Accounting for Pollution

An entry about the costs of pollution in Paul Krugman's blog yesterday had the title "Markets can be very, very wrong". Indeed. A point we wanted to make in The Economics Anti-Textbook was that, for all the talk about Pigouvian taxes and tradeable permits in the microeconomics texts, the textbooks spend little or no time pointing out that governments often don't actually impose the taxes the textbook says they should to improve efficiency.

Perhaps pointing out the obvious would raise 'controversial' questions (Why don't they use such taxes? Whose interests are served by allowing excessive pollution?). Controversy is something to be avoided in Textbookland, where the goal seems to be to maximize the share of the market and not annoy potential adopters of the textbook.

The paper Krugman was writing about was "Environmental Accounting for Pollution in the United States Economy", the lead paper in the August 2011 issue of The American Economic Review, the flagship publication of the American economics profession. The authors, Nicholas Muller, Robert Mendelsohn and William Nordhaus, attempt to compare the gross external damages caused by production in various sectors with the value-added in the sector that is traditionally measured in the national accounts. The idea is that the national accounts should measure the net output of a sector, so that external damages are netted out from the estimate of its value added to get "each industry's net contribution to national output" (p.1672). They conclude that "Solid waste combustion, sewage treatment, stone quarrying, marinas, and oil and coal-fired power plants have air pollution damages larger than their value added." (p.1649)

A coal-fired power plant whose pollution damage exceeds the value of its output at market prices according to Muller, Mendelsohn and Nordhaus's paper

They remark (p.1672) that "this does not necessarily imply that these industries should be shut down." [After all, where would ordinary folk take their yachts if there were no marinas?!] "On a formal level, it signifies that a one-unit increase in output of that industry has additional social costs that are higher than incremental revenues. At an intuitive level, it indicates that the regulated levels of emissions from the industry are too high."

Krugman suggests that those opposing greater regulation of pollution are "operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good." The promoters of that "mystical faith" have huge resources and are engaging in a long-term campaign of ideological warfare in which the university campus is a key battleground. If you can stomach it, check out the website of "Students for Liberty", funded, it seems, by the usual suspects...

RH