China to reduce coal consumption?

I've tried to emphasise the importance of relative concepts many times on this blog. However, there are occasions when relative measures can also be more than a little misleading. Case in point: This article from Reuters, which describes how China plans to reduce its coal consumption to 65% of primary energy by 2017.

This policy prescription is primarily motivated by desire to improve the country's terrible air pollution. Of course, a reduction in coal will also bring climate benefits. (I have previously talked about the "co-benefits" of climate policy and local air pollution measures here.)

However, despite being a tentative step in a right direction, this is hardly a watershed moment. In fact, the US Energy Information Agency (EIA) was already forecasting a drop in Chinese coal consumption to 65% of total energy by 2017 (from 69% in 2012) in the reference scenario of its International Energy Outlook, which was published earlier this year.

More importantly, this relative decrease glosses over the fact that the absolute consumption of coal is forecast to increase by nearly 20% over the same period... Up from 79.2 quadrillion Btu in 2012 to an eye-watering 94.1 quad Btu in 2017!

Source: EIA data tool

THOUGHT FOR THE DAY: Be wary of anyone who tells you that China is leading the race in de-carbonising their economy, or winning the battle on renewables for that matter. There may be an element of truth in such statements, but the bigger picture is far more sobering.

Review: Surviving Progress

Apologies for the lack of posting recently. Aside from research stuff, most of my "internet" time has been spent working on the RECONOMICS HUB.[*] We have now officially gone live and will hopefully see a consistent level of posting from the various contributors in the weeks and months to come. Please free to stop by and let us know what you think... or follow us on Twitter!

My latest contribution to the blog is a review of the film Surviving Progress (produced by Martin Scorsese). To summarize, the film is long on intent and activism, but often fails to make a convincing argument. A snippet:

In another segment, the film jumps from Ronald Wright’s idea of a “progress trap” — something which certainly has merit in of itself — to claim that modern technology is at complete odds with our primitive physiology. (Wright: “We are running 21st century software, our knowledge, on hardware that hasn't been upgraded for 50,000 years.”) The language is undeniably provocative but is it necessarily meaningful? After all, our knowledge and innovations didn't occur in a vacuum. It is certainly hard to believe that any technological development can persist without bringing at least some form of benefit to its progenitors. The very strong conclusions that the film draws don’t necessarily follow from the premises that it provides.

Surviving Progress relies on a number of interviews and some of these work better than others. I was particularly unimpressed by a clip involving "geneticist/activist" David Suzuki, who is unilaterally scathing about the economics profession. (He calls conventional economics "a form of brain damage").

So, according to Suzuki, “externalities” is a collective term that economists use to explain away pesky things like the ozone layer, topsoil and biodiversity. Hmmm… 

There’s no other way to put this, so I’ll simply come out and say that Suzuki has completely mangled the concept of economic externalities. I cannot think of a single economist who subscribes to anything approaching the definition that he gives. (I’d even be surprised if anyone that has followed an ECO101 class would define an externality in this way.) Suzuki could open any introductory economics textbook and discover that an “externality” is simply some spillover cost or benefit incurred by a third party, which is not accounted for in the market price.

___
[*] Resources. Energy. Climate. Economics

Why do we pay tax on plastic bags?

Because here's why:



Forget the environment. This flagrant disregard for personal space must end!

Climate mitigation as a secondary benefit

But keep it quiet.

I spent some time last week with the Dutch economist, Johannes Bollen, who was visiting my university to present his research on the "co-benefits" of climate and air pollution policies. His basic argument is that you can go a long way towards meeting (global) climate goals simply by tackling (local) air pollution. In fact, his most up-to-date model suggests that rigorously addressing air pollution -- finding the optimal balance between health improvements and increased energy costs -- will get us 75 percent of the way towards the "2°C target" of the Copenhagen Accord.

Those results bear repeating: No global carbon tax or binding international treaties required. Just individual countries focused on cleaning up their own air pollution and we have already solved three-quarters of the climate problem. It sounds too good to be true and, yet, there's a growing body of evidence that points towards similar conclusions.[*]

For instance, you might remember an AER paper by Muller et al. (2011) that I mentioned a few months back. Their study made a big splash because, among other things, it showed that the price of coal-fired electricity should be several times higher than it currently is, given the adverse effects that local air pollutants (small particulates, SO2, NOx) have on human health and productivity. Again, nothing to do with climate effects; just accounting for the local health damages caused by dirty air.

It almost goes without saying that this promises to be a very important research area. The climate change narrative -- despite many excellent scientists and economists producing meticulous research -- has become bogged down by its own press and politics. We're at such an impasse that I simply can't see the necessary political will (and public buy-in?) to move us forward in any meaningful way over the next decade.

Focusing on local pollution, however, allows us to abstract from the most problematic areas of climate change; whether that is the unjustified/misplaced skepticism about the underlying science, or the longer-term uncertainties that make cost-benefit analysis of climate change mitigation difficult. From a purely economic perspective, it also frees you from the inherent problems associated with a global commons; such as competing incentives, inter-temporal conflicts, lack of enforcement, and free-rider problems. Those kinds of issues are dramatically simplified when you move from the global scale to the national scale, and narrow your time horizon.

The thing is, and while it's obviously great to kill two birds with one stone, I actually think that we should be very careful about emphasizing the climate link. Rightly or wrongly, policy geared towards tackling climate change is an extremely touchy subject. Yes, it's absurd to think that there is some grand communist plot at hand whenever someone mentions "cap-and-trade" or "carbon tax". (Also ironic when you consider that accounting for environmental damages is about putting an end to the socialized benefits that polluters enjoy at the expense of everyone else.) However, we have to acknowledge and operate within the practical confines of our world... which, more often than not, means making allowances for the irrationalities, whims and idiocies of our fellow citizens. And, yes, I'm sure the feeling is mutual.

THOUGHT FOR THE DAY: Tackling local air pollution will bring about marked improvements in human health and economic welfare, both now and in the future. We also have good reason to believe that it will go a long way towards mitigating climate problems. Unfortunately, climate change is a subject that comes with a lot of baggage. I'd prefer to see the results without bringing up the baggage.

UPDATE: The British Medical Journal gets in on the action here.

[*] I haven't scrutinized Johannes' model in enough detail to proclaim his results as gospel truth. That being said, seeing his presentation and having talked through the underlying methodology certainly makes me confident that he has carefully covered his bases. I'll try to keep tabs on how his working paper develops or is revised over the coming months.

A very interesting paper...

From the latest American Economic Review:

Environmental Accounting for Pollution in the United States Economy

By Nicholas Z. Muller, Robert Mendelsohn, and William Nordhaus

ABSTRACT

This study presents a framework to include environmental externalities into a system of national accounts. The paper estimates the air pollution damages for each industry in the United States. An integrated-assessment model quantifies the marginal damages of air pollution emissions for the US which are multiplied times the quantity of emissions by industry to compute gross damages. Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added. The largest industrial contributor to external costs is coal-fired electric generation, whose damages range from 0.8 to 5.6 times value added.

Unless you're on a university server, you'll probably find that the article is gated. [Update - The working paper version is accessible here.] Fortunately, there are a number of good summaries available on the net. Bottom line: We severely underpay for the goods and services provided by major industries, given the measurable effect that air pollution from these industries has on human health and productivity.

Crucially, the environmental damages that drive these results have nothing to do with any kind of long-term climate change effects. They are simply the local damages that result from compromised air quality and are happening right now.

Lest it be unclear, this most certainly isn't about turning our back on coal (or even agriculture, another industry with a surprisingly high un-costed air pollution damages figure). Or markets in general. It is simply about trying to account for full costs and thinking about the best ways in which we can do that. That's all that good economics is about.

Should pregnant women be banned from smoking?

In several recent posts, Dan Kuehn advanced the notion that "the future" is, in some sense, an autarkic regime... Basically, that people in the future simply aren't able to trade/negotiate with us in a way that materially affects our decisions today. Future generations are thus unable to provide the normal market signals and incentives, which would impact our behaviour on matters that stand to directly impact them. (E.g. "We'll compensate you for investing in this technology today, as we'll desparately need it fifty years from now"; "Stop this activity as soon as possible, or we'll sue you for ruining our habitat"; etc).

This sparked off an interesting back-and-forth on, not only whether "autarky" was the correct term to use in this case, but also on whether characterising things in this manner significantly alters the way that we already think about making provisions for / sacrifices on behalf of future generations. For the record, I tend to agree with Bob Murphy that "autarky" isn't technically the right term to use, because it is simply the laws of physics that prevent the future from being able to trade with us. (Contrast, say, the autarkic regime of North Korea, which is physically able to trade with other nations, but has embarked upon a bizarre policy of self-sufficiency because of political and institutional settings.) However, I do think that Daniel's framing was useful because it serves to emphasise the remorseless, uni-directional march of time and how this should inform our policy decisions.

Now, I'm pretty interested in the intemporal trade-offs, as some of you might have guessed from my numerous posts on climate change and, more recently, sustainability. In that light, I left a comment under one of DK's "the-future-is-autarkic" posts... Effectively, the discussion reminded me of an Amartya Sen article that he wrote in support of smoking bans. The position that Sen took was interesting, because he partly appealed to the ethical distinction between a smoker's past and present self, and the inability of these two to negotiate with each other:

Unrestrained smoking is a libertarian half-way house[*]

[H]ow should we see the demands of freedom when habit-forming behaviour today restricts the freedom of the same person in the future? Once acquired, the habit of smoking is hard to kick, and it can be asked, with some plausibility, whether youthful smokers have an unqualified right to place their future selves in such bondage.

Thus, Sen was making a normative argument based on the idea that we aren't always equally "free" to make decisions when it comes to smoking. It's much easier to start the habit than it is to stop and I doubt that any plausible arguments could be made to the contrary. In the Wordsworthian sense, the young smoker is the father of the man that follows him... and yet the latter is far more constrained in his choices than the former. While certainly interesting, this is not what I want to discuss today, however -- not least because there are some very murky waters to tread when it comes to putting boundaries on personal freedom.

Here's another poser for you then: Instead of focusing on an individual smoker's freedom to do to unto themselves as they wish (consequences be damned), should pregnant women be allowed to smoke?

I ask this question after reading about a new British mother who smoked an astonishing 3,500 cigarettes during her pregnancy. This special individual not only exposed her baby to (apparently) six times the safe level of carbon monoxide, but -- surprise! -- successfully ensured that her child was borne underweight and premature. God only knows what medical surprises await this kid as the years roll by... However, I'll offer even money to anyone willing to bet on the mother's own professional prognosis:

I think it was my right and I don’t believe it was hurting Lilly. It’s making the baby use its heart on its own in the first place, so that when it comes out, it’s going to be able to do them things by itself. Where’s the proof that it’s so bad to smoke? - Charlie Wilcox, M.D. (not) and candidate for new mother of the year.

"I'm, like, making the baby's lungs stronger and stuff, innit."
LOL

(Source: Daily Mail via 2oceansvibe)

Is this not the most clear-cut case of a negative externality that you can imagine? Why do we -- for the most part anyway -- endorse smoking bans in public places and yet permit such direct offences to persist in the case of mother and child? Surely there is no logical consistency?

Of course, you could probably extend this argument to parent-offspring relationships in general. If secondary smoke is harmful to strangers in public places, why is it fine for parents to smoke in front of their kids in private homes? Again, there is a strong inconsistency from a purely logical perspective.

I'm interested to hear the libertarian take on this. Is the simple libertarian answer that the child would sue her mother for health ailments, emotional suffering, etc once she reaches the requisite age? [Side note: Does anyone know of such a case?] More plausibly, perhaps children are expected to negotiate with their parents about where and when they smoke in each other's company? (I say "plausible", but that still leaves the uncomfortable period when the toddler or young child is powerless to negotiate on anything resembling equal terms.)

Two caveats before any comments:

1. This is meant to be a thought exercise more than anything else. I'm not making any claims on the practicalities of policing the smoking activities of pregnant women. I'm simply interested in normative ethics at present.
2. Yes, I am discussing a particularly reckless type of parent here. I know that most people are inestimably more responsible than dear Ms Wilcox above. However, I've seen enough pregnant women smoking to know that it happens... Say nothing of smoking in the direct presence of toddlers, which is far more widespread. The point here isn't to examine what most sensible and loving parents would likely do, but to think about how we can best protect kids that are marginalised by the stupid behaviour of their parents. 

[*] Those of you who can't access the original Financial Times article, can read (most of) Sen's text of here.

Links - Market Design edition

Regular readers[*] will know that a favourite theme of this blog is thinking about how -- and where -- markets function "optimally", versus cases where some form of intervention/regulation might be preferable. In that tinkering spirit...

1) The Boston Globe has a profile on Harvard's Alvin Roth, who specialises in optimising market design in a variety of sectors. Apart from his dedication to solving real-life problems, about the most interesting aspect of Roth's work is that he focuses on recreating market processes in precisely the industries where markets seem out of place, or even "repugnant" (e.g. organ donors). Much of this involves dealing with goods that are intrinsically hard to evaluate in monetary terms. [HT: Michael Giberson. I'd recommend a visit to Roth's Market Design blog as well.]

Reading the article, I was immediately reminded of the literature on "intrinsic motivation" and "moral crowding out", which highlight the pitfalls of trying to replace moral contracts with monetary incentives. The most famous example of this is probably the study of late parent arrivals at day-care centres in Haifa, which went up after monetary fines were introduced. In other words, the introduction of fines had the exact opposite effect of what was intended. Parents no longer felt bad about making a teacher stay late looking after their kids, since they were incurring a fine in return... A "fair" trade in their eyes.

2) Rob Stavins on the design options for cap-and-trade versus the alternatives. This is an older post, but one that is well worth revisiting for anyone interested in the options regarding climate policy and, as per usual, Stavins gives a really good breakdown of the key issues. To be honest, I've been meaning to write a brief summary on the differences between cap-and-trade and carbon taxes for a while (pros, cons, etc)... But this post (and others by Stavins) are a great place to start if you want to understand the basic arguments for and against the different climate policy instruments.

3) Daniel Kuehn is frustrated by the asymmetries in the public choice discourse. In particular, he takes issue with the assumption that being interested in market failure somehow makes you oblivious to government failure. I've trod a similar line here before and strongly agree that this is a false dichotomy.[**] However, and while I believe that Daniel is referring more to the armchair proponents of the public choice school than anything else, I would still note that the leading public choice figures themselves generally offer a far more nuanced and considered view of the market-vs-government debate. (E.g. See the paper by James Buchanan that I mention towards the bottom of this post. Some more thoughts on the matter here.)

Daniel quotes a segment from George Akerlof's seminal paper on information asymmetry, A Market For Lemons, which points to a careful arbitration between government intervention and private solutions:

It should be perceived that in these markets social and private returns differ, and therefore, in some cases, government intervention may increase the welfare of all parties. Or private institutions may arise to take advantage of the potential increase in welfare which can accrue to all parties. By nature, however, these institutions are nonatomistic, and therefore concentrations of power - with ill consequence of their own - can develop.

I replied in kind in the comments section by quoting the closing paragraph of Ronald Coase's 1960 essay, The Problem of Social Cost, in which he established the underpinnings for his eponymous theory on bargaining rights and (environmental) externalities:

It would clearly be desirable if the only actions performed were those in which what was gained was worth more than what was lost. But in choosing between social arrangements within the context of which individual decisions are made, we have to bear in mind that a change in the existing system which will lead to an improvement in some decisions may well lead to a worsening of others. Furthermore we have to take into account the costs involved in operating the various social arrangements (whether it be the working of a market or of a government department), as well as the costs involved in moving to a new system. In devising and choosing between social arrangements we should have regard for the total effect. This, above all, is the change in approach which I, am advocating.

So, ya... Call me crazy, but that's two Nobel Prize laureates -- whose respective theories can and have been twisted by completely opposing factions -- essentially coming down on the same side of the issue.

[*] Both of us... Hi Mom. Other readers might be interested in the "regulation" or "externalities" taglines.
[**] I imagine that some might think me slightly schizophrenic to strongly criticize overbearing government in some posts on this blog and then complain about a lack of decent regulatory frameworks in others. However, I'm very much a horses-for-courses man. My basic premise is that markets work fantastically well by themselves most of the time... But it's the exceptions that make life interesting. 

Hippie Baptists and Libertarian Bootleggers

Like, take it easy, Man.

Disclaimer: I've conflated a lot of libertarianism/Austrianism in post. This was partly for simplicity, but also because I'm recalling a personal exchange where the people involved were familiar with each other's ideological beliefs. My advice before continuing; if the shoe fits, wear it. If not, don't. 

Fresh on the heels of my discussion on the roll of tort law in controlling pollution, say nothing of the asteroid vs taxes showdown, here is another take on the moral implications of dogmatic libertarianism in the presence of negative externalities. In particular, David Sobel argues that strict/deontological libertarianism takes us to untenable places if applied to climate change (and other pollution problems affecting "the commons"):

Libertarianism and Pollution

One might try saying that we are better off because people polluted, or flew, or whatever. If previous generations had been forbidden from doing this, we would have much less material wealth. But again, I might be better off if someone straps me down and involuntarily gives me a root canal, but still, I would have thought, that does not show that doing so does not violate my Libertarian rights. The polluter seems to not leave as much and as good air, water, whatever, for the rest of us, thus seemingly violating the Lockian Proviso. One might try to compensate for the loss but I don’t see how to put a price on the loss. One might give the loss a market price but I might truthfully not have been willing to make the trade at that price. One could try asking me what price I want, but that will result in strategic issues and some rabid anti-pollution folks who will not sell at any price.

Sobel continues in a follow-up post (Property Rights and Moral Seriousness), in which he basically says that failure to distinguish various degrees of rights violations forces libertarians into ridiculous positions:

Now if [all] rights violation were treated as just as morally important as taking someone’s organs against her will, then, since there will be many such rights violations as a result of the pollution, surely such pollution would be impermissible. But this would shut down much of the economy of the world we are imagining and it would radically restrict the liberties of people in such a world. 

[HT: Bleeding Heart Libertarians]

===

Without being too self-congratulatory, I've been trying to point out the same issues to dogmatic libertarian friends of mine for some time. Here is part of an email that I wrote to one such friend last year:

I actually think that the Austrian/Libertarian perspective is particularly weak in this area [i.e. dealing with climate change], given its slavish fixation on property rights. Consider the hypothetical case of some hippie refusing to bargain for any climate change impacts on his property... Let’s just imagine that his love for the environment is not for sale. As far as I understand, he would have the right to enjoin all activities threatening his property under a strict Libertarian framework. Is that correct? If so, couldn’t we literally see a complete shutdown of industry based on the preferences of a very small portion of the population?

My friend responded by saying that other people would hold vastly different subjective valuations of the hippie's property (e.g. $5 versus $5 trillion). Following this, he made the assertion that: "Whatever our subjective valuations are, there will be a market price for this against which the hippie's claim would be measured, to see whether it is reasonable or not." He went on to add that the courts would eventually decide who's claim is most reasonable. I replied:

You haven't answered the question... And it appears that you are abandoning your principles and embracing mine; which would make sense to me, as I can't see the Austrian property fixation holding up to broader logic and a sense of social justice or, (warning: bad word ahead) fairness.  

This is how I understand the "Austrian" position:  

If it is my property, then -- excluding murder and so forth -- I am the only person entitled to decide what happens there. Non-coercion and all that, right? Since we've just been discussing subjective value, isn't it also irrelevant what price you or any other person (including the court) would accept or deem fair for climate change impacts to the hippie's property? He owns this land and $5 trillion is his valuation. To be strictly consistent with your original theory, the court would have to accept that the hippie's subjective value as the only one that ultimately counts... whether everyone else regards it as ridiculous or not. 

A simple thought experiment: Let's imagine it as an extreme version of 'The Castle' [brilliant movie if you haven't seen it - Ed]. Except now substitute the Kerrigins with the hippie, and the Melbourne Airport Company with CO2-emitting industries around the world. The Kerrigins didn't want to move and, ultimately, the courts forbade the Airport company from expanding despite all their financial sweeteners as recompense. In this case, the hippie also doesn't care for generous financial compensation and won't move either. Industry has to stop activities or else find a way to emitting the carbon that impacts the hippie's property. Again: he would ostensibly have the right to enjoin ALL activities impacting his property. 

Of course, I don't regard this is a reasonable position to support. That's why I don't subscribe to it. I think that, somewhere along the line, we have to try and incorporate broader social welfare calculations that transcend the unyielding veto of private property rights. However, as far as I can tell, my little scenario above encapsulates your position pretty well if taken to it's logical conclusion. Either you stick to your guns by accepting that the owner's subjective valuation of his own property right is sacrosanct, and that he has the final say on what happens on his land... Or, you override his subjective valuation through court decision, but betray your fundamental principles in the process. 

THOUGHT FOR THE DAY: Making compromises is part of life. Taking the dogmatic/ deontological libertarian position to its ultimate conclusion often leads - I believe - to untenable outcomes. The case of global warming is a prime example. Libertarians that slavishly hold personal property rights above all else would inadvertently open the way for eco-fundamentalists to enjoin virtually all industrial activity. In doing so, they would threaten to form an unholy coalition that makes it impossible for society to react to an immensely complex problem in any sensible way. They would, in effect, become Baptists and Bootleggers for the 21st century.

Sisters: Doing it for themselves

Tort law is no panacea for the environment

Looking over the comments section of an old post, I realised that I had yet to make good on a promise to "flesh out my scepticism regarding the ability of tort law to meaningfully contribute to climate change action" (or, alternatively, expose it as a sham). Essentially, a friend of mine with strong anarcho-capitalist leanings had suggested that the climate impasse could - and should - be resolved through the private courts rather than any type of government regulation that seeks to create, for example, a carbon price via cap-and-trade or carbon taxes. I have just left my response underneath his comment as to why I regard this stance to be wholly unworkable in practice. I invite you to look over my points and see whether you agree or not. (The summary version: Non-representation of future claimants, and the complete impracticability of claimants to adequately and fairly engage separate carbon producers from all over the world; and vice versa).

Anyway, moving beyond the specific case of climate change, this is leads me to the consideration of tort law as a means of addressing environmental ills, generally. Indeed, I would say it is very much related to something that's central to my specialisation: The role of markets (underpinned by legal institutions like tort law) versus the role of governmental regulation in dealing with environmental problems. Before continuing, let me first say that my usual position on economic matters is fairly uncontroversial in that I regard markets as vastly superior to any supervening government force. Freedom to choose, responsibility for our own actions, etc, etc...

However, as an environmental and resource economist, I am constantly brought up against cases where markets don't work particularly well, or, alternatively, no market exists to deal with the provision of certain goods. That is the nature of our specialisation; we have to consider externalities, fuzzy property rights, environmental public goods, and other market "failures". Even with these imperfections, I am inclined to heed the words of one of my university professors who said something to the effect of: "Always consider other options before getting involved in environmental policy, because outside actions have the potential to stuff things up proper make matters even worse".

Having said that, there are still undoubtedly many cases where government intervention and regulation has led to improvements in environmental outcomes and natural resource management. Further, it's no coincidence that such instances often invoke market mechanisms, thereby simulating artificial scarcity and conferring property rights. This ultimately creates the right set of incentives for people to act in a profitable way to address environmental issues.[*] I can name many, many examples... From the rejuvenation of previously endangered fisheries, to the reduction of acid rain.

Even if we ignore such successes, I find it curious that certain libertarians continue to hold an unshakeable belief in the efficiency of tort law to resolve all environmental ills in an otherwise unregulated market. Regulation, on the other hand, is seen as nothing more than unworkable nonsense cobbled up by a lumbering coalition of bureaucratic imbeciles and self-serving politicians. This position seems to not only understate the transaction costs and asymmetries of information and financial power in a real-world market system, but also thoroughly oversells the efficiency of our legal systems. So, in addition to the points that I tried to highlight specifically with regards to climate change, here are some additional factors that I believe limit the effectiveness of tort law when it comes to addressing environmental problems on a more general scale:

First and foremost, litigation takes a very long time and can be hideously expensive... especially when there is money and power involved. It's easy to cite a number of high-profile environmental and health incidents that illustrate this. Exxon took 20 years to pay out after the Valdez oil spill off Prince William Sound. Officials from Union Carbide were still embroiled in criminal proceedings upon the 25th anniversary of the Bhopal Gas Disaster in India (although the company had made an out-of court settlement in 1989). More recently, Chevron has vowed to overturn a landmark $8.6bn fine imposed by a court in Ecuador in a case that has already been running for 18 years. Because of these factors, there is an inherent bias towards groups with money and legal clout. Legal disputes are hardly ever a fair fight between equals; it's about who brings the best lawyers to the party and who can confidently front the costs for the entire (possible) duration of a trial.

These are pretty fair indications of how inefficient legal systems can be, with endless recourse to stalling and appeals. Indeed, (good) regulation is often aimed at circumventing inefficient and protracted tort processes such as the ones that I have highlighted. In other words, it helps to reduce transaction costs to a minimum.[**]

To be sure, unchecked government meddling in production and industrial processes can have - and has had - very damaging consequences to both human beings and our environment. For instance, the Indian Government had a heavy hand in the Bhopal Plant and may be as liable as anybody for the tragedy that ensued. However, I don't see that as particularly relevant to the sheer length of the subsequent court case. Moreover, if regulation is dangerous because it affords power to supposedly disinterested third parties, would judges and juries not be susceptible to this influence too? Or, more simply, could they not also be subject to making the same bad decisions that stand to affect both current and future outcomes through the rule of legal precedent?

This leads me to another weakness underpinning our legal system: It lacks the very mechanism that makes markets work so efficiently. That is, there is no comparable profit-loss mechanism that leads self-interested parties to drive a continual improvement of the system. This idea was succinctly captured in a recent paper by Nobel Laureate James Buchanan: The Limits of Market Efficiency. As a pioneering figure in public choice theory, Buchanan did as much as anyone to highlight the fallibility of government authorities in being effective regulators. In this paper, however, he sets to balance the scales by showing that a) markets "work" only under certain legislative frameworks, and b) these frameworks are themselves devoid of forces that would make them inherently optimal. Here's a snippet:

Consider[...] the differences between the spontaneous emergence of a body of law, a set of rules, and the allocation of valued resources in the market process. In the latter, [...]opportunities for securing differential private rents and avoiding differential negative rents are open and available to prospective entrepreneurs-arbitrageurs, whose behavior, in itself, becomes part of the correction that efficiency conditions require. Contrast this process with application to law. Suppose that a law, rule, or convention emerges and exists, one that is recognized, even if by all participants, to be less enhancing to their well-being than a readily imagined alternative. The opportunity cannot, however, be exploited by single entrepreneurs-artibrageurs because of the nonpartitionability of law, as such. There is nothing comparable to the profit-loss dynamic of the market that will insure any continuing thrust toward more desirable outcomes. 

To conclude, I think that scepticism of government is absolutely justified in many cases, as I have tried to indicate at the beginning of this post and in a number of my previous posts. If there are market imperfections, it doesn't necessarily follow that government involvement will adequately address them. Indeed, it could exacerbate the situation and, frankly, it’s ridiculous to pretend otherwise. Where possible, I absolutely support community/individual management of resources above that of the State, just I support individual responsibility in many economic aspects. I also think that tort law can play an important role in controlling for localised environmental externalities. However, as per my reasons above, I disagree that regulations are inherently inefficient in comparison to a purely market-based system underpinned by tort law. Again, the danger is in applying blanket rules to complex situations that require evaluation on an individual basis.

THOUGHT FOR THE DAY: There is no silver bullet solution to solving our many, and often complex, environmental problems. Those that see tort law as some kind of panacea overlook the very real inefficiencies present in such a system. Consequently, torts remain very useful tools alongside regulatory measures for addressing environmental issues, but I don't believe that they can succeed by, or in of, themselves.

UPDATE: I completely forgot to talk about something that I'd originally meant to include in this discussion; the role that risk plays in limiting the effectiveness of pure market transactions. In particular, how different risk premiums are exacerbated by asymmetries of information, and how this can make it preferable to have some unilateral rule in place that guarantees us a minimum standard of protection from risk, which we cannot otherwise control for. This is very important in the context of justice administered ex post versus ex ante. As I wrote here:

[...] I much prefer driving in a country where standardised driver licenses and road-worthiness tests for vehicles offers me some insurance against risk-prone drivers. There's no way I control for who shares a highway with me, but at least I am reassured that their cars (say nothing of the drivers themselves) are expected to meet certain minimum standards. 

And, of course, I would suggest that "justice" administered ex post is, in many cases, a straggling third best; especially when it comes to more dramatic outcomes like severe injury and death. Don't get me wrong; there's plenty bad regulation out there... But I'd prefer (regulatory?) prevention than (courtroom?) "cure" when the latter involves putting a monetary value on matters that are inherently beyond valuation.

UPDATE 2: In an older blog post, Tyler Cowen points to an AER paper by Susan Rose-Ackerman, Regulation and the Law of Torts, which strongly supports the basic arguments I have made above. Speaking of Marginal Revolution bloggers, Alex Tabarrok co-authored this book a few years ago on the inefficiencies prevalent in the US tort system.

UPDATE 3: A follow-up, of sorts, here.
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[*] Daniel Kuehn has a really good series of posts in this regard, under the collective heading of calculation verses incentive problems.
[**] Two points additional bear mentioning. First, in all of the above cases claimants were afforded a fraction of the recompense that they were initially promised due, in large part, to the principles of corporate limited liability. In this matter, I am in essentially in agreement with the proponents of tort law that a system of limited liability encourages unduly risky behaviour. To get an idea of my views on limited versus strict liability, please see here. Second, I have seen tort proponents argue that transaction costs are subsidised by government in the case of regulation and therefore of equal weight to transaction costs incurred when markets are left to their own devices. This is a non sequitur. To use a simple example, if government bans the use of lead in petrol unilaterally then transaction costs have essentially been reduced to a minimum. Alternatively, think about how impossible it would be to track down the former owner of each and every plastic bag that happens to blow into your property versus government simply adding a tax to each bag that makes people utilise them in a far more effective and environmentally friendly way.

Daylight savings, cigarette bans and the freedom to choose

Over on the aguanomics blog, David Zetland has a post arguing that the concept of Daylight Savings Time (DST) is "rubbish". He says that it does not contribute towards energy savings and simply inconveniences people.

I'm pretty sceptical of the 'benefits' of DST myself, but felt compelled to comment on his assertion that "it wold be better (more flexible) for businesses to adjust work hours, instead of facing a command and control 'fix'". In essence, my point is that individual businesses are unlikely to adjust their own work hours, or have much freedom (i.e. scope) to do so in reality. Firms need to operate during "conventional" office hours because this is when everyone else is doing business. It just isn't profitable to break rank when it comes to this kind of thing. Deciding to open shop an hour later would be counterproductive in terms of profitability and competitiveness; you've essentially cut yourself off from the bulk of the marketplace for that entire period.

In these situations - where we're faced with norms that have become institutionalised - it's very difficult to establish the level of coordination that makes it profitable for a firm to change its work hours without some intervening force guaranteeing that everyone does the same. Or, at least some critical mass of firms that corresponds to a tipping point. Thus, if daylight savings does confer benefits (again, I'm certainly not convinced), the institutional inertia associated with the established system makes the market inflexible to adapt. In short, my behaviour is too dependent on the behaviour of others and the norms in society. This is closely linked to what Thomas Schelling described in discussing the problems of "micromotives and macrobehaviour"...

To give some brief anecdotal evidence, I mentioned the fact that, having worked in countries without DST, I can't really recall any companies changing hours of their own volition. (Flexible work hours -- e.g. the option to arrive between 9am and 9:30am -- don't count because firms arrange for overlapping cover. Someone has to be at the office at 9am and again until 5pm.)

Anyway, this got me on to the issue of cigarette bans and smoking laws, which I do consider a legitimate problem. I've been chewing on this for a little, since I sympathise with free market arguments over the primacy of private property and market incentives to create "smoke-free" clubs and restaurants if there is a need. Further, if non-smokers freely choose to frequent such places, exactly what externality does Government correct when it passes smoking legislation? However, while there's a seductive logic to these sort of arguments, things just don't seem to work like this in reality... Again, I can draw on my personal experiences.

Having spent most of my childhood in South Africa, I remember restaurants installing separate smoking sections only once they had been required to do so by law. Despite this convention having been in place for over a decade now, bars and nightclubs -- which do not fall under the same law -- have yet to follow suit. So it's not like the market hasn't had time to react. In my home city of Cape Town (and the rest of the country for that matter), I really can't recall a single bar or nightclub that has established smoke-free zones of their own accord. I've asked several friends and family members just to be sure and they can't name any either. It's the same for other areas of the world that I've visited where no smoking bans exist.

Public health issues of cigarette smoke aside, I think that this again boils down a matter of institutional inertia and a coordination problem that is limited by competitive behaviour. Nightclubs and bars may want to switch over to smoke-free environments, but would be nervous to lose clientèle. Further, the problem with these places of social gathering is that they represent, in effect, areas that we like to enjoy in common. I don't wish to exclude my smoking friends from the places that I frequent, and vice versa. (I think that this issue of "commons" is another reason to be sceptical of the "freedom to choose" argument in this particular instance.) Unfortunately, since there are inevitably some people already smoking in the club, there's little point in "polite" -- for want of a better word -- smokers going outside for a drag. Lastly, I'd suggest that it's not a matter of smoking being "socially unacceptable", but rather that these institutions have become so entrenched that we can't assume businesses will change their own rules, at least not on any significant scale.

THOUGHT FOR THE DAY: We should always question whether Government interventions really make us better off as a society. The rule of thumb is that we want less micromanagement and more freedom to choose for ourselves. However, market outcomes don't always play out as well as we'd like to think they will. As always, the proof of the pudding is in the eating.

UPDATE: Karl Smith agrees.

Carbon Price vs Technology (R&D) Initiatives

This coming in a few days late, but Rob Stavins continues with his series of excellent posts on environmental economics and policy instruments. In his most recent column, he discusses the need for substantive climate policy to go beyond the view that we should either establish a carbon price or pump money into technology R&D. Instead of being seen as substitutes, these two policy alternatives should be viewed as compliments to achieve meaningful emissions reductions...

Both are necessary but neither is sufficient:

For many years, there has been a great deal of discussion about carbon-pricing – whether carbon taxes or cap-and-trade – as an essential part of a meaningful national climate policy. It has long been recognized that although carbon-pricing will be necessary, it will not be sufficient. Economists and other policy analysts have noted that policies intended to foster climate-friendly technology research and development (R&D) will also be necessary, but likewise will not be sufficient on their own.

Stavins then lists some of the key elements that make a carbon price and technology polices, respectively, important.

For the former, his basic argument is that a carbon price (i.e. carbon tax or cap-and-trade) internalises the negative externalities of CO2 at the least cost to society; something widely agreed on by economists. It does this by establishing a level playing field that allows for decentralised decision-making by firms on how best to reduce their own emissions, while also overcoming problems of pollution heterogeneity. (In economics jargon, a carbon tax or cap-and-trade can ensure that marginal costs of abatement are equalised across producers... Which basically just means that we cut our pollution as efficiently as possible.)

However, while a carbon price is the most cost-effective means of reducing CO2 emissions, it falters in other areas... most importantly "R&D market failure". This essentially refers to the fact that firms are unwilling to make the necessary (i.e. efficient) levels of investment in R&D, because they won't capture the spillover effects that accrue to other firms from pioneering new technology. To bring it back to economic jargon, this time we are faced with a positive externality that is not sufficiently exploited. Or, as one of the top executives at Statoil put it when referring specifically to Carbon Capture and Storage (CCS): "There is a first-mover disadvantage, as the one who builds (later) will not make the same mistakes and learn from others."

In other words, we probably need active technology polices that aim to foster innovation and R&D directly. Stavins doesn't readily name many examples in his post, but they include things like targeted investment support and government research, as well as feed-in schemes for alternative energy sources. These issues all fall within the category of innovation economics, which is a very interesting field. (Unfortunately, the wiki entry on innovation economics that I've linked to here is pretty poor in my opinion. Nothing on lock-in and path dependency, learning effects and learning-by-doing, spillovers and network effects,...)

Before wrapping this post up, I'll say that focusing on direct technology support and investment has become increasingly popular recently. To name one prominent example, controversial environmental commentator Bjørn Lomborg raised more than a few eyebrows when he called for the establishment of a $100bn climate fund in late August... to be funded by a $250bn carbon tax, no less. (No matter how some sceptics were trying to frame it, this was certainly a stark departure from his previous position that climate change did not seem to warrant dramatic mitigating action, as this wouldn't yield a profitable return on investment.)

THOUGHT FOR THE DAY: Sometimes two weapons are better than one. Just ask He-Man...

Gun? Check!
Sword? Check!

"South Africa facing water pollution crisis"

Supplies, supplies.

(See what I did there?)

So back home, more and more people are cottoning on to the fact that the local water situation ain't looking too hot:

The Environment and Conservation Association said in a statement on Tuesday that it was estimated that in five years, almost 80% of the country's fresh water resources would be so badly polluted that no process of purification available in the country would be able to clean it sufficiently to make it fit for human or animal consumption.

[snip]

The impending disaster that would be created by acid mine drainage as well as sewerage and industrial pollution had on many occasions been brought to the attention of the government, with no positive results however, the association said.

[snip].

"We will need approximately R1m for [an extensive water monitoring project aimed at fully ascertaining the status of the country's freshwater reserves]. It is time that big businesses, especially those that rely on water for the production of their products like Coca Cola, SAB Miller, Windhoek Beer, all soft drink manufacturers and food producers, get involved and make a substantial contribution towards organisations like ours so we can save South Africa's water."

While I certainly appreciate efforts to create more awareness of SA's freshwater problem, the general stance as regards treatment still leaves much to be desired. I don't know much about The Environment and Conservation Association, but from their website it seems a pretty small outfit with no formal economics influence. (I'm also just a little dubious about the severity of their claim - 80% by 2015?? - but I'll leave those details aside for the moment.) Some brief thoughts:

1) Marginal Cost ≠ 0?, Marginal Benefit ≠ 0?

How about coming around to the fact that ascribing zero value to a resource inevitably leads to people treating it such (i.e. worthless)? We need to start charging water rates commensurate to the (marginal) costs of providing it. Before anyone complains that "water is a human right!"; yes, I agree.[*] That's why I want to make sure we manage it properly. There a number of available pricing structures to achieve this, while still protecting the poor and ensuring that everyone has access to some basic, "human rights" level of water. Two of my preferred candidates: (increasing) block-rate pricing and two-part tariffs (a la cellphones).

2) Property rights anyone?

If mines and industry are polluting your water, then call up your lawyer. Or, if you are worried about the protracted inefficiencies of the legal/tort system, you can try to minimise transaction costs by pressuring government into regulation. Okay, it's hardly that simple in the real world - the article makes this very clear - but don't shoot the messenger. I'm trying to make the point that there is more than one option available to prevent corporations from enjoying a free lunch at our expense. I also don't think that the public vs privatisation argument should be a barrier to agreeing about basic property rights in this context... I'm less concerned with who owns a water source, than the fact that they (Govt, business, whoever) are within their rights to prevent an external party from ruining it for the purpose for which it was intended.

3) I'm glad that the ECA is looking to get some of the big beverage companies on board in its campaign. However, you don't need to appeal to their sense of civic duty if you manage to get the first two points right (pricing and property rights). In other words, you're better off appealing to their own self interest. The same goes for residential consumers. Individuals aren't going to conserve water until it starts hurting their pocket, or runs them into trouble with the law.

THOUGHT FOR THE DAY: South Africa has vulnerable freshwater supplies that require careful management. Public awareness is the first step, but it's ultimately economic incentives that will ensure the sustainable use of the country's water resources. I'm happy to see steps in the right direction, but big problems require big actions. Until I stop seeing studies and articles like this, I'm going to remain of the opinion that there's a lot more that can and needs to be done.

[UPDATE: Apparently officials aren't particularly impressed by the report. I've seen this movie before... Although, in fairness, I've already mentioned my scepticism over the extent of the ECA's claims.]

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[*]Agree... up until a point, that is. As Peter Braebeck puts it: 

"I think that [the question of water as a human right] is a very, very crucial question and it is being brought forward by some NGOs in a very simplistic manner. They are saying water is a human right; therefore, it's not a commercial material.

My answer to this is, yes, you're right. Water is a human right.

The 25 liters of water that we need as a minimum, as a person, in order to live decently[...]. Yes, this is a human right. But I don't think it's a human right to fill up my swimming pool, to wash my cars, to water the golf course, or even to water the garden."