From: eeb1@quads.uchicago.edu (e elizabeth bartley)
Subject: Economics and the Environment
Reply-To: eeb1@midway.uchicago.edu
Organization: University of Chicago Computing Organizations
Date: Mon, 9 Nov 1992 02:31:17 GMT

From: lydick@SOL1.GPS.CALTECH.EDU (Speaker-to-Minerals)

[Why the world isn't Pareto efficien]

>1)  No externalities.  This is pretty much equivalent to a requirement that
>    there be a market for EVERYTHING.  An example of an externality is smog:
>    If a person drives his car in a smoggy area, he's increasing the amount of
>    smog there.  That extra smog injures everyone; it doesn't hurt any
>    particular person very much, but it hurts a LOT of people.  But the
>    (greedy) individual driver takes into account only the effects of the smog
>    he produces on himself.  As a result, he drives if the benefits to himself
>    from driving are greater than the harm to himself arising from the extra
>    smog he's creating.  The injuries to everyone else are not a factor.  So
>    he drives more than is socially optimal.  *IF* there were a market in
>    smog, then either he would have to buy the right to produce smog from his
>    fellow citizens, or his fellow citizens would be able to pay him not to
>    drive so much.  In either case, he'd almost certainly drive somewhat less.
>    But there IS no market.  Why?  Well, for one thing, the cost of having the
>    driver negotiate with all the other citizens would be prohibitive which
>    brings us to [2) No transaction costs]

Beth nods in partial agreement.  "The cost of all citizens negotiating
with each other to determine how much everybody pays everybody else
for polluting would be prohibitive.  However, in lieu of this, voters
could determine a fee for polluting (per unit of smog, actually
determined in miles driven times smog produced per mile), paid to the
government and thus reducing taxes (or for that matter, collected by
the government and paid out to every person).  I think this works oh
so much better than the government mandating that new cars must emit
less than [x] amount of smog per mile, which drives up the cost of new
cars and thus causes people to drive their old polluting clunker
longer -- and also provides no incentive for people to retune their
cars to reduce the smog they emit."

Beth looks down at the stack of soapboxes Mike had warned her about,
then shrugs and continues, "In general, a lot of the government's
environmental policy takes the form of setting standards which must be
complied with, roughly analogous to saying that new cars must emit no
more pollution per mile than [x] -- saying that every factory must
produce no more than [y] amount of pollution a year, for example.
This provides no incentive for the factory to produce [y/2] pollution
instead of [y] pollution, and may cause a factory to go bankrupt if it
simply couldn't manage any better than [4y/3] pollution.  It does more
good and less harm to establish a "pollution fee" at an appropriate
level."

Beth takes a swallow of her coke and continues, "There are
circumstances where a "pollution fee" is inappropriate; for example,
the government has a mandate to halve pollution and they don't know
how to set the "pollution fee" to do it.  Under those circumstances,
the government can create a "right to pollute".  It gives all the
factories vouchers for polluting half as much as they did last year,
and lets the factories buy and sell these "pollution rights".  Some
factories will reduce their pollution by exactly half; others that can
be easily improved reduce their pollution by more than half and sell
their pollution rights to factories that have already minimized their
pollution and so can't easily reduce the amount they pollute.  Or if
the government wants to try to be fairer and not reward companies for
having polluted a lot and penalize them for not having polluted, it
can award the "pollution rights" per output instead of per pollution."

"Every factory will produce the same amount of pollution regardless of
who you assign the "pollution rights" to, because the trade-off in
paying whatever the market price is for one unit of "pollution right"
(whether by buying that "pollution right" or by not selling that
"pollution right") versus installing anti-pollution machines to remove
that pollution is the same; the only difference is who has how much
money when the factories are done buying and selling the "pollution
rights".  However, one *does* have to assign the "pollution rights" to
people besides the government, or there's a monopoly in "pollution
rights", which creates all kind of difficulties."

Beth pauses to refill her coke from the bottle she'd brought with her;
the bar is rather inaccessible from this height of soapboxes.  On
second thought, she pours herself a diet coke from the other bottle in
the minifridge: less taste, less calories.

"Anyway," she continues, "I think a lot of what should be done to try
and help the environment is to make companies pay for the damage they
do.  I don't mean that in any vindictive sense; it's simply a fact
that modern industry harms the environment and I'm not angry at
industry for doing it within reason.  But one has to make the people
who do the damage pay for doing it in order to discourage the damage;
this is called 'internalizing the costs' and I've never yet heard an
economist argue against it."  Beth pauses.  "And if I did, I'd
distrust the economist instead of the principle of 'internalizing the
costs'."  She shrugs.  "Anyway, people want to have more things
recyclable: make the producers pay for the garbage disposal and/or
recycling cost.  Recycling is cheaper; they'll pass the cost on to the
consumers, the consumers will buy more recyclable goods.  If you want
to discourage disposable goods and encourage disposable goods for
aesthetic reasons as well - I do, though not to as great an extent as
many - make the produers pay half again the garbage disposal cost
and/or only two-thirds the recycling cost.  Or twice and half, or
three times and a third ... whatever encourages recycling enough.
This works better than outright bans, because there are bound to be
times when disposable goods are the only alternative."

Beth looks at the soapboxes she's generated and shakes her head.
"Well, thanks for the parachute, Mike...."

-- 
    Beth Bartley               Delurked -- Hi, all!
                "Kbox fall down go boom."    - Ron Levy
"He who will not reason, is a bigot; he who cannot is a fool; and he who
dares not, is a slave."                - William Drummond