Sunday, May 28, 2006

Costs and Regulation

Let's distinguish two forms of regulation, reflecting the statist vs. Hayekian distinction. One option is to make the undesirable activity illegal. The alternative is to make it costly. More generally, we can regulate activities either by using the blunt instrument of the law, or else by the more subtle manipulation of market forces. I think the latter will often be preferable.

A major advantage of the market is the sheer efficiency brought about by the informational sensitivity of price signals. Greenies want to help the environment, but often don't know how best to achieve this. Some proposals seem to have mainly symbolic value, as their slight good consequences may be outweighed by the time and effort put into them, especially when opportunity costs are taken into account. PC claims that recycling is such an example:
[W]hen used items have real value -- Ferraris for example -- they don't need to be 'recycled,' they get sold. 'Recycled' is what happens to stuff with no value, or with so little value only a government regulation can make enough people care.

This is deceptive, however, because our current pseudo-market externalizes environmental costs. Price and cost thus come apart in a way that's far from ideal. However, if only we were to stop subsidizing polluters, then perhaps prices really would signal value.

(N.B. In response to these externalities, we must take care to tax the right thing. The Greens want to "link car registration charges with fuel efficiency", so as to "reward people who bought “environmentally sensible” cars." But this seems to fetishize a 'means' over the 'end'. What really matters here is the fuel use itself, not the efficiency with which it's used. So, as Kiwi Pundit points out, we would do better to increase fuel taxes instead. This direct approach will indirectly incentivize such derivative goods as fuel-efficiency anyway. But it avoids various inefficiencies that would arise from confusing the means and ends in this case.)

Brad Templeton explains how buying energy efficient cars or home solar panels could actually be "bad for the environment, compared to the choice of buying carbon credits, which is to say bribing existing polluters to cut back their output":
The answer, right now, is that it’s far easier and cheaper to reduce pollution by cutting output at the big polluting factories and power plants. A dollar spent there does an order of magnitude more to cut pollution than a dollar spent on personal PV panels or a personal hybrid car.

Markets are thus important because prices signal information about ease and efficiency, and so can help us to identify how we can do the most good. Or, as Brad puts it:
A working credit system (and I’m not ready to make the final claim that we have one) creates a market that focuses the money on the places where you can get the most bang for your buck in pollution reduction. A working credit system means you don’t work on your own house because you can spend the money getting somebody else’s far less efficient house in order first. Sometimes people justify their own solar panels or Prius by saying that they want to do something, and they can’t do anything about the big power plant. But with a credit system that’s exactly what they can, and should do — until the markets change and it makes sense to spend money on your own car.

Internalizing costs through the market is also superior to heavy-handed regulation in terms of human freedom. Consider my old post on urban sprawl: outward development imposes significant public costs, and statists in local government respond to this with zoning regulations to prevent or restrict the harmful activity of expanding development. A better solution might be to internalize the costs, say by requiring developers to pay for the requisite public infrastructure (presumably passing this along in the form of higher housing prices), and charging higher rates to peripheral real estate in order to meet the ongoing costs of sprawl.

This would give more people the freedom to live in suburbs if they so wish, without subsidizing their choice as our current pseudo-market does. If people want the suburban lifestyle enough to be willing to pay for the indirect costs, then why stand in their way? A market system, with true costs appropriately internalized, strikes me as an institution with great potential for enabling humanity.


  1. we would do better to increase fuel taxes instead.

    Wouldn't this effectively penalise the poorest members of society? The fairly affluent would probably be able to either absorb the increased cost, or cut down on unnecessary use - but those already struggling to meet costs and for whom the car is a necessity would be hit quite hard.

  2. Charging them extra rego fees wouldn't necessarily be any easier on them. (I assume the bill would come to the same in the end.)

    But I do think we should set up our institutions (e.g. public transport) so that cars are not a necessity for anyone. And we can help the poor in other ways (e.g. by granting a UBI) that don't involve harming the environment.

  3. A couple observations:

    1) I think you overestimating the costs and problems of well designed statist solutions. I can think of at least two off the top of my head that have worked well. The first are CAFE standards where automakers were required by law to increase the fuel efficiency of their vehicles over time. It has been massively successful (unfortunately, SUVs aren't, Damn Bushies, under CAFE standards and the standards haven't been increased in ten years) in reducing American oil consumption. Second, American law states that smokestacks have to have scrubbers on them that will reduce the amounts of carbon dioxide/monoxide sent into the atmosphere from their operation.

    It does not seem obvious to me that either of these programs are more costly to operate and enforce that analagous tax-credit plans would be. It doesn't strike me as obvious that they are less effective either. In the latter case, for example, you have 100 percent participation in a program that reduces smog and acid rain.

    And these programs don't have the regressive effects that taxing gas or energy usage would. Or take your idea of passing on public infrastructure costs to the homeowners. That will result, if the American experience in education is any indication, with rich neighborhoods having great service and poor neighborhoods having crappy service.

    2) Do you think this would work well with economic regulations that aren't environmental? Surely, you don't want "discrimination" credits whereby we simply make it more expensive to have discriminatory hiring and gender practices. Similarly for worker safety, it seems that you want to require a corporation to enact reasonable worker safety standards. Or child labor etc etc.

    I think you are going to say that these are different from the environmental case, so we can be a statist in one area but a Hayekian in others (obviously, we don't give people murder credits).

    And that makes me wonder what the important difference is...The presence of a quantifiable externality perhaps?

  4. Now tha yu make the point this way I feel a bit more Hayekian... Iwonder if there were any concepts in that survey I wont end up switching sides on heh

  5. To me most mundane or worldly law, esp in social contexts, is conventionalised established 'rules & regulations' which naturally bring about or account for passed statutory laws; or else that law couldn't be humanitarian & guaranty freedom & welfare, not by a long chalk; & is doomed from the start. Accordingly, only societally evolved agreements may result in peacemakin' or peaceful the status quo 'law & order' of developed nations. Only this sort of 'laid down statute' has meaningfully teeth & I regard it as 'fait accompli' that needs to be changed (altered or amended, annulled or abolished & whatever else) by the above-mentioned natural lawmakin' process, & essentially not by statute.
    Apart from your quoted "So, as Kiwi Pundit points out, we would do better to increase fuel taxes instead" that, I reckon, is so controversial & challengin', 'cos it shews you, at the very least to a certain extent, believe in statism, I was wonderin' wot about an exemplary or imaginary case, just for the heck of it, if whatsoever you advocate in your article, for instance through carbon/workin' credit system, are necessitated by the law? How much will this 'law enforcement' be favourable? Wot might be the possible 'law enforcement procedures' like?

  6. The first are CAFE standards where automakers were required by law to increase the fuel efficiency of their vehicles over time. It has been massively successful (unfortunately, SUVs aren't, Damn Bushies, under CAFE standards and the standards haven't been increased in ten years)

    SUVs were around before Bush, and in fact demonstrate a critical flaw in statist policies. CAFE standards inspire both auto manufactuerers and drivers to exploit loopholes in the law so that they can get what they really want, which are often big gas-guzzling cars whose costs they can partially externalize. Gas taxes internalize those costs, thereby closing *all* loopholes, even the ones we haven't thought of yet. CAFE standards are probably better than nothing, but replacing them with higher gas taxes would be better still. If you're concerned about the regressive effect, other taxes can be cut to compensate, such as the regressive payroll tax.

  7. Pat, that's right, there's certainly a place for inflexible "statism", e.g. in response to violent crime. Though I'm not so sure about worker safety -- if someone is willing to work in dangerous conditions for higher pay, they should be allowed to. The real concern is to ensure that they're in a position to give genuine consent, which again the UBI would help with.

    Given my examples, externalities do look to be the key difference. Perhaps part of it is ensuring that the people you harm are adequately compensated. That rules out "murder credits", for obvious reasons. You can't undo a specific harm by compensating someone else. But for general harms, a tax to "society" in general may do the trick.


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