Heather Warner
Dec. 6, 2000
Economics 100 (02)
Professor Gabriel
Economists often talk about
letting the economy work through the mechanism of the free market
versus government control and regulation. Some believe that if
the market is allowed to "do its thing" unprohibited
and without government interference, then resources will be allocated
efficiently, equilibrium will be found, and so on… However,
this is not always possible. Of course, government control is
not always perfect either. Thus, it would seem that at times the
market may be more appropriate than the government; other times
the government may be needed because the market is not able to
function properly; and other times a combination of the two working
in unison may provide the best and most effective and efficient
answers.
The market may fail if there
is, for example, "imperfect market structure" and thus
the presence of "monopoly power." In this case then
chances are that the prices that are established will be higher
than "necessary" and the quantity supplied less than
"adequate" to meet the needs and desires of people.
The market may also fail if there is the presence of "public
goods." This is when something is characterized by being
"nonexcludable" and "nonrival." That is to
say that anyone who wants to can "consume" the good
or service and that everyone can have as much of it as they want,
even if they have not paid for the use of it. The presence of
"externalities" can also cause the market to be inefficient
because the private costs and social costs are not equal. Pollution
is one such problem where the market may or may not be able to
function "properly," since there seems to be a divergence
between individual and collective incentives.
Property rights determine
how producers and consumers use environmental resources. In a
capitalist economy, property rights are vested with individuals.
Oftentimes the source of environmental problems in a capitalist
economy is from the pursuit of profits, which means that the market
system itself is not working well and other things may be needed
to help. Property rights that would lead to efficient allocations
have four main characteristics: universality, exclusivity, transferability,
and enforceability. "Universality" is when all resources
are privately owned and the entitlements are specified. "Exclusivity"
refers to the fact that all benefits and costs due to owning and
using the resource should be directed solely at the owner. "Transferability"
refers to the fact that all property rights should be transferable
from one owner to another in voluntary exchange. And finally,
"enforceability" simply means that all property rights
should be secure from involuntary seizure by others. With all
of these in place, one would certainly use a resource efficiently
because a decline in the value of the resource would represent
a personal loss. Furthermore, individuals will only buy as much
of something so that the marginal cost is equal to the marginal
benefit that they receive from purchasing it. And thus, with these
defined property rights in place the market indeed would prevail.
Environmental problems are
one important class of circumstances in which the market economic
system is not always efficient. This occurs most especially because
of the presence of externalities, and the fact that the agents
making the decisions do not bear all of the consequences of their
actions, and thus do not take all of the costs into account when
they makes their decisions. Basically whenever the welfare of
some agent directly depends not only on its own activities but
also on activities under the control of some other agent, then
an externality exists. Usually the societal cost will be greater
than the private cost because society considers both the cost
of pollution and the cost of producing a product (the price that
they pay for it when they purchase it). The general conclusions
that can be made about market allocations of commodities causing
pollution externalities are as follows: In general, the output
of the commodity is too large; too much pollution is produced;
the prices of products responsible for the pollution are too low;
as long as the costs are external, no incentives for ways to yield
less pollution per unit output are introduced by the market; and
recycling and reuse of the polluting substances are discouraged
because release into the environment is so inefficiently cheap.
All the above ideas are ways
in which the market may fail, but it must be mentioned, even if
only briefly, that government failure can also arise, as improper
incentives can often be in place. Rent seeking is once such time
when resources are used in lobbying and other activities to help
ensure some legislative position. But the benefits gained to the
individual are greater than those gained by society as a while.
At any rate, in order to resolve
the inefficiencies that exist there are several methods that can
be used: negotiations, boycotts, strikes and other forms of labor
resistance. The courts can also be used to help establish property
rules and liability rules (however transaction costs must not
exceed the benefits that will be gained), if efficiency is desired.
But in order to do this there
must be ways to compare things. Often this is done with numbers
(prices, costs, benefits, etc…). Yet how can we possibly
put a price on the environment? Cost-benefit analysis is one way
to value the environment, and helps to determine which policy
choices are efficient. After all information for costs and benefits
have been collected then comparisons can be made and decisions
drawn-and want to be made where marginal benefits equal marginal
costs. Environmental problems exist when resource allocations
are inefficient or expect to leave future generations worse off.
It is necessary to find the appropriate social arrangement and
policies for dealing with the harmful effects. There is a necessary
role for cost-benefit analysis in environmental, health, and safety
regulation and policy-making.
The goal of an economic cost-benefit
analysis is to categorize and value all costs and benefits, now
and in the future, to society as a whole. There should be many
considerations when evaluating projects and cost-benefit analysis
is but one input into the decision-making process. Although this
process should not be used alone it is a valuable component of
the policy process even if in the end exact estimates could not
be obtained. At the very least it can help determine efficient
policies from inefficient ones-by providing a useful "complement"
to the other influences on political processes by helping to determine
the highest net benefit to society. Again, although cost-benefit
analysis might not be reliable enough to be used to fine-tune
a policy, it certainly is good enough to tell one if the benefits
from environmental control are large and worth pursuing. (In Erin
Brockovich the fact that each family is awarded a huge sum
of money, and that the Company is required to change its techniques
and clean-up the surrounding environment, proves that in this
case the benefits from environmental control outweighed the costs
of the environmental control).
To minimize possible abuses
of this technique, economists and environmentalists have come
up with a list of guidelines that can be followed and used:
1) Use uniform standards
2) Clearly state all assumptions
3) Evaluate the reliability of all data inputs as high, medium,
or low
4) Make projections using high, medium, and low discount rates
5) Show the estimated range of costs to all affected population
groups
6) Estimate the short-term and long-term benefits and costs to
all affected population groups
7) Estimate the effectiveness of the project or form of regulation
instead of assuming that
all projects and regulations will be executed with 100% efficiency
and effectiveness
8) Open the evaluations to public review and discussion
People might argue that cost-benefit
analysis makes it hard to measure the benefits of certain things
that are, for example, not of a "normal market." An
example is "recreation benefits" and this "problem"
can be gotten around either by using the "Clawson-Knetsh
Method" (which uses travel costs as people's willingness
to pay), or again-by using cost-benefit analysis in conjunction
with other techniques to avoid having results that are misconstrued
and misrepresentative. Many further argue that this type of analysis
leaves out the idea of morals, values, and ethics. However, this
can be "gotten around" (minimized) by using an appropriate
discount rate when performing certain calculations.
DeLong, Solow, and Butters
all provide arguments in favor of cost-benefit analysis This technique
is far from perfect. But to ignore its importance could be tragic
and foolish. It is an economic tool that needs to be used for
comparing the desirable and undesirable impacts of proposed policies-helping
to highlight the trade-offs involved in making different kinds
of social investments.
The role of information is
key to structuring an appropriate relationship between humankind
and the environment. Cost-benefit analysis takes information in,
uses the available information, and then in the end provides more
useful information for policy makers to have available at their
disposal when making decisions.
Despite this being a highly controversial subject, the very fact
that in 1996 economists with varying views about cost-benefit
analysis were able to come together and draw a unanimous conclusion
about this topic of cost-benefit analysis as being an important
tool and technique in policy making seems to be an important step
in the right direction for the environment. On P. 79 of Tietenberg's
book Environmental Economics and Policy the quotation is
as follows,
Contingent Valuation Analysis
(CV) is another difficult and controversial means of environmental
resource valuation. Yet many economists regard it as the only
valid means of measuring values in environmental policy. It is
a survey method for assessing monetary value that is particularly
useful for items which don't have object market prices-they aren't
of what we would call "normal market" (as mentioned
above). This method seems to have gained greater legal recognition
during the last few years as courts have increasingly acknowledged
the need to consider all environmental assets, including publicly
owned natural resources for which market value is inadequate.
In this sense it is felt that more adequate estimates can be assessed
and used as helpful "tools" in decision-making processes.
There are definitely both
many strengths and many weaknesses to this methodology, as there
are with cost-benefit analysis too. In using CV, policy makers
can use the information obtained to more clearly represent the
needs of the environment and the wants of the people. It can be
used to make the cost-benefit analysis more accurate and thus
the policies adopted more efficient.
Granted, there may be biases
in the survey responses (strategic bias, information bias, starting
point bias, and hypothetical bias), but these can be minimized
through various techniques. Although there is probably no way
to completely eliminate the biases, they can be minimized to the
point where they may be seen as negligible. Also, on P. 67 of
Tietenberg's book he stated that experimental work has been done
and it determined that although biases exist, they can be kept
small with suitably designed survey instruments. Therefore it
would seem to be that the costs that the biases impose on making
the results a bit inaccurate are small in comparison to the gains
and benefits which might be obtained from using CV to help with
decision-making processes.
Some might wish to argue that
no number is better than an incorrect number. At first I disagreed
with this. I believed that any number was good because it could
serve as a starting point, providing and acting like a guideline
for policy makers. To some extent I still do agree with my original
inclination. However, only if it is not solely relied upon in
the decision-making process.
I certainly do not advocate
complete reliance on this method-in fact I believe that doing
that would be quite foolish and stupid. It should be used in conjunction
with experts. However we must also be aware of the fact that like
the biases which may present themselves in the CV method, so too
can experts have biases. Hopefully, however, by using experts
and the public together, a reasonable solution can be obtained.
Some would argue that this is expensive, and thus the added expense
would be inefficient. Although it may be expensive to employ both
methods (CV and experts) I do not believe that expense should
prevent the use of both, nor do I believe that in the end it would
prove to be expensive or inefficient, especially if it avoids
our having to correct for mistakes in the long run. Plus, we live
on this planet and it is pretty important to make good decisions
because otherwise someday we might not be left with much of anything.
Therefore, the extra money and added time and effort seem appropriate
to me.
It also seems that the new
and strict guidelines of the NOAA are helping to inform people
a bit more and eliminate some bias and other areas that people
originally saw to be problematic with CV. It is crucial, for example,
that people be made aware of the fact that were such and such
a proposal to be passed, they would be expected to pay higher
taxes. This would certainly ensure the most "truthful"
responses from the respondents possible, since they would be directly
affect by the taxes, even if they were not directly or immediately
affected by the environmental problem.
Education really is key to
all of this-as it is for most everything in life. If everyone
were fully educated on all topics and with all sides of the situation
taken into consideration, then the proper estimates could surely
be obtained. It might therefore be interesting and good to start
having more billboards, programs on TV, classes in school, etc…
dealing with environmental issues-presenting both sides-so that
in the future more "exact" valuations could be made.
CV is the best method that we have right now for valuing non-marketed
values, and thus it should be used. (Of course I wish that we
could always overvalue the environment so that all results are
in favor of the environment).
Interestingly enough, from
the studies that have been done, those times when we weighed the
environmental side very heavily, it ended up benefiting everyone
in the end (even if originally/immediately the benefits were not
seen). For example, companies who had to decrease carbon monoxide
levels and other pollutants may have incurred some high costs
at first, but in the end it forced them to be more efficient and
in the end they were producing things at a smaller cost, plus
the environment obviously benefited from the reduction in pollution
as well as the population in general.
Also, Eco-Tourism is increasingly
becoming a great way for countries to make money. Rather than
destroying everything much money could be made by just setting
the land aside and preserving it for people to see the pretty
areas. Why waste our time doing an analysis? You might be tempted
to say, because the opportunity cost of not doing something else
with the land is too great. However, as less and less land seems
to be preserved these days, those areas that we do preserve have
greater value and could in the future attract many visitors and
thus profits.
Studies have also shown that
once in the future we always realize that we should have done
more sooner. What ends up happening is that we spend even more
money trying to fix things. But oftentimes we have gotten to the
point of no return and despite trying to fix the "problems"
and spending a lot of money, we cannot. Think of how costly this
all is. We try to fix a problem (spending a lot of money) and
yet oftentimes still are unsuccessful despite the large amount
of money that we spent in trying. In my opinion we just need to
save the environment. We need to consider it irreplaceable. What
is it worth when it is gone (ie: the Carrier Pigeon)? We need
to stop things now. The problem is one in that we live in a society
where people are out for themselves, and if this is the mentality
then the environment will always be undervalued.
Why do I mention all of this?
In the movie Erin Brockovich, Erin Brockovich and Ed Masry
decide to help the inhabitants of the town of Hinkley to obtain
some money from the "Pacific Gas & Electric Company"
(PG&E) for the pain and suffering that the inhabitants may
have incurred from the actions of PG&E. Many people have become
sick due to ground water being contaminated by Chromium 6 which
PG&E used to prevent corrosion in the coolants of their plants.
This $28 Billion Corporation lied to the families about the harmfulness
of this highly toxic carcinogenic. To them, they probably believed
that it was cheaper to continue with its use and pay the families
off-they had hoped that they might be able to buy each home for
only $250,000. What they didn't bargain for was the price that
they are expected to pay in the end. A grand total of $333 million
(one family, the Jensen Family for example, is awarded $5 million).
This sum of money may seem
enormous, and indeed it is, but it is because so many other factors
must be considered and so that future contamination by the corporation
is deterred. The families are awarded this money not only for
the sicknesses that they incur, but also for such things as the
reduced value of the land which they now live on, the deaths of
other organisms, the effects on the surrounding environment, etc...
Were the inhabitants to decide to sell their homes and move elsewhere,
who would want to buy this land that is polluted, and so on? In
the end it would seem that this enormous sum of money causes the
PG&E corporation to rethink what it is doing, as we are told
that they started lining the ponds that they dump the excess water
into so that now they are preventing it from flowing into the
ground water. The costs to the environment are just as important
as the costs inflicted on the individuals by the company's carelessness
and deliberate polluting. Although the movie does not focus as
much on the environmental aspects of what the company is doing
(it focuses more on the harms caused to the people), in today's
society these problems are very real too, and they must be considered
by all. Also, we (as the viewers) are not told exactly how the
amount of $333 million was arrived at, but we can assume that
it involved some type or alteration of the above mentioned techniques.
Some companies today will
continue to pollute because for them it is cheaper to pay the
clean-up costs than to install new, more environmentally friendly
equipment. It is sad that we live in a society where this is possible,
but it exists all the same. It is truly despicable that the system
would work in such a way as to make polluting more appealing than
not polluting. And in fact, is the sum arrived at in the movie
of $333 million even large enough? After all this is a company
that is worth $28 billion, so to them it may seem like pocket
change. No one should be allowed to pollute the environment and
yet in finding the efficient ways to do things, pollution will
always probably exist, for sometimes the costs of stopping pollution
will outweigh the benefits of doing it. In other words, what may
end up being the efficient ways of doing things may not always
end up being the best for the environment.
Tietenberg, Tom. Environmental Economics and Policy. (Second
Edition). Reading,
Massachusetts: Addison-Wesley Educational Publishers
Inc. 1998.