going to talk about. The most important of which is what we call externalities, I run a steel mill. I create steel, which is useful in so many ways in our modern society. But I also admit a lot of pollution into the air, poisoning people's lungs. I emit pollution into the water, killing fish, harming people's water quality. I can do a lot of bad things. Another issue we'll talk about are what are called common pools. The most obvious issues of those are involves hunting and fishing. Many of my students grow up in rural Pennsylvania and they have hunting and fishing family traditions. So they get up early in the morning and they paint themselves with deer urine or something like that. And they go hide out in the woods with large guns and they're ready to shoot these poor animals who wander by on the first day of hunting season. Now everyone's taste differ. This doesn't sound like fun to me, but I know lots of my students like it. On the other hand, they think I'm odd when I talk about how much fun I have curling. So, you know, different taste differ. But if you think about these common pool issues what are called common pools, what's a common pool? Well think about this deer. Nobody owns the deer until it's dead. Which gives people lots of incentives to kill deer or other wildlife that are actually scarce or fish, for instance. So for instance if you think about issues about saving whale habitat, well nobody owns whales and so 30 years ago whales were on the verge of being extinct. Because the only way to own a whale was to kill it. Nowadays society has moved forward to that and we've made some progress on these issues. The third issue we'll talk about a little bit is the idea of consumer deception in environmental products. How do you know that a detergent is environmentally friendly? I, of course, try to get the special fish killing detergent that will maximize the number of fish killed when I do my wash. However, on the other hand, may have less perverse taste than desire to have an environmentally friendly detergent. How do you know that it's really a good detergent? Do you think about that? So now we have a market and we have market failures and we look to government to solve these problems. But the problem with government, as I think you know, is that government is less than perfect. And this all starts with voting. Have you ever wondered why you vote? It couldn't be because you think you're going to affect the election. No one ever wins an election by one vote. You know that. So why do you vote? Well, we can talk about a variety of reasons. Since your vote doesn't matter, you don't really invest in learning about politicians. So they try to get your attention by having all kinds of highly sophisticated and yet almost substance, perfectly sophisticated campaign commercials with almost no substance at all. And then when they get to office are they interested in standing up for your interest or being re-elected? And appearing to look good on cameras like I'm on. Politicians specialize in looking good in cameras. Well, you've watched me for a few minutes. Do you think I should be a politician? Probably not. So we talk about how governments fail and then we'll try to apply that to a variety of circumstance. In particular, we'll talk about what is now called cap and trade programs. The economist solution to environmental problems, where we give people rights to pollution and allow them to trade. And according to our theory and according to our classroom exercise, which I hope we're going to do in class, that brings about our pollution reductions at the lowest cost of society. And we'll talk about a variety of issues of how they work, how they create wealth, and even sometimes about how, maybe or not, they're very moral. Of course, I told you I'm an economist. I'm a moral. I'm not interested in morality. But you, as a typical human being, may well be interested in morality. And finally, we'll talk about energy issues. Energy issues are very big in our society. The price of oil jumps up and down. So in 1998, when I first came to Penn State, the oil cost about $12 a barrel. In 1998 it cost $140 a barrel. Now it cost about $64 a barrel. It goes up and down and all around. It has all kinds of implications for society. We'll talk about if we're running out of oil, if there are other forms of energy, and what we should do, if anything, to address our oil issue, our oil and energy supply issues. We hope that during this class you'll learn to think about how incentives matter. How, about how to follow the money. Because that's what typical greedy people do. They act to do things that are in their own self-interest and try to avoid things that aren't in their self-interest. So the first thing that we want you to think about is how self-interest plays a role in our everyday economy. Whether it's a market economy or even in a communist economy. Any kind of economy is dictated by self-interest. And human beings, they're interested in themselves. And that's really, in large part, what economics is about. And then to use those principles, to think about public policy issues, but in particular environmental issues. To think about them analytically. What you see on television and other places about the environment is very thin without a lot of substance. It's about good guys and bad guys. And so what I want you to think about is not a world of good guys and bad guys, but a world where people are their incentives. And the goal of policy is to create incentives to maximize the wealth of society. Not only the physical wealth and the money wealth, but also the value of our environmental goods. There have been a variety of books that have come out lately. The most well-known book called Freakonomics, which tries to involve implying incentives to society and to understand why things happen in the way they happen to address certain what you might think of as puzzles of society. But to economists are perhaps less puzzling. One of the songs I like in thinking about economics is the Money Song by a 1970s comedy group from Britain called Money Python. And I remember as a teenager back before we had cable TV staying up late and watching them on public broadcasting and really being enthralled by their skits and their humor. And this song and the Money Song is they sing about being greedy. And in some context it's a little bit more interesting in that if you think about Britain in the 1970s under a very socialistic labor government, the government was really driving the country into bankruptcy because they basically were ignoring incentives and using the government to hand out money. And so basically people stopped working and Britain got poorer and poorer. And for me, the Money Song where they basically sing about different kinds of money and how important money is if you go listen to it one of the key lines is you can keep your Marxist ways but it's only goods that pay is really a satire attacking the British government at the time where they were interested in Marxist ideas. Now later when that government fell they were placed by the government of Market Thatcher which to many economists she's a hero because she instituted the British system and once more Britain is a rich country. I just got done reading a book called My Freshman Year which is written by an anthropologist a woman in her early 50s who realizing that she didn't understand her students at the university she taught at decided to become a student go undercover as you might say and live in freshman dormitory and of course for me living in freshman dorms well I did it once and I don't want to do it again and so I admire her conviction what she indicated was that our undergraduate students were very stressed out and very alienated from a lot of things that we're trying to do here in university life. One of the things we're trying to do is to teach students things that will be useful to them in many ways in many ways that it's hard for them to conceive of now because they don't quite understand where it will be important to really know why it's important that equilibrium in markets is where the supply curve intersects the demand curve and it's very hard to teach that to students who are under a lot of stress under a lot of personal stress under a lot of financial stress so it's very hard for me to know what students expect students take my course I fear because one it's the introductory course in the major in energy business and finance we've managed to put together a very attractive looking program and so and second because it's their time to take it so what do they expect I really don't know what students expect and I think that's a challenge for all of us professors the other thing is you have to remember for us professors we were the ones who like school who like going to class we aren't the typical student who isn't going to get a PhD and so for me as professor I find it a continuing challenge to try to think about what students really want out of classes and what we can expect them to get out of that giving all the constraints they're working under well in many ways this course is a beginning not an end that so if you just take one course in economics or really any other field a few months a few years later it's hard to think about anything that applies as an undergraduate I had to take a course in eastern religions trust me I don't remember anything at all from it so we hope that in the course of study in energy business and policy in the course of our undergraduate major we'll reinforce the lessons that are taught here really help our students become energy professionals and perhaps more importantly just to get a better understanding of what goes on in the world and why things happen at least from an economic point of view I view economics as a lens a way of seeing things in the world it's the way I see things it's the way I best at seeing things there are other ways of seeing things of course but for me it really helps me understand a lot of what's going on for our professionals who come into the program they have their own types of stress they're a more mature audience than what professors like myself are used to dealing with they have their professions they want to seek to improve themselves in ways that are perhaps more defined under a lot of time pressure a lot of family commitments a lot of personal commitments and so for those students what we're trying to do is to help them understand better where they are in the world and where they're going and in the context of energy issues how energy markets work how energy policy doesn't work I got my degree in 1987 then I worked for the government I've been teaching this class since 1991 so for about 18 years and the classes change and in particular what's changed is society has become richer and become more interested in environmental issues and also, and this is something I would not have predicted 10 years ago, energy issues have become environmental issues all energy issues now have environmental components you want to build a new gas plant that emits certain problems you want to build a natural gas plant you want to build a coal plant you want to build a nuclear power plant all those have different types of environmental features and so for me what I've seen in the course of teaching this is that the environment has become much more important to society and from a policy point of view much more interesting what you see in developing countries that struggle for food don't have the luxury of worrying about clean air and that as societies become richer people become more financially secure they live longer they're more concerned about health issues they're more concerned about the environment and they're more able by the way to engage in environmental goods to engage in tourism to go see things that are interesting from an environmental point of view so all this implies that a richer society and for me of course the reverse is also true that a poorer society will not care about the environment and actually one way to protect the environment is to generate incentives and systems to cause societies to become richer and so they'll be more interested in protecting the environment well interesting as you see countries get richer they become more interested so currently China and India are becoming richer and you see a larger interest in environmental issues there particularly China and industrialization there are pollution problems and finally the government there is starting to respond to that on the other hand Russia which has really had tremendous economic difficulties does not seem so interested in environmental issues even though they had tremendous environmental issues dating from the communist era where the government really didn't care about protecting the environment and nobody had any incentives to protect the environment so they had some real environmental horror stories today they're still struggling they seem less interested in the environment Western Europe which has become richer continues to be interested in the environment the United States has become richer and this is an interesting trend my current research topic deals with electricity issues and electricity supply issues and this is very interesting for a couple of different reasons one of which is that many people perhaps including myself are trying to deregulate electricity markets but deregulating electricity markets is not as easy as say deregulating telephone or airline markets electricity is a funny creature that goes where it wants and setting up the institutions to do that is very difficult and indeed for me and other economists interested in electricity issues we think about the issues in 2000-2001 in California where a purportedly restructured system completely crashed so here in Pennsylvania we have a very effective restructured system and in particular that system is well suited to pick up the additional demands that our state legislators and our federal legislators are imposing of renewable energy sources that each state will now have a certain amount of power that will have to be renewable in this state in large part wind power but wind power has its own interesting issues because if you think about electricity grid you don't want the electricity grid to crash and because electricity isn't storeable you need supply to equal demand at all times so what happens if you pace 20% of your grid on wind power and one day the wind stops blowing do the lights go out this is a very difficult problem and a problem that we'll be studying for some time and that's where my current research interests lie I just want to say that a famous person who is George Bush's first secretary Ari Fleischer who's bald like me I just want to say in college I taught him when I was news director of the college radio station I taught him how to be a newscaster and yet I picked up his biography and he didn't mention me and I'm still annoyed so Ari if you're out there send me some love 30 seconds I think you should take this course why? first you'll understand how free markets work and how they generate wealth for society second you'll understand how free markets don't work and how they imply that we should have government solutions third, you'll learn about how governments unfortunately aren't the perfect instrument to solve our society's economic problems and finally you'll learn how to apply this into a variety of circumstances and through this course you'll learn a lot about how the real world actually works so they say you can teach a parrot how to be an economist just get the parrot to repeat supply and demand so we'll apply supply and demand to a few puzzles so for instance you need that to live and it's really cheap diamonds like the one that is around my wife's my wife's ring finger are very expensive and why? well it all relates to supply and demand in particular to supply here here in Pennsylvania there's plenty of water so water is really cheap but diamonds are really scarce so at the margin the value of using water is really low at the margin I guess I could take a shower for 10 less seconds this morning not a big deal but diamonds at the margin are very valuable we can talk about why people like diamonds and why they're valuable but it's clear they are valuable as tokens of engagement similarly we can talk about people we see on TV versus your elementary school teacher so who gets paid more your fourth grade teacher a large seven footer who runs up and down the basketball court in front of several thousand people in his pajamas playing three minutes a night your fourth grade teacher I don't know might get 40, 45 thousand dollars a year this giant behemoth maybe three million dollars a year who's worth more to society well on average couldn't get along without fourth grade teachers but at the margin which determines how people are compensated our seven footer is much more valuable because as any basketball coach will tell you you can't coach height I'm not talking about Shaquille O'Neal I'm talking about the third center on any NBA team who only play three minutes a night and my favorite and hopefully you'll have film of him is Chris Dudley from Yale where I went to graduate school and I watched Chris play in graduate school and he was pretty good in the Ivy League and he played in the NBA for about 15 years made about 35 million dollars I don't know what Chris did with it all but he's going to he made a lot more money than I ever will well Chris doesn't owe me anything but Ari Ari I'm waiting for you buddy now I mean you can see some you know you can see production values basketball players running up and down Mrs. Burns fourth grade teacher later on Homer Simpson Homer Simpson the nuclear power plant we can't really get down on the way yet can we? no we don't want to get down