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. 2

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. 3

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. 4

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. 5

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.” 6

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. 7

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. 8

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. 9

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. 10

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. 11

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. 12

Relative Cost Analysis InformationMonitoring/ Administration Lobbying PerformanceLowHighLow TechnologyHighLowHigh EconomicHigh Low 13

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? 14

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. 15

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? 16

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? 17

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. 18

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. 19

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. 20

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. 21

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. 22

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. 23

Bootleggers & Baptists, cont’d Environmentalists oppose emission fees and permits.  They favor C-and-C. Industries seeking cartelization join the chorus. CAA 1977 and SO 2 reductions  Environmentalists favored scrubbers b/c it would lower the demand for stripped-mined coal in the West. 24

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). 25

Leaky Coal Pipes Because they were required to install scrubbers, Midwestern electric utilities switched back to dirty (high-sulfur) coal. Emissions of SO 2 increased. The scrubber requirement extended the life of older, dirtier coal-fired plants. 26

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. 27