Here is another article on the potential economic impacts of climate change policy in NC. Headline: Study sees boon in climate change.
I spent a lot of time yesterday worrying about the details of the results. I overlooked one simple concept: additional jobs created by climate change policy are COSTS TRANSFERS, not benefits. Here is the short story from yesterday:
Using a simple demand and supply analysis, government regulations ... will increase the costs of production as firms switch from low cost production technologies to high cost technologies .... The increased production costs will decrease the supply of goods and services and increase prices.
The benefits and costs associated with this policy are measured as the changes in consumer surplus and producer surplus in the related markets and the non-market impacts (i.e., the effects on health, recreation, etc. that might arise from the environmental policy. Here is an example of the sort of study that measures the benefits of climate change policy.
Jobs and income are not parts of benefit-cost analysis of environmental policy for a few reasons.
First, jobs and income result in the labor markets. Environmental regulation is mostly targeted at product markets. Considering both labor and product markets could result in double counting. According to the national income accounting identity, income is equivalent to, and another way of measuring, expenditures. In order words, national income equals gross domestic product. Adding the two together would generate a $26 million economy for the U.S.
Second, and related to the first, all (or most) of the market benefits and costs of a government policy can be measured in the market that is primarily regulated. Consideration of secondary market impacts will result in double-counting. The labor markets are the secondary markets that are related to the regulated primary markets.
Third, jobs and income is a macroeconomic issue. Very few environmental and other microeconomic government policies are going to nudge the unemployment rate and labor force participation rate. During the 1970s environmental regulation was partially blamed for the stagflation of high inflation and high unemployment. However, we still have the Clean Water Act and the Clean Air Act and prices are low and unemployment is low. My guess is that in the long run, climate change policy won't have much impact on the unemployment rate. Inflation is another issue.
So, to get back to my first point (and the rest of this post is going into our 101 pages). Increases in the number of jobs are costs of many environmental policies.
Consider the standard demand and supply diagram with pollution
(click on the thumbnail to the right for a bigger image). An
unregulated market leads to equilibrium price and quantity determined at the
intersection of the supply, or marginal private cost (MPC), curve and the
demand curve: P1, Q1.
Consumers and producers enjoy the gains from this equilibrium. The consumer surplus is the difference between willingness to pay (height of the demand curve) and price: area a + b + c + d. You enjoy consumer surplus every time you buy something and get a "good deal."
The producer surplus is the difference between the revenue earned on each unit (P1) and its marginal cost of production: area f + g + h (note that f includes the tiny triangle below P1 and above the MSC curve). Producer surplus is equivalent to profit without the fixed cost (e.g., monthly lease payments that don't change with output).
Unfortunately, production of Q generates some harmful side (i.e., external) effects
such as fewer healthy days, fewer recreation opportunities, etc:
marginal external cost = MEC. If these costs are constant then the full
costs to society of production of Q is the marginal social cost curve:
MSC = MPC + MEC. The external costs of Q1 are equal to area c + d + e +
f + g + h. (Nothing in the conclusions changes if the MEC is increasing in Q0.
Environmental regulation is designed to get firms to "internalize
the externality" by considering the external costs of production. If
firms face a constant pollution tax on each unit of output so that they face
production costs equivalent to the MSC curve then the new market
equilibrium will be P2, Q2. The regulated product market will have a
higher price and lower quantity.
At the new equilibrium, consumer surplus is area a and producer surplus is h. Government revenue is area b + c + f. The deadweight loss (DWL) of the tax is d + g (poof!). However, the avoided external cost is equal to d + e + g. Therefore, the net benefit of the environmental regulation is d + e + g - d - g = e > 0 (MEC - DWL). A benefit-cost analysis would indicate that the pollution tax is an efficient policy.
Now imagine that the environmental policy is command and control (and assume that abatement costs of command and control are the minimum abatement costs): firms are required to use a clean technology. In this case the producer surplus becomes area b and area c + f + h is simply the higher production costs associated with pollution abatement: the increased capital and labor devoted to pollution reduction.
Jobs are lost as output decreases from Q1 to Q2 but jobs are gained with activities associated with pollution control. If the pollution control activities are more labor intensive than production of the good, then jobs might be created as a result of environmental regulation. Yet, these jobs represent an additional cost of production and the benefit-cost analysis conclusion is as before. Counting abatement costs c + f + h as beneficial jobs without recognizing the offsetting loss of producer surplus (i.e., profit) to the polluting firm is to confuse costs and benefits.
References
- Boardman, Greenberg, Vining and Weimer, Cost-Benefit Analysis, 4e, 2006.
Note: You might think it is ludicrous for an economist to say that jobs and incomes are not benefits. Only when those jobs and incomes are not double counted and when a government policy results in an avoidance of a loss of jobs and income can they be counted as benefits. For example, the costs of dredging an inlet are the government expenditures on dredging. The benefits are the jobs and incomes saved as a result of the dredging. Alternatively, the benefits of dredging are the changes in consumer and producer surplus from the lower prices and higher quantities of ocean-related goods and services.
