I wasn't Gary Becker's best student but bear with me and permit me to pose an Econ 301 problem set question that I could imagine that Becker/Mulligan/Murphy would now pose to the new generation of UChicago Students. Recall that in Becker's household production function approach that consumers had basic wants; each wants to be comfortable, healthy and safe. They use market inputs and their time to produce these goods. Preferences do not change over time. Instead, what changes over time is the production function of "comfort", "health" and "safety". Nobody gains direct utility from having an alarm system for their home. An alarm system can be an effective input in producing safety but a gun may be a substitute. If the price of guns goes way down, some people may substitute from alarm systems to guns.
Let's explore this basic logic in the context of adapting to climate change. The following example is stripped down.
A consumer gains utility from eating pizza but he enjoys eating this pizza less if it is hotter outside. His ideal temperature is 65 degrees F. For those who have taken an economics class, his marginal utility from eating pizza is declining in summer temperature (T).
If this consumer cannot offset the heat using air conditioning (the stand in adaptation technology), then his utility is a decreasing function of outdoor temperature. He would be willing to give up some pizza to be exposed to a lower temperature. Now, a key point is that this demand for cooler temperatures should induce supply side innovation! Demand creates supply. Read our 2017 paper.
Suppose that if this consumer pays F dollars he can buy an air conditioner and for each our he operates it it requires E units of electricity that cost $p each.
Becker would ask his students, for any temperature T > 65, how much consumer surplus does the consumer lose in an economy featuring air conditioning?
Here is my answer:
Step #1: Solve for maximum utility if T = 65 (so no climate change).
Given the utility function, this consumer will spend all of his income on pizza . Calculate this affordable pizza level and plug into the utility function to yield the answer.
Step #2: For any Temperature T > 65, solve for the optimal number of hours of air conditioning given the efficiency of the air conditioner, the lost income due to the payment of $F and the price of electricity. The rational consumer will equate the marginal utility of the last $ spent on pizza to the marginal utility of the last $ spent on air conditioning. So, note the budget constraint logic; the consumer sacrifices pizza so that he has the $ to run his air conditioner. He doesn't gain direct pleasure from AC --- instead the AC reduces his exposure to the heat and this raises his marginal utility from the remaining pizza he is consuming. Given a functional form assumption here, you can grind out the algebra solution.
Once you find the optimal consumption bundle of pizza and air conditioning, plug these into the utility function and solve for the utility level.
Return to Step #1 and calculate how much pizza the consumer would be willing to sacrifice to not face the climate change (recall that the worst he can do is your solution to step #2).
The key point is that the damage caused by climate change (i.e a temperature > 65) is a decreasing function of the price of energy and the price of the air conditioner and the energy efficiency of the air conditioner. So, even in this simple economy --- there are 3 adaptation margins.
To repeat my point, if air conditioners become cheaper (think of China exporting them), if they become more efficient (think of MIT engineers) or if the price of energy falls (think of Elon Musk capturing the sun power), the adaptation challenge becomes easier and even poorer people suffer less from the climate change.
This is the micro-economics of climate change adaptation. This is what is missing in the recent climate economics literature. Read my 2010 Climatopolis. and read my 2014 Istanbul Lecture.
Why have I posted this? The new highly celebrated UC Berkeley study does not explicitly incorporate any substitution possibilities in response to anticipated climate change on either the demand side or the supply side. This "behavioral invariance" leads to some over-stated predictions.