Public Choice and the Environment: From the Frying Pan to the Fire

Bruce Yandle

Introduction

Some environmental problems seem tough to understand and deal with; others seem simple.

Uncontrolled discharge of sewage, emissions of suspended particulates, disposal of hazardous wastes into landfills seem simple.

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Introduction

Simple solutions? Why not hold the polluter responsible for

common law violation of adjoining environmental rights and either shut the polluter down or make the polluter pay damages?

Since simple solutions are rejected, it suggests that environmental regulation is not just about improving environmental quality.

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Frying Pan into the Fire

Having abandoned environmental protections afforded by common law, city and state regulations, and regional compacts in favor of federal control, have we jumped from the frying pan into the fire?

Collective decision-making—politics—is the complicating factor.

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Leaky Pipes

Federal environmental regulation has been less than successful—pipes are still leaking after 35 years.

The policies are the result of conscious decisions.

One must conclude that leaky pipes are the desired outcome.

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II. The Simple Analytics: Before Politics Enters A . Two Approaches to the Problem: Pigou

and Coase Pigou and externalities mean gov’t solutions:

standards specifying a specific technology. performance standards. economic incentives such as taxes or emission

fees, or tradable permits. Government acts to correct a “market failure.”

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Coase

Focusing on the same plant, pollution that imposes unwanted costs is evidence of a violated property right, if the right exists in the first place. Rather than call on the government for

technologies, controls and permits, the property-right economist calls for institutional change.

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Institutional Change

Define environmental rights or enforce those in place.

With rights defined and protected, let the related parties deal with the problem. This may mean bargaining between affected

landowners, applying the common law of nuisance, or the purchase of easements, or the purchase of the affected land.

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B. The Choice of Instruments

To choose government control (Pigou and externalities) means a second choice: which instrument?

Regulate inputs through a technology standard. Performance standards set maximum allowable

emissions. Taxes or fees on emissions above the standard.

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1. Performance Standards

Performance Standards set specific goals and penalties for not achieving those goals.

Outcomes must be monitored and penalties applied. Monitoring costs are relatively high

Regulated firms have incentives to find the cheapest abatement costs. Firms have competitive incentives to find cheap

abatement methods. Patents matter a great deal.

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2. Technology Standards

Large amounts of information must be studied to select technologies.

Start-up costs are high, but monitoring costs are low.

Inputs, not outcomes, matter most. Political influence matters a lot, patents matter

less. Firms have no incentive to invest in newer, cleaner

technology.

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3. Economic Instruments

A standard must be set, and then prices or taxes must be determined to get the right discharge. Emissions must be monitored and bills issued and

collected. Theoretically, different prices for different

polluters. Polluters have incentives to find ways to reduce

discharge or relocate to reduce damage costs.

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Relative Cost Analysis

Information Monitoring/

Administration

Lobbying

Performance Low High Low

Technology High Low High

Economic High High Low

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C. Choosing Property Rights Enforcement

“The incentives that come from predicting with some confidence that property rights will be protected cause cost-avoiding people to minimize the harm they impose on others.”

How would your neighbor react if you dumped trash over the fence into her yard?

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Pollution Liability Insurance

Firms seeking to minimizing the risk of common law suits from environmental spills and accidents purchase liability insurance to cover future claims.

Insurance companies require the insured to install state-of-the-art equipment and management systems that reduce hazards. Insurance companies monitor performance.

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A Choice: Pigou vs. Coase

The choice—public law and regulation or private law and markets—depends largely on the extent to which efficiency-enhancing forces survive when steps are taken to move from the world of theory to the world of practice.

So, how are public choices made?

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III. What Happens When Public Choices Are Made?

If federal politicians want efficient pollution reduction, they would blend performance standards with permit trading, and the leaks would be stopped.

So why is command-and-control the method most often adopted? Why do the pipes still leak?

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A. What Public Choice Tells Us A competitive industry has something to gain

from command-and-control regulation: the industry can be cartelized. C-and-C sets output constraints, mandates

methods, and restricts expansion and entry. No fees or taxes are placed on pollution. Older plants are generally treated better than

newer ones.

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What Do Politicians Gain?

Command-and-control regulations fail to patch the leaky pipes. Performance standards and emission fees do not

limit entry. Industries act as special-interest groups seeking

rents (or profits) from government. Politicians are rewarded for their support of

special interests.

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Who Wants National C-and-C?1) Industry wants national uniform technology

(input) standards that limit entry. State regulation means non-uniform standards.

2) Environmentalists oppose fees and permits as licenses to pollute. Equivalent of selling permits to commit murder?

3) National bureaucracy is manned by environmentalists that design and enforce the rules.

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Iron Triangle of Politics

Command-and-control regulation connects industry, environmentalists, the bureaucracy, and politicians by the famous iron triangle of politics. The purpose of environmental policy is all but

forgotten (has federal regulation worked?) Even today researchers find it difficult to get a

consistent set of time-series data on air and water pollution.

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Iron Triangle

In United States politics, "iron triangle" is a term used by economists to describe the policy-making relationship between the legislature, the bureaucracy, and interest groups.

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Bootleggers and Baptists

How do messages get organized and transferred from special interests to politicians?

Often two interest groups emerge together, asking for the same outcome when environmental rules are being written. One group takes the high road calling for a better life. The other takes the low, looking for higher profits.

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Bootleggers & Baptists, cont’d Environmentalists oppose emission fees and

permits. They favor C-and-C.

Industries seeking cartelization join the chorus.

CAA 1977 and SO2 reductions Environmentalists favored scrubbers b/c it would

lower the demand for stripped-mined coal in the West.

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Eastern Coal Bootleggers

Eastern coal companies didn’t want to lose market share to clean (low-sulfur) western coal.

United Mine Workers Union didn’t want to lose jobs in the Eastern coal mines.

Mandating scrubbers for all coal-fired electric generating plants—whether the coal burned produced sulfur oxides or not—linked the environmentalists (Baptists) and bootleggers (eastern coal industry).

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Leaky Coal Pipes

Because they were required to install scrubbers, Midwestern electric utilities switched back to dirty (high-sulfur) coal.

Emissions of SO2 increased. The scrubber requirement extended the life of

older, dirtier coal-fired plants.

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Conclusion

Federal environmental regulation is costly and the leaky pipes have not been fixed.

Environmental regulation has been designed to serve the special interests—industry, the bureaucracy, and environmental groups—not to produce environmental improvement. To the extent that we get a cleaner, rather than a

dirtier, environment it’s because the costly regulations fix a few pipes as an ancillary benefit.

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