Free To Choose: A Personal Statement – Charter 7 : Who Protects the Consumer?(5)
ENVIRONMENT
The environmental movement is responsible for one of the most rapidly growing areas of federal intervention. The Environmental Protection Agency, established in 1970 “to protect and enhance the physical environment,” has been granted increasing power and authority. Its budget has multiplied sevenfold from 1970 to 1978 and is now more than half a billion dollars. It has a staff of about 7,000. It has imposed costs on industry and local and state governments to meet its standards that total in the tens of billions of dollars a year. Something between a tenth and a quarter of total net investment in new capital equipment by business now goes for antipollution purposes. And this does not 17 214 count the costs of requirements imposed by other agencies, such as those designed to control emissions of motor vehicles, or the costs of land-use planning or wilderness preservation or a host of other federal, state, and local government activities undertaken in the name of protecting the environment.
The preservation of the environment and the avoidance of un- due pollution are real problems and they are problems concerning which the government has an important role to play. When all the costs and benefits of any action, and the people hurt or benefited, are readily identifiable, the market provides an ex- cellent means for assuring that only those actions are under- taken for which the benefits exceed the costs for all participants.
But when the costs and benefits or the people affected cannot be identified, there is a market failure of the kind discussed in Chap- ter 1 as arising from “third-party” or neighborhood effects.
To take a simple example, if someone upstream contaminates a river, he is, in effect, exchanging bad water for good water with people downstream. There may well be terms on which the people downstream would be willing to make the exchange. The problem is that it isn’t feasible to make that transaction the subject of a voluntary exchange, to identify just who got the bad water that a particular person upstream was responsible for, and to require that his permission be obtained.
Government is one means through which we can try to com- pensate for “market failure,” try to use our resources more effec- tively to produce the amount of clean air, water, and land that we are willing to pay for. Unfortunately, the very factors that produce the market failure also make it difficult for government to achieve a satisfactory solution. Generally, it is no easier for government to identify the specific persons who are hurt and benefited than for market participants, no easier for government to assess the amount of harm or benefit to each. Attempts to use government to correct market failure have often simply substi- tuted government failure for market failure.
Public discussion of the environmental issue is frequently char- acterized more by emotion than reason. Much of it proceeds as if the issue is pollution versus no pollution, as if it were desirable and possible to have a world without pollution. That is clearly Who Protects the Consumer? 215 nonsense. No one who contemplates the problem seriously will regard zero pollution as either a desirable or a possible state of affairs. We could have zero pollution from automobiles, for ex- ample, by simply abolishing all automobiles. That would also make the kind of agricultural and industrial productivity we now enjoy impossible, and so condemn most of us to a drastically lower standard of living, perhaps many even to death. One source of atmospheric pollution is the carbon dioxide that we all exhale.
We could stop that very simply. But the cost would clearly ex- ceed the gain.
It costs something to have clean air, just as it costs something to have other good things we want. Our resources are limited and we must weigh the gains from reducing pollution against the costs. Moreover, “pollution” is not an objective phenomenon. One person’s pollution may be another’s pleasure. To some of us rock music is noise pollution; to others of us it is pleasure.
The real problem is not “eliminating pollution,” but trying to establish arrangements that will yield the “right” amount of pol- lution: an amount such that the gain from reducing pollution a bit more just balances the sacrifice of the other good things— houses, shoes, coats, and so on—that would have to be given up in order to reduce the pollution. If we go farther than that, we sacrifice more than we gain.
Another obstacle to rational analysis of the environmental issue is the tendency to pose it in terms of good or evil—to proceed as if bad, malicious people are pouring pollutants into the atmo- sphere out of the blackness of their hearts, that the problem is one of motives, that if only those of us who are noble would rise in our wrath to subdue the evil men, all would be well. It is always much easier to call other people names than to engage in hard intellectual analysis.
In the case of pollution, the devil blamed is typically “busi- ness,” the enterprises that produce goods and services. In fact, the people responsible for pollution are consumers, not producers.
They create, as it were, a demand for pollution. People who use electricity are responsible for the smoke that comes out of the stacks of the generating plants. If we want to have the electricity with less pollution, we shall have to pay, directly or indirectly, a 216 high enough price for the electricity to cover the extra costs.
Ultimately, the cost of getting cleaner air, water, and all the rest must be borne by the consumer. There is no one else to pay for it.
Business is only an intermediary, a way of coordinating the ac- tivities of people as consumers and producers.
The problem of controlling pollution and protecting the en- vironment is greatly complicated by the tendency for the gains and losses derived from doing so to fall on different people. The people, for example, who gain from the greater availability of wilderness areas, or from the improvement of the recreational quality of lakes or rivers, or from the cleaner air in the cities, are generally not the same people as those who would lose from the resulting higher costs of food or steel or chemicals. Typically, we suspect, the people who would benefit most from the reduction of pollution are better off, financially and educationally, than the people who would benefit most from the lower cost of things that would result from permitting more pollution. The latter might prefer cheaper electricity to cleaner air. Director’s Law is not absent from the pollution area.
The same approach has generally been adopted in the attempt to control pollution as in regulating railroads and trucks, con- trolling food and drugs, and promoting the safety of products.
Establish a government regulatory agency that has discretionary power to issue rules and orders specifying actions that private enterprises or individuals or states and local communities must take. Seek to enforce these regulations by sanctions imposed by the agency or by courts.
This system provides no effective mechanism to assure the bal- ancing of costs and benefits. By putting the whole issue in terms of enforceable orders, it creates a situation suggestive of crime and punishment, not of buying and selling; of right and wrong, not of more or less. Moreover, it has the same defects as this kind of regulation in other areas. The persons or agencies regulated have a strong interest in spending resources, not to achieve the desired objectives, but to get favorable rulings, to influence the bureaucrats. And the self-interest of the regulators in its turn bears only the most distant relation to the basic objective. As always in the bureaucratic process, diffused and widely spread Who Protects the Consumer? 217 interests get short shrift; the concentrated interests take over. In the past these have generally been the business enterprises, and particularly the large and important ones. More recently they have been joined by the self-styled, highly organized “public interest” groups that profess to speak for a constituency that may be utterly unaware of their existence.
Most economists agree that a far better way to control pollution than the present method of specific regulation and supervision is to introduce market discipline by imposing effluent charges. For example, instead of requiring firms to erect specific kinds of waste disposal plants or to achieve a specified level of water quality in water discharged into a lake or river, impose a tax of a specified amount per unit of effluent discharged. That way, the firm would have an incentive to use the cheapest way to keep down the effluent. Equally important, that way there would be objective evidence of the costs of reducing pollution. If a small tax led to a large reduction, that would be a clear indication that there is little to gain from permitting the discharge. On the other hand, if even a high tax left much discharge, that would indicate the reverse, but also would provide substantial sums to compen- sate the losers or undo the damage. The tax rate itself could be varied as experience yielded information on costs and gains.
Like regulations, an effluent charge automatically puts the cost on the users of the products responsible for the pollution. Those products for which it is expensive to reduce pollution would go up in price compared to those for which it is cheap, just as now those products on which regulations impose heavy costs go up in price relative to others. The output of the former would go down, of the latter up. The difference between the effluent charge and the regulations is that the effluent charge would control pol- lution more effectively at lower cost, and impose fewer burdens on nonpolluting activities.
In an excellent article A. Myrick Freeman III and Robert H. Haveman write, “It is not entirely facetious to suggest that the reason an economic-incentive approach has not been tried in this country is that it would work.” As they say, “Establishment of a pollution-charge system in conjunction with environmental quality standards would resolve 218 most of the political conflict over the environment. And it would do so in a highly visible way, so that those who would be hurt by such a policy could see what was happening. It is the open- ness and explicitness of such choices that policy makers seek to 18 This is a very brief treatment of an extremely important and far-reaching problem. But perhaps it is sufficient to suggest that the difficulties that have plagued government regulation in areas where government has no place whatsoever—as in fixing prices and allocating routes in trucking, rail travel, and air travel—also arise in areas where government has a role to play.
Perhaps also it may lead to a second look at the performance of market mechanisms in areas where they admittedly operate imperfectly. The imperfect market may, after all, do as well or better than the imperfect government. In pollution, such a look would bring many surprises.
If we look not at rhetoric but at reality, the air is in general far cleaner and the water safer today than one hundred years ago.
The air is cleaner and the water safer in the advanced countries of the world today than in the backward countries. Industrial- ization has raised new problems, but it has also provided the means to solve prior problems. The development of the auto- mobile did add to one form of pollution—but it largely ended a far less attractive form.