Apologies to those of you who have missed me the last few weeks (hi mom!) as I have recovered from taking care of some lingering neck issues from my years of head banging to 80's hair bands. I'm back on my feet (computer) and ready to go (from the confines of my family room).
Anyway, I know John posted about our article that (finally) came out in the Review of Environmental Economics and Policy, describing the set of issues upon which a sample of AERE members appear to have consensus, and those for which they don't. Here are a few highlights from the survey in light of President Trump's budget, keeping in mind that the survey was conducted before the thought of a Trump presidency was even a twinkle in the eye, and some of my thoughts on the results.
- 96% of respondents feel that unregulated markets do not provide public goods in optimal quantities.
Thought: I contend that many people who advocate for free markets fail to recognize the important distinction between 'free' markets and 'unregulated' markets. From most economists' perspectives, a truly 'free' market is a market in which all of the costs and benefits associated with production and consumption (current and expected future) are fully encumbered by actors in that market today.
Ok, try this:
'Free' markets have no unintended consequences.
Still too technical?
OK, how about one more:
'Free' markets have no spillovers.
I could go one, but hopefully you get the point. If there are benefits or costs that come from making or consuming something, and those benefits or costs can't or aren't captured in the market from which they originate, the market is failing to do it's job. That's why we call it a market failure.
An externality occurs when a cost or benefit from making or consuming something ends up costing or benefiting someone else, and that someone else has no choice in the matter. For example, the health effects of air pollution from coal-fired electricity production in Ohio on the good people of Boston (I assume there are at least some good people in Boston), or the effects of second-hand smoke on those stuck in an airplane with a smoker, or the spill-overs from improved workforce productivity and social benefits of decreased crime from increased education.
Each of these is an example of a cost or benefit that is generated by activity in a market, but spills over to people outside the market. The result is that, in these cases, unregulated markets tend to underproduce good things and overproduce bad things (too much pollution, too much second-hand smoke, too little education).
Why then don't the people in the markets, through generosity, just do the right thing?
Unfortunately market forces are powerful. If a good-hearted electricity producer in Ohio decided to voluntarily absorb the costs of pollution, the Ohio electricity-producer's costs of production will go up. The producer then has the choice of trying to charge higher prices to those buying electricity, or settle for lower profits. If they choose to raise prices, they are now at a competitive disadvantage to the less-good-hearted producers. Most consumers don't really know (or care?) where they get their electricity, so they are going to choose to buy from the cheapest seller, which now causes a big dilemma for the good-hearted producer: raising prices is off the table, so I either settle for lower profits or I abandon my morals and pollute.
Stakeholders are going to be less than pleased with lower profits, to the point that voluntarily lowering profits is not a long-term sustainable business strategy. So ruling that out, the good-hearted producer has to either pollute or shut down.
Sorry, that was a long way to go to make the point that this is NOT a 'free' market. It is an 'unregulated market.' And in the case of an externality, an unregulated market will overproduce bad things and underproduce good things (in the case of education, do you consider the positive benefits you provide to society when you decide how much education to get? Or do you just consider your personal benefits?).
That is why, 96% of AERE members who responded to our survey think that unregulated markets fail to provide optimal quantities of public goods (an extreme form of externalities). And it is also why:
Eighty-percent of environmental economists surveyed think cutting EPA regulations will not benefit the U.S. economy
Environmental economists are not market-killers. In fact, most are advocates for truly free markets: markets that fully capture all benefits and cost of production and consumption through market-based regulations. Afterall,
Eighty-six percent of respondents agree that emissions taxes or marketable emissions permits are a more economically efficient approach to pollution control than emissions standards.
Sensible market-based regulations make sense.