Why Costs Should Count
- Editor, The Region
Published December 1, 2001 | December 2001 issue
In standard economic theory, negative externalities (or spillovers) are the rationale for regulation of polluters. Producers who don't cover the full costs of productionincluding the costs imposed on society by pollutionshould be forced to internalize those costs. But what if regulations force producers to pay too much, to pay more than the actual costs they impose on society by polluting?
Those excess costs constitute the opportunity costs of inefficient regulation: What else might be done with that money? Rather than cleaning the air of another part per million of ozone, perhaps the funds could be spent for cleaning water, improving prenatal care or building safer highways. Would society benefit more from such expenditures than from forcing producers to clean the air just a bit better? We all want the cleanest air possible, but there is a limit to the amount of resources we would devote to that goal, given the variety of other goals we have.
So, how clean is clean enoughwhat is the efficient level of pollution? Most economists view cost-benefit analysis as the best tool available for answering that question, for deciding what the true costs and benefits are for a given environmental policy and what tradeoffs exist in implementing it. What are the benefits gained by society for implementing a certain standard and what does it cost to achieve that standard? Would a higher or lower standard be better?
And of course, economists like to calculate at the margins. If society can spend one more dollar cleaning the air and save two dollars in health care costs because of lowered lung damage, it's money well spent. But if it costs two dollars to clean the air and saves just one dollar in health care costs, society as a whole has not benefited. Those two dollars might have yielded greater benefit if spent on medical research. The right standard, from an economist's standpoint, equates the marginal cost with the marginal benefit: the point at which net benefits (total benefits minus total costs) are greatest.
To prohibit analysts from considering costs in setting pollution standardsas the Supreme Court says Congress did in writing the Clean Air Actis to create an economic scissor with just one blade. Not considering costs makes it impossible to determine an economically efficient level of pollution, and that indeterminacy is staggeringly troublesome to an economist.
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