Goldman School of Public Policy - University of California, Berkeley

Lee Friedman

Professor of Public Policy

Areas of Expertise

  • Environment
  • Regulation
  • Economic Organization
  • Environmental Markets
  • School Finance
  • Utility Regulation

Biography

Lee Friedman is an economist and Professor of Public Policy at the Richard & Rhoda Goldman School of Public Policy at the University of California at Berkeley. He is a graduate of Dartmouth College and received his Ph.D. from Yale University. After two years of analytic experience working for the Vera Institute of Justice in New York City, he joined the Berkeley faculty in 1974 to help fashion the economics curriculum of the public policy program.  His research is on a wide variety of issues, among them climate change policies, utility regulation, educational finance, criminal justice policies, agricultural subsidies, and consumer decision-making. His work strives to improve the effectiveness of microeconomic policy analysis on actual public policies and practices. He is a recipient of the David N. Kershaw Award for distinguished public policy research, and of the University of California's Distinguished Teaching Award. He is former Editor of the Journal of Policy Analysis and Management, and has served as President of the Association for Public Policy Analysis and Management.

Website

Working Papers

  • Consumers’ willingness to pay for alternative fuel vehicles: comparative analysis between US and Japan

    Co-authors: Makoto Tanaka, Takanori Ida, , Kayo Murakami

    GSPP Working Paper: GSPP13-001 (January 2013)

    Abstract

    This paper conducts conjoint analysis using a mixed logit model to estimate consumers' willingness to pay (WTP) for electric vehicles (EV) and plug-in hybrid electric vehicles (PHEV) on the basis of an online survey carried out in the US and Japan in 2012. We also carry out a comparative analysis across four US states. We find that on average the US consumers are more sensitive about fuel cost reduction and fuel station availability, whereas Japanese consumers are more sensitive about driving range and emissions reduction. As for the comparative analysis across the four US states, we find that WTP for fuel cost reduction varies significantly, and is the greatest in California. We use the estimates obtained in the conjoint analysis to consider EV/PHEV diffusion rates under several scenarios. In a base case scenario with relatively realistic attribute levels, conventional gasoline vehicles still dominate both in the US and Japan. However, in an innovation scenario with significant purchase price reduction, we observe a high penetration of alternative fuel vehicles both in the US and Japan. We illustrate the potential use of conjoint analysis for forward-looking policy analysis, with the future opportunity to compare its predictions against actual revealed choices. In this case, increased purchase price subsidies are likely to have a significant impact on the diffusion rates of alternative fuel vehicles.

  • The Importance of Marginal Cost Electricity Pricing to the Success of Greenhouse Gas Reduction Progr

    GSPP Working Paper: GSPP10-002 (November 2009)

    Abstract

    This paper identifies a previously unnoticed problem important for the efficient reduction of GHG
    emissions: the pricing of off‐peak electricity. There may be many opportunities to reduce emissions by
    substituting relatively clean and inexpensive off‐peak electricity in place of a more GHG‐intensive fuel,
    with the most important example being vehicle electrification. However, off‐peak electricity for
    residential consumers is currently priced at 331% above its marginal cost in the United States as a
    whole. Even for the 1.3% of residences that are on some form of time‐of‐use rate schedule, the off‐peak
    rate is still almost three times higher than the marginal cost. A primary barrier to the increased use of
    marginal‐cost based TOU rates is that less than 5% of U.S. households have the “smart” meters in place
    that can measure and record the time of consumption. A FERC report estimates the deployment rate of
    these meters for residences by 2019 will reach only 40%; policies should be put in place so that this
    deployment rate nears 100% by that time. Another important barrier is TOU rate design. I describe two
    TOU rate designs (baseline and two‐part tariff) that utilize marginal‐cost based rates, ensure appropriate
    cost recovery, and minimize bill changes from current rate structures. A final barrier is to get residences
    on to these rates. I consider whether a marginal‐cost based TOU rate design should remain as an
    alternative for which residences could “opt‐in,” or become the default choice, or become mandatory. I
    conclude that it should become mandatory. Time‐invariant rates are a historical anachronism that
    subsidize very costly peak‐period consumption and penalize off‐peak usage to our environmental
    detriment. There is no reason for such a system to continue.

  • Intertemporal Regulatory Tasks and Responsibilities for Greenhouse Gas Reductions

    Co-author: Jeff Deason

    GSPP Working Paper: GSPP09-001 (January 2010)

    Abstract

    Jurisdictions are in the process of establishing regulatory systems to control greenhouse gas emissions. Short-term and sometimes long-term emissions reduction goals are established, as California does for 2020 and 2050, but little attention has yet been focused on annual emissions targets for the intervening years. We develop recommendations for how these annual targets - which we collectively term a “compliance pathway” - can be set, as well as what flexibility sources should have to adjust in light of cost uncertainties. Environmental effectiveness, efficiency, equity, adaptability, and encouraging global participation are appropriate criteria by which these intertemporal policy alternatives should be judged. Limited but useful knowledge about costs leads us to recommend a compliance pathway characterized by increasing incremental reductions along it. This can be approximated by discrete linear segments, which may fit better with global negotiations. While the above conclusion applies to any long-term GHG regulatory program, many jurisdictions will rely heavily on a cap-and-trade system and the same pathway recommendation applies to its time schedule of allowances. Furthermore, borrowing constraints in cap-and-trade systems can impose substantial unnecessary costs. To avoid most of these costs, we recommend that sources be allowed early use of limited percentages of allowances intended for future years. We also find that a three-year compliance period can have substantial benefit over a one-year period. The paper here is the earlier working paper version of the final paper published in the Journal of Policy Analysis and Management.

  • Should California Include Motor Vehicle Fuels in a Greenhouse Gas Cap-and-Trade Program?

    GSPP Working Paper: GSPP08-001 (June 2008)

    Abstract

    This paper considers whether the California Air Resources Board, in implementing regulations to achieve the greenhouse gas reduction goals of the AB32 legislation, should include motor vehicle fuels as part of a cap-and-trade program. Its conclusion is that it is of importance to do so. While this may be relatively uncontroversial on the grounds of first-best economic principles, there are numerous political, administrative and second-best economic reasons that suggest other courses may be preferred. These reasons include compliance and enforcement concerns, the existence of other regulatory programs for the transportation sector, belief that efficiency gains from inclusion would be small, jurisdictional linkage issues, and both political skepticism and agency inexperience with broad market-based regulation. However, consideration of most of these factors strengthens the conclusion. Additionally, a cap-and-trade market with motor vehicle fuels included is necessary to create an important economic competition between the electricity sector and the motor vehicle fuels sector, in which they (and others) vie to see which can most successfully replace ordinary gasoline and diesel with much greener sources. The overall program will be more effective, efficient and equitable with motor vehicle fuels included as part of the cap-and-trade component. This paper is the earlier working paper version of the final paper published in the Journal of Comparative Policy Analysis.

  • The Long and the Short of It: California’s Electricity Crisis

    GSPP Working Paper: (November 2009)

    Abstract

    Unexpected problems sometimes arise when governments attempt to
    introduce competition. The problem considered herein is market power and its
    exercise during the California electricity crisis of 2000–2001. In introducing
    competition, both transitional and long-run opportunities for firms to exercise
    market power may arise. California had transitional rules that severely limited
    participation of its utilities in forward markets and enhanced the market power
    of new generating entities. The transitional problems could have been avoided,
    but in the long-run a smaller market power issue should be expected to arise
    stochastically. This analysis suggests a new long-run institutional policy role:
    continual regulatory oversight of an industry that could be workably
    competitive most of the time. This explains why an agency like the Federal
    Energy Regulatory Commission should have a permanent Office of Market
    Monitoring. It also suggests why, in some electricity markets, stochastic market
    power events may arise before capacity gets strained.

  • Consumer-Friendly and Environmentally-Sound Electricity Rates for the Twenty-First Century

    GSPP Working Paper: (March 2012)

    Abstract

    This paper emphasizes the importance of bringing off-peak rates down to their
    marginal costs so that the current mispricing of electricity does not act as a substantial
    deterrent to the reduction of greenhouse gases, as through vehicle electrification. It
    considers whether there are feasible, efficient and equitable time-varying electricity rate
    structures that will be attractive to large numbers of residential customers with smart
    meters. One family of rate structures called Household On and Off Peak (HOOP) plans meets
    the efficiency criterion and is promising for meeting the distributional ones. HOOP plans
    utilize marginal-cost time-based rates except for fixed infrastructure charges that vary by
    customer group and cover nonmarginal expenses. Two alternative equity principles to guide
    the assignment of the fixed infrastructure charges to different groups are considered. A
    representative sample of California residences with usage data for each 15 minute interval
    for a one year period enablessome preliminary tests ofthese HOOP designs. Simple
    statewide versions of these designs replicate reasonably closely the actual bill distribution
    that results from the independent and far more complex rate structures in use by the three
    separate utilities that service these residences, suggesting that each utility could use HOOP
    designs to meet the necessary criteria.

  • The Theory and Practice of Public Good Selection: The Case of Legal Aid

    Co-author: Robert Letzler

    GSPP Working Paper: (November 2005)

    Abstract

    We began this research with two overlapping objectives. The first, and of most general
    academic interest, is to gain insight about the following puzzle: why has there been
    essentially nil implementation of any of the institutional ideas in the economics literature
    for improving the efficiency of public goods decisions? These ideas have been proposed
    and refined in literally hundreds of academic articles over the past 30 years, many of
    them have undergone extensive laboratory testing, and we have an extensive network of
    public policy practitioners and academics that might be expected to help bring them into
    practice. The second objective is more specific and of immediate policy relevance: to
    understand if there are opportunities to increase the effectiveness of the federal Legal
    Services Corporation (LSC) by improving its decisions about its own internal public
    goods, largely the provision of information to attorneys that directly service the eligible
    low-income population. Providing these public goods requires locating, customizing,
    synthesizing, and creating documents and templates, doing research, leading training, and
    answering questions. We hope that our joint consideration of these two objectives might
    be beneficial to each: identifying practical implications of the public goods literature may
    benefit the LSC, and a case-study of LSC may identify general challenges that public
    goods mechanism literature should address.

  • Wither, or Whither, Agricultural Crop Subsidies?

    GSPP Working Paper: (July 2003)

    Abstract

    There is and always has been virtual consensus among economists that many agricultural
    crop support programs cause inefficiency. Equally true, economists also know that whenever
    there is inefficiency, there is "room for a deal" that mitigates it. However, the standard
    political explanations for the persistence of these inefficient programs rely on the strength of
    the farm lobby relative to the diffuse and difficult-to-organize consumers that pay for them.
    This is unsatisfactory because, by the logic of economics, there is an opportunity for a deal
    that would benefit the farm lobby in exchange for shedding the inefficient programs. If the
    farm lobby could itself benefit, then we have no explanation for the persistence of the
    inefficient programs. I examine this puzzle, and conclude that increased political
    sophistication on the part of agricultural economists could have a high social payoff in terms
    of reduced program inefficiencies over time.

Selected Publications

  • Should the Regulator or the Market Decide When to Reduce Greenhouse Gas Emissions?

    Friedman, Lee. The Economists' Voice, 6, No. 13, December 2009, Article 1.

    Abstract

    Although much of what economists write is "inside baseball" — written for a small audience of specialists — economists have much to contribute to the public debate on a wide range of policy issues. We believe that anyone concerned about the central issues of the day, whether they are students, policymakers, or other citizens, would benefit from hearing economists debate what should be done about problems from budget balancing to global development, from intellectual property to outsourcing, from health care reform to how to provide old age security.

    The Economists' Voice creates a forum for readable ideas and analysis by leading economists on vital issues of our day.

  • The History of Electricity Restructuring in California

    Friedman, Lee. Journal of Industry, Competition and Trade, 2, No. 1/2, 2002, pp. 9-38.

    Abstract

    This paper aims to provide an objective history of electricity restructuring in California from the mid-1990s to the immediate end of the “California Energy Crisis” in June 2001. We discuss the restructuring debate that led to the restructuring law (AB1890), and describe how the new structure worked after it took effect in April 1998. We discuss the course of events during the crisis, and factors contributing to it, including the supply-demand balance in California and in the West, rising gas prices, the complexity of the market design, market power, and the regulatory decision to cap retail but not wholesale prices.

  • Bounded Rationality versus Utility Maximization:  A Test of Energy Price Responsiveness

    Friedman, Lee S. Judgments, Decisions and Public Policy, Cambridge University Press (Cambridge, UK: 2002), pp. 138-173.

    Abstract

    Behavioral decision theory draws on experimental research in cognitive psychology to provide a descriptively accurate model of human behavior. It shows that people systematically violate the normative assumptions of economic rationality by miscalculating probabilities and making choices based on one-economic criteria. Behavioral decision theory's ability to capture the complexity of human judgments and choices makes it a useful foundation for improving public policy analysis, design, and implementation. Originally published in 2001, this volume showcases the research of leading scholars who are working on applications of behavioral decision theory in diverse policy settings. It is designed to give policy analysts and practitioners who are non-psychologists a clearer understanding of the complexities of human judgment and choice, and suggest how to integrate behavioral decision theoretic insights into the policy sciences. This interdisciplinary volume should be insightful and useful wherever people's judgments and choices matter for policy formulation, acceptance, and effectiveness.

  • The Microeconomics of Public Policy Analysis

    Friedman, Lee S. The Microeconomics of Public Policy Analysis. Princeton, NJ: Princeton UP, 2002.

    Abstract

    This book shows, from start to finish, how microeconomics can and should be used in the analysis of public policy problems. It is an exciting new way to learn microeconomics, motivated by its application to important, real-world issues. Lee Friedman's modern replacement for his influential 1984 work not only brings the issues addressed into the present but develops all intermediate microeconomic theory to make this book accessible to a much wider audience.

    Friedman offers the microeconomic tools necessary to understand policy analysis of a wide range of matters of public concern--including the recent California electricity crisis, welfare reform, public school finance, global warming, health insurance, day care, tax policies, college loans, and mass transit pricing. These issues are scrutinized through microeconomic models that identify policy strengths, weaknesses, and ideas for improvements. Each chapter begins with explanations of several fundamental microeconomic principles and then develops models that use and probe them in analyzing specific public policies.

    The book has two primary and complementary goals. One is to develop skills of economic policy analysis: to design, predict the effects of, and evaluate public policies. The other is to develop a deep understanding of microeconomics as an analytic tool for application--its strengths and extensions into such advanced techniques as general equilibrium models and pricing methods for natural monopolies and its weaknesses, such as behavioral inconsistencies with utility-maximization models and its limits in comparing institutional alternatives. The result is an invaluable professional and academic reference, one whose clear explanation of principles and analytic techniques, and wealth of constructive applications, will ensure it a prominent place not only on the bookshelves but also on the desks of students and professionals alike.