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YOU DECIDE: Can economics solve pollution?

April 20, 2007

By Dr. Mike Walden
North Carolina Cooperative Extension Service

MEDIA CONTACT: Dr. Mike Walden, 919.515.4671 or michael_walden@ncsu.edu

Dr. Mike Walden
Media representatives: For a black-and-white or color copy of this photo, call 919.513.3127 or e-mail dave_caldwell@ncsu.edu.
There appears to be growing concern about pollution and the environment.

Pollution is not a new issue. Widespread public attention began at least as early as the 1970s. But with the growth of greenhouse gases and the debate over global warming, addressing pollutants has achieved a new prominence today.

Let me state one fact up front: I am not an environmental scientist, and have no expertise in evaluating debates about the environment and pollution occurring in both scientific quarters and the popular media.

My approach is to say, "If global warming is happening and we want to reduce it (and, again, I'll leave it to others to make these judgments), then can economics be useful in finding an approach?"

First, a little background on economic behavior and pollution sets the stage. Most - probably even all - pollution occurs not because people or businesses purposefully want to harm the environment. Instead, pollution happens as a byproduct of doing something that helps us. Drivers of cars and trucks pollute, but they do so only because the driving gets them to work, school, shopping or vacation spots - all destinations that are beneficial to and productive in our lives.

Or a coal-fired electric generating plant emits pollutants not because the managers and owners of the company want dirtier air, but because the pollution happens when electricity is produced, and electricity is desirable because it powers our appliances, lets us watch TV and listen to music and keeps us warm in the winter and cool in the summer.

Since pollution - something bad - happens when something good - driving or powering our home - occurs, this makes it difficult to reduce pollution. Because to reduce pollution, we have to reduce the good things that cause pollution in the first place.

Can economics help?

Short of some brilliant inventors creating pollution-free automobiles and completely clean power plants, economists don't have a magic silver bullet that will reduce pollution without added costs. But what economists can do is recommend some procedures and processes that may make the changes less costly and give us more "reduction for our buck" in moderating pollution.

One approach is a "pollution fee," a charge attached to any product which, when used, creates pollution. The fee's amount would be an approximation of the cost of the pollution. So for example, if every time you drove and used a gallon of gas, you created 40 cents worth of pollution, 40 cents would be added to the price of gas as a pollution fee.

There are several problems with this approach.

One, it's very difficult to calculate pollution fees. Two, there is no assurance fees will reduce pollution to acceptable levels. And third, for pollution created by our vehicles, there's the practical reality that drivers are very sensitive to gas prices and resistant to anything that increases those prices. So it might be difficult to find enough public support for pollution fees, particularly related to gas.

Economists do have another pollution-reducing idea up their sleeves that is receiving considerable current attention.

It has three steps. First, someone sets a standard, or limit, for total pollution. In the case of air pollution, the limit would relate to carbon dioxide. Next, someone sells "pollution permits," for which the sum of the permits equals the pollution limit. Third, and perhaps most importantly, government would then leave it to the private sector (companies, individuals) to figure out how to keep pollution within the limits allowed by the permits.

Economists see several advantages to this plan. Government stays out of micro-managing pollution behavior, leaving it to the give-and-take of economic markets to meet the standards. Companies and individuals who have the toughest time reducing pollution would presumably purchase more of the permits, while those who could more easily reduce pollution wouldn't. So pollution reduction would be achieved most efficiently. Finally, the plan would stimulate tremendous innovation in ways to cost-effectively reduce pollution.

The creation of pollution is certainly a physical process, but the motivation for pollution is clearly economic, since pollution happens so we can have the products and services we want.

You decide if economics also has the answer for reducing pollution!

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Dr. Mike Walden is a William Neal Reynolds Professor and extension economist in the Department of Agricultural and Resource Economics of N.C. State University's College of Agriculture and Life Sciences. He teaches and writes on personal finance, economic outlook and public policy. The Department of Communication Services provides his You Decide column every two weeks. Earlier You Decide columns are at http://www.cals.ncsu.edu/agcomm/writing/walden/decide.htm

Related audio files are at http://www.ces.ncsu.edu/depts/agcomm/writing/walden/index.html

Posted by Dave at April 20, 2007 04:10 PM