 This is One of my favorite talks actually I give a lot of favorite talks here at Mises you so it's It's it's my area that I worked on when I was in grad school at Auburn. It was Environmental regulation was subject to my dissertation and I've Maintained an interest in this over the years and it's I think part of my interest came from the fact that this is a difficult area for a lot of people working in free markets People who are sympathetic to free markets When it comes to environmental issues, they say well, maybe we need some government intervention here because it's You know, we need some regulation in order to prevent firms from releasing massive amounts of pollution because that's What they assume would happen if there were no government regulation here Let me there's a lot to cover and we've got limited time But there are two key issues that come up with environmental economics one is environmental resource use So how do we how do we deal with? forest cutting down of forests What do we what do we do about? the local food kind of Idea Endangered species and reason and extinction would be part of this energy conservation would be part of this The fuel economy regulations that you see on automobiles the notorious cafe Restrictions are part of the resource use question Incidentally, I I like to start off discussions on this with my classes by Mentioning that if they really like trees, they should not recycle paper And they sort of looks a little startled like what this is heresy. How can you say this? I say well think about it. If you decided you liked corn and You said well, I'm not going to eat any more corn because I like corn plants how many corn plants would farmers then plant So if you like trees and you you should then use as much of that resource as possible so that Tree farmers then decide to continue to farm trees instead of farming something else Or doing something else with that land so That sort of gets people's attention usually because it's it's just so counter-intuitive to the modern way of thinking about these things the second major piece of environmental Issues that we can discuss are externalities. That's the the term commonly used in Economics for a spillover effect a byproduct so if I'm smoking a cigarette and Somebody nearby breathes my cigarette smoke and is affected by that negatively or positively then that's an externality and Tom De Lorenzo gave a talk yesterday on market failure and this is one of those Areas where market failure said to result from from markets or firms not taking adequate account of externalities and pollution problems are in that category most most Most commonly regarded as a negative externality now these aren't really as separate as they might appear because Externalities really boil down to questions over ownership of a particular resource. So who owns the air that I'm dumping my Particulates into as I smoke a cigarette Who owns the water that is receiving the effluent from some kind of mill? These are resource ownership questions. So they're really connected. They're not as separate as you might think now There are three basic approaches That you'll see to dealing with environmental problems one of them is the Pigovian approach named for Arthur Cecil Pigou Cambridge Economist and he came up with these ideas about taxing negative externalities and subsidizing positive externalities and That was supposed to help resolve these problems because then the firm that is generating some kind of smoke Would then reduce its quantity of smoke produced if they know that they're going to be taxed per unit of the of the pollution Or if a firm is producing some kind of positive externality and they know that they're getting a subsidy for it then they start to take that into account when they decide how much of the of the the Product to to produce that's something also that that time dealt with yesterday But we'll expand on that a little bit today as well There's secondly a regulatory approach. This is where the government says we know how much of The pollution is acceptable And we're going to require firms to cut their pollution to that level so they're going to say You can only produce x number of tons of sulfur dioxide From your factory or they may even say we're going to require you to use this particular piece of equipment So your your cars have catalytic converters on them that Converts some of the chemicals coming out of your Engine into something a little less dangerous and inert perhaps So that that's supposed to reduce the impact on the environment. Well, I mean if you came up with some other kind of Method of reducing pollution That may not be something that you could actually use in a vehicle because the government says you have to use this particular technology So that's sometimes called command and control command and control regulation a third approach is The property rights approach and I'm taking a broad perspective on this. I'm including here not only the common law perspective Judge Napolitano talked about the common law a little bit on Monday night, and I hope you were there to hear that The common perception that I am picking up from my students on on environmental issues is that before the EPA Or before there was command and control regulation, then it was just a free-for-all firms who just dump stuff into the water or the air ocean and nobody Could say anything to them about it. It was just a Hesitate to use the word wild the term wild west because as you some of you may know the wild west really wasn't all that wild But it was an un restrained kind of environment That's not the case There were laws of nuisance for examples if you dumped Pollution into a river and someone downstream suffers from that they could sue you Without the EPA or other regulatory agencies being involved to say how much of the emissions were appropriate And how how much the firm could produce that that was not necessary for firms to be restrained in their production You had to show that there was actually a harm generated by this firm and that was a way of Of requiring firms to take account of their pollution We're going to talk later about coasts. You can't really talk about environmental issues here without discussing Ronald coasts And so there are some criticisms that I'll level at Kosian the coast there and that kind of thing So we'll discuss that in a minute first Let's look at two of the key problems that we see with the mainstream approach to the environment Roy cardado who's written a book which I think is in the bookstore here externalities in an open-ended universe Says efficiency is an individual goal-seeking problem not a value maximization problem Why is that important? from the Austrian perspective Efficiency is attained when legal institutions allow individuals to pursue their ends Whatever they might be The there may be conflicts over the use of scarce goods, but the Austrian doesn't the Austrian economist doesn't say well Let's try to figure out what the value of this use is and the value of that use is How much value does the water have when people are fishing in it and swimming in it? How much value does the water have when it's used as a Dumping ground for some effluent. There's there's no way for us to really make those comparisons because Costs are subjective They cannot be measured Now I will say this and then you'll see if you take a Typical class on environmental economics or sometimes this comes into the principles of micro class You'll see This is kind of assumption that we could actually measure these costs What you'll see is often a graph like this and I'll spend some time on this because you you'll If you take economics courses, you'll probably see this What you've got on the vertical axis there is marginal private cost marginal social cost and marginal private benefit All right, so let me go through those for a minute on the on the horizontal axis is the quantity of the output of the goods You're producing so if it's a paper mill producing paper Then we're looking at how to have a measure paper tons of paper or something and The marginal benefit to the firm of producing paper. I've drawn as a downward sloping line. It could be less sloping could be flat But that's the benefit to the firm of producing the paper it's private benefit That is if they produce more paper, they get more money more revenue from the sale of the paper No big mystery there Then we have the marginal private cost again, I've drawn this is upward sloping but it It could be less sloping if depending on the conditions in the marketplace, but these are the these are the cost to the paper mill their accountant would take a Account of these these costs as they produce more paper Maybe they have to go further and pay more for the remaining trees or Maybe they have to pay more for the real estate on which the trees are grown and so forth So maybe this is an upward sloping line again depending on the the market conditions Now the marginal social cost is what you get when you add To the cost of the firm the paper mill in this case the external costs on bystanders If you've been around a paper mill at all, you know, it gives off a kind of a rotten egg odor Which most people find unpleasant? And it may generate some other other effluent Perhaps it it use from my understanding uses a lot of water the water emitted from the plant might be might be Polluted to some extent and so if we add those costs those external costs and bystanders who are not buyers of paper not sellers of paper just Standing around being near the paper mill Then you get an additional cost and the vertical distance between these two lines Indicates the amount of that external cost Now here's the problem We can't measure this We don't know even if we can figure out even if the firm says we know what our costs are How do you measure the impact on a bystander of having a bad smell in the neighborhood? So you can go around with a survey and maybe you have a clipboard and you can knock on doors and you say well, how much sir did Smelling this rotten eggs odor cost you last year. How do you even put that in in? Numbers if the person is being honest about Trying to be honest about the cost And that's not even considering the fact that some people might look at the surveyor and say if I say a big number maybe they'll Maybe that'll make it more likely that the firm will be shut down Which is what I really want since I don't work at the firm and I don't buy paper and I don't I don't want to smell rotten eggs, so if I say Five million dollars or something Then maybe the surveyor will dutifully write this down and turn that in and it'll be more likely that the firm will be shut down Or maybe the person says well, I work at the paper mill I you know, I don't like the bad smell, but I don't want to lose my job either So I'm gonna say well it cost me about 50 cents last year So we get all kinds of problems in trying to measure this even if the person knows and a lot of times We don't know what our costs are until we're actually faced with a decision to either incur that cost or not How much would I pay for a hamburger at lunch? How hungry am I I mean would I pay $15 for a hamburger if I'm if I'm really hungry? I don't really know I don't really know until I make that decision and of course these costs will change over time They're not going to stay constant So even if you miraculously figured out what the distance is between these two lines you figured out somehow What the what the external cost is how do you know that's going to stay the same? Over time Maybe if I you know if I have a child a small child and I suddenly become more concerned about the impact of The neighboring factories and missions on the development of my child or maybe my maybe I think that those costs are higher And so forth So we have a calculation problem Now often you'll hear comments About overuse of resources We're putting too much pollution in the air or we're putting too much pollution into the water there there's too much Fertilizer washing off into watersheds and causing algal blooms downstream and so forth So we're we talk about these over this overuse Well in order to have a meaningful concept of overuse We have to have an idea of what the optimal rate of use is Otherwise, it's meaningless So you say well Should should we reduce pollution and somebody you're talking to let's say well, yes So let's suppose we did that and then you come back to the person you say well, how much should we reduce pollution again? I mean you you if you continue to do this the optimal rate of pollution is Not zero that would imply that we would just just have to cease to exist I'm up here exhaling carbon dioxide and other things on Some people co2 is considered a pollutant does that mean that I should cease to exist so that So that my production of waste products from the chemical processes in my body would then cease So we don't really know where the marginal social benefit and the marginal social cost are equal Back to my diagram here The ideal from the point of view of most environmental economists is to locate this point Q star as You're increasing your output initially the marginal private benefit of Producing this good is higher than the marginal social cost So we say well, it's optimal socially efficient and so forth to continue to increase the the output of this product Well, we can we can continue to do this Until we reach this point Q star at that point any further increase in the output would cost more to society Then it benefits the firm If the firm doesn't care about the cost on bystanders and is only looking at The cost of timber or the cost of water or the cost of labor and so forth then The firm will continue to increase output up to QM At QM the firm will finally say well now if we increase our output the cost to us would be greater than the benefits to us So we'll stop there. We won't increase our output anymore From the environmental mainstream environmental economists perspective. That's that's too much because at that point the marginal social costs exceed the benefits of producing this product and So the environmental economists would then say well what we need to do is I should say the typical Environmental economists would say well, what we need to do is somehow induce the firm to cut its output from QM down to Q star at that point we have social efficiency now again We don't know where that point is because we cannot measure those social costs. We can't measure those external costs now The Pagovian tax approach which says we're going to tax each unit of pollution Let's say each ton of sulfur dioxide by X amount of dollars What's the X? Well X would be determined by how far that marginal social cost is above the marginal Private cost the external the cost on bystanders. We're going to then Determine how much that is and we're going to tax the firm by that amount And so you see Sometimes carbon tax proposals which have been the headlines in recent years are an effort in that direction If they say well co2 is a bad thing. We don't want to produce more of it. So we're going to tax fuels that have carbon in them Some economists Have said well carbon taxes have some problems. Maybe we can instead use tradable permits So we can say we're going to allow X number of tons of sulfur dioxide to be emitted into the air in the next year and So we're going to create a permit one ton of emissions per Permit and then we're going to auction these off. This has been done auction these off So firms that find that it's very expensive for them to reduce their pollution We'll buy a lot of permits instead because the permits will be cheaper and the firms that say well It's it's pretty cheap for us to reduce our pollution. So instead of buying those permits which look expensive to us We're going to reduce pollution instead Now this is appealing from an efficiency perspective because this means that the Instead of applying the one size fits all command and control regulation to all the firms This means that the firms that face high cost to reduce pollution don't and instead those that face low cost Reduce the pollution instead. So this means that you get some efficiency advantages Nevertheless this is Going to require government to do the impossible It's going to require government to assess the ideal quantity of pollution permits so if you choose a pollution tax And you say we're going to tax units of carbon By some amount. Well, you've got to figure out what that distance is and then you've got to Put that into dollar terms and impose that tax Secondly if you say well, you know, maybe we're not real sure what the tax ought to be and So for whatever reason we think that that's that's not ideal. Let's use a market approach Let's have tradable permits. Nobody likes taxes. Anyway tradable permits sound so flexible It sounds so reasonable and efficient and we an economist Look at this and they say well, you know, just this is This is ideal if we can we can sort of sort things out that way. Well, then you have to figure out this distance here You have to figure out what Q star is which again means that you've got to figure out where that intersection is We don't know where that intersection is Now you might say well, you know, maybe maybe we understand that that we can't figure out exactly where that point is But we we do know that we're producing too much pollution. So we should reduce Well, first of all, we don't really know that we're producing too much pollution But even if you did that if you if you overshot and you wound up down here You thought Q star was here when it was in fact here If you thought it was lower than where it actually is you can do more damage than Then you're then the damage you're averting or avoiding So it it's a it's a very sticky kind of problem and not one that has Has a good solution from a government intervention policy perspective Art Cardin I have a higher guard for art and his his work and and he contributed Paper I think it was actually a comment or a note to the quarterly journal of Austrian economics a while back We had a brief exchange Dolan and block were Discussing environmental policy issues and in art weighed in on this and he said the calculation objection Which is what I'm talking about the difficulty of determining exactly what these these costs are the calculation to emissions Trading calculation objection to emissions trading schemes is more than a simple. How do you know? Conversation stopper Finding the right amount of emissions to allow might require some trial and error But credible commitment remains an important potential obstacle What incentive is there for a state to specify a particular level of carbon emissions that will be allowed each year and then not Change this in response to political pressure Now I would quibble with art on this bit about trial and error trial and error requires a measure of success and failure and We don't have that in this case Yes, you can say that if you impose a higher tax you get less pollution but how much pollution is ideal again, we're back to the calculation problem and without prices and profits and losses that are originating from Voluntary interactions in the marketplace You don't really have a way to determine whether the trial reduced resulted in a Better outcome or a worse outcome. Okay, so when the government's got its thumb on the scale We don't really have a good way to determine where the proper balance is But art brings up an important point and that's Political continuity, how do we know that the policy that the government imposed today is going to be appropriate? Even if miraculously they came up with the appropriate policy today How do we know that's going to continue to be appropriate next year or the year after that or even next week? So we don't know this we're living in a dynamic marketplace. We have things that are changing around us all the time policies tend to be Static they tend to to be put into place when the political conditions arise to to do that and Then the next Election comes along and the next group of politicians decide something very different Firms that are trying to decide whether or not to make some kind of massive long-term investment Have to take this into consideration. Do they reduce pollution? Or do they not reduce pollution? What what should they do? How much pollution should they reduce given the existing policy environment? What's the policy environment going to be next year the year after they don't know and therefore that makes investment decisions very difficult Also, how do we know that politicians won't set limits that are conducive to exploitation by constituent groups? if you have this idea that politicians and the bureaucrats of the EPA are Sitting there trying to honestly come up with the ideal amount of pollution for the nation as a whole or the world as a whole There's a great deal of literature Austrian and otherwise a lot of this is the so-called public choice Literature that indicates this is not what politicians and bureaucrats are really after what are politicians? What are elected officials want more than anything else? They want to get reelected Okay, if that means that they Have to sacrifice some broader economic broader environmental goal in order to satisfy the Constituents in their districts. That's what they'll do So if the paper mills pumping out a lot of pollution and the paper mills sends a lobbyist to the politician and says well You know, we're really important for jobs in our district and yes, we produce pollution But we also produce these these beneficial things and by the way, here's a campaign contribution Do you think that perhaps you could see fit to loosen the requirements on us? and At the same time you might have other groups that come in and say well, you know, we're destroying our environment And we that aside here's a campaign contribution Do you think you could see fit to vote our way and we'll make that known to our members of our environmental organization and and and we'll Make sure that we we put you in a favorable light so that you win the next election so you have these special interest groups that are That are constantly putting pressure on environmental policy and if we actually got something that was Ideal whatever that might look like for the at the current time it would be happenstance more than a matter of of Deliberation and consideration of science If you want to look up that article about art What should Austrian economists do it's in volume 17 that's several years ago for the QJ AE He's pointing out this Calculation problem, I'll move on in the interest of time. Let's talk about this efficiency fetish If we could calculate the efficient quantity of pollution Where has that gotten us? if we knew somehow What Q star was if we knew somehow where the what the ideal amount of SO to or CO or some other pollutant might be now what? How does that trump property rights? The issue becomes an ethical issue I shouldn't say it becomes an ethical issue. It's always an ethical issue here How do we violate the property rights of another person? It's not about exceeding some Number in our measurement of parts per million Rory Cordado says pollution is therefore not about harming the environment but about human conflict over the use of physical resources Humans change the environment such a way that it harms others who might be planning to use it for conflicting purposes it's about Competing uses of a resource air water land and so forth Now I'm I'm running short on time. I see but let's let's talk about this tragedy of the commons for for a couple of minutes Some of you might recognize this setup here on the screen. This is a prisoner's dilemma diagram and The tragedy of the commons, which is a term that a biologist Garrett Hardin came up with decades ago indicates that There is not Definite property ownership over a resource that resource may be overused that is it will not be used in such a way as to maximize its Output over the long run. So a classic example of this would be some kind of pasture land So let's suppose we have two ranchers Al and Bob And Al and Bob have to decide how many of their cows to put out onto this common pasture land More cows there are on the land the more grass gets eaten and the less in pounds of beef per cow you get So if Al and Bob both choose to put one cow on this pasture then Al and Bob both get Let's say five pounds of extra beef per day Added weight gain in there in their livestock That's a total of 10 and If they chose both to put two cows on The property so Bob puts his two and Al puts his two then Al and Bob get four pounds each of Weight gain for their cows total of eight so greatest long-term output for this pasture is if there are only two cows on the pasture and They get a total of ten pounds collectively across the two cows If Bob and Al put a total of four cows on the property then each cow is gaining only two pounds per day total of eight Okay so Here's where there's a problem. Let's say let's say Bob is trying to decide what he should do Should he put one cow out or two cows out? well, obviously the The weight gain depends on what Al does so Bob's thinking well, what if Al is going to put one cow out on the on this pasture Then that means if I also put one cow out on the pasture I get five Pounds of weight gain, but if I put two cows out I get six pounds of weight gain. I think I'll put two Al is making the same decision. He doesn't know exactly what Bob's going to end up doing but he says well, what if What if Bob puts one cow out on the property then if I choose one cow as well I get five pounds of weight gain if I put two cows out I get six pounds of weight gain I think I'll put two cows out So both of them end up putting two cows out on the property They end up in this box here with a total of eight pounds of weight gain instead of the Maximized output that you would get if they both restrained their their Putting of cows out to pasture and put only one cow out each so we get an overuse of the resource over grazing and We get less than optimal output Carl Minger When we heard about from the very first night Actually, I think it was the next morning Monday morning. You heard Joe Salerno's talk on the history of the Austrian school And he spent some time on Minger Minger says when all members of society compete for a given quantity of goods that is insufficient or scarce a Practical solution of this conflict of interest is only conceivable if the goods pass into the possession of some of the economizing individuals and if these individuals are protected by society in their possession to the exclusion of other individuals So back to our diagram if Al Somehow comes into ownership of the pasture. It's no longer shared ownership. It's no longer common access Well Al then says well, I want the most output I can get from this property Maybe this means that That I choose to put a total of two cows out on the property and that there may be it may be that they're both my cows It may be that I put one of mine and I rent the pasture out to Bob who also puts one of his Or it may be that I don't put any cows out and Bob puts two but in whatever Whatever arrangement we come to The property is going to be optimally used if Al can say no more cows after two and That results in a higher level of output Now we come to coasts Famous coast theorem coasts last I heard his His most famous Journal article in the Journal of Law and Economics had more citations than any other article in the entire economics literature So and one of the Nobel Prize. I think that was in 1990 I want to say 90 Anyway Coast said if you don't have transaction cost that is the cost of negotiating and arranging a transaction then The outcome the the the amount of pollution generated will be the same Regardless of the initial assignment of property rights now Transaction costs aren't zero We know that they're not and some people make this mistake They'll say well in a cosian world and by that they mean in a world with no transaction cost coasts himself didn't think transaction costs were zero He knew this I mean so it's a kind of a straw man argument to say well, you know coasts was wrong because transaction costs aren't zero when he knew that So he said well courts then should balance the costs and the benefits of both sides and then make a determination the decision of the courts is relevant when transaction costs are not zero Now the one of the problems with this cosian approach is that it neglects the problem of subjectivity of costs and benefits The time I have left I'd like to go through an example of this so that you can see this problem coast mentioned a problem of Steam locomotives Going down a track burning coal or wood or something and emitting sparks out of the stack sparks land on fields and property adjacent to the track and as a result Fires destroy some of the output from those neighboring fields. So this is a kind of an externality problem here negative externality So let's let's suppose these are orchards and the orchards are being destroyed by sparks from the passing train let's suppose that the burnt property Or the property that's at least subject to being burnt has lost market value as a result of this Casting off of sparks by the train So there's a let's say a hundred thousand dollar reduction in the market value of property So a farmer has to suffer the loss of the trees or at least the ability to grow trees and the market value of the property is now $15,000 not much else. You can do the property Let's suppose that installing a device that would cut back on the sparks to prevent this burning Would cost a hundred twenty thousand dollars So should the sparks fly or should the orchard grow? What's the more valuable? Use of the property should we allow the railroad to proceed and using the space as a dumping ground for its effluent or Should we allow the farmer to use the space to grow fruit? So the mainstream is going to look at this and say well a hundred twenty thousand dollars is greater than a hundred thousand dollars So the railroad's use is more valuable abatement of this of this Emission is going to be too costly Relative to the resource that is being preserved. So growing trees would be inefficient QED no problem here. We just did the math now We've said a hundred thousand dollar reduction in the market value of property 120,000 dollar cost of spark reduction devices now Here's where the coast therein comes into play if we there if there are zero transaction cost Let's suppose the court says well, we're going to give the rights to the farmer a railroad would then say well, it's worth a lot to us To be able to continue to use the tracks and the farmer is suffering a market loss of a hundred thousand dollars We'll just pay the farmer a hundred thousand dollars So that we do not have to install the hundred twenty thousand dollar spark abatement device and farmer loses the trees but is compensated for that and Society as a whole is better off by twenty thousand dollars Now let's suppose in the second case the court say for whatever reason we're going to give the rights to the railroad Now the farmer is not going to be willing to pay a hundred twenty thousand dollars to induce the railroad to install devices That would protect a hundred thousand dollars of market value. It doesn't make any sense So the devices are not installed the trees are gone Society gains by twenty thousand dollars. This is this is coast saying it doesn't matter what the courts decide if there is zero transaction cost You get the same exact result in both cases now Let's suppose that the land is not only valuable According to its market value, but it's got a subjective value non-marketable to the farmer Maybe this is land that's been in the farmers family for six generations or maybe the family graveyard is on this property and and losing the Having the graveyard burned over every so often about sparks from the train is going to be very disturbing to this person or maybe for whatever reason this is going to be Psychologically harmful for the farmer Maybe the trees are special you know my great-grandfather planted these trees I harvest fruit from these trees that makes me feel like I'm connected to my great-grandfather and and Losing those trees would mean more than just the loss of the property. Now. This is this is common. This is not some sort of Strange idea When I got engaged to my wife, I gave her a diamond ring the diamond ring has market value I would like to think that if the That my wife would not say well, you know, I really would like to put some new carpet in the living room Yeah, this got some market value. I think I'll sell this It's got hopefully some sentimental value to her as well So this this is not uncommon for this for the market value to not be representative of the total value of an asset So let's suppose now the railroad gets the right to the total market value of the property was only a hundred and fifteen thousand dollars Farmers not going to be able to raise a hundred twenty thousand dollars to induce the railroad to install devices So the devices are not installed the trees are gone In this case society loses by a hundred thousand dollar loss of market value plus nine hundred thousand dollars of psychological loss to the farmer and Then of course there are the savings from the no spark reduction devices So we factor that in and we get a total loss to society. We can't really measure this of course, but we We could easily get a loss that is far far greater than the savings So a resource that is very valuable to the owner is then lost So this is why Rothbard says we can't decide on public policy tort law rights or liabilities on the basis of efficiencies or minimizing of costs Now I'm out of time. I'm going to instead of going through All this other wonderful material about drones and radio waves and other things. I'm going to point you to A few things that you can use to follow up on this matter the classic Austrian paper on Environmental issues is Murray Rothbard's law property rights and air pollution Bob Murphy mentioned this paper Yesterday in his talk on the Paris climate agreement Which is an excellent talk? I'm assuming it's available in Mises org So you should take a look at that if you have not already. It's a very good stuff there Free market environmentalism by Walter Block Roar could not Roy Cortado's book that I mentioned earlier externalities in an open-ended universe and also a Paper in the QG AE from a few years back toward an Austrian theory of environmental economics I can also look at the aforementioned block Dolan Kardon discussion In an issue of about three years ago So those are some places you can go to get the Austrian perspective on environmental issues I'm sorry. I don't have enough time to go through some of these other things. This is a massive amount of Material we could discuss here I'll be available later in the week For office hours if you have some follow-up questions. Thank you very much