Economists use stock-and-flow models to forecast the economic impact of environmental changes in the face of uncertainty.
One popular application of the stock-and-flow model is towards climate change. By constructing feedback loops between geophysical and economic parameters we can estimate the optimal discount rate. The discount rate is simply how much we value future damages in the present. The literature abounds with arguments for high and low discount rates between 0.1% and 7.0%. Economists argue for an optimal discount rate on the grounds of efficiency: A rate that is too low would mean overinvestment in emissions reductions while higher return investments in non-climate-related capital are neglected, and vice versa.
I am using the stock-and-flow model to analyze the effects of drought in the Mahbubnagar district of Andhra Pradesh. Given a variety of agricultural parameters (soil condition, rainfall, water availability, slope, elevation, etc.) based on historical data, I am using statistics to predict the availability of water in the future and the economic impacts. It is essentially a risk-assessment: if X water is available, the production losses will cost a farmer $Y. Or to rephrase it: If water costs $X, the farmer can increase their income to $Y by switching to crop Z, which uses less water (holding all other inputs constant).
I am using three pieces of software:
- Stata, to predict macroeconomic effects on the secondary and tertiary parts of the economy.
- WinEPIC, a non-proprietary, open source, stock-and-flow model available for download form Texas A&M. You can download it here and the Aggies will email you the password.
- ArcGIS to perform geostatistical analysis of non-spatial data. ArcGIS lowers transaction costs by bundling the weather and economic information together in a visual framework; see image at right.
* Recent graduate of the Environmental Economics and Policy program at UC Berkeley now doing research at ICRISAT. Read Blake's blog here. ICRISAT is a non-profit and non-political research organization that serves the poorest of the poor in the semi-arid areas of the developing world. We use science as a means to serve the poor, not as an end in itself. This is the human face of science and agricultural research.