Once you stray from using market prices, you can have all sorts of unintended consequences. How many gallons of fresh water should you be willing to use up to save a pound of carbon emissions? Do you know how much more water is used in the manufacturing of biofuels compared with the refining of gasoline? The whole point of market prices is to do these calculations for us.The usual result is overpayment for little actual benefit. 3) When the laws are set up so that the cost of pollution is low, it makes economic sense for people and firms to pollute. The environmental problem is known in economic terms as a free rider problem. If paying taxes was voluntary, it wouldn’t make sense for anyone to pay, because everyone enjoys the benefits, like an army and paved roads, whether or not they personally paid taxes. Similarly, it doesn’t make sense for people to reduce their polluting activity, because the Earth is going to warm up whether or not they eat less meat this year.We pollute because it is cheapest for us to do so, even though in the long run society is worse off. Companies have only one goal: to maximize profits for their shareholders, by providing services or goods that people want at the lowest possible cost. Environmentalists tend to view this as evidence of the evilness of firms, but companies are not purposefully evil; they are indifferent. Extra costs for helping the environment, in the form of “social obligations,” will raise a firm’s costs, reduce its profits, and make it less competitive relative to firms that are not worried about the environment. I believe most current environmental efforts by firms are merely for good public relations, as in #1. 4) If people think their voluntary efforts are actually making a difference, they may be less likely to support the massively expensive, painful regulations that we will need to actually solve the problem. As Richard Posner writes,
If people believe that voluntary efforts will suffice, there will be no political pressure to incur the heavy costs that will be necessary to avert the risk of catastrophic climate change.The people who are most likely to buy carbon offsets, go local, support the environment, are the people who we need most to support useful legislation on the environment. If they are content to "avoid cognitive dissonance by exaggerating the practical efficacy of largely symbolic gestures, such as purchasing carbon offsets," as Posner says, they will be less likely to push for the deeper sacrifices that we need to make to save the planet. The simplest economic solution, but the toughest politically, is to place a higher price on pollution, so that people and firms make environmentally beneficial decisions as a normal result of cost-benefit analysis. Prices are an unbelievable tool for aggregating costs. The price of milk tells you exactly how much it costs to raise a cow, milk it, bottle the milk, drive it to the store, and pay someone to stock it, without having to worry about how much the individual components cost. That way, people who pollute would pay higher prices, to offset the damage they cause to the environment, and everyone would have an incentive to make smart environmental decisions.
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