The Trump administration’s proposal to cut the Environmental Protection Agency’s budget raises the question of what is the optimal geographic area to cover with some economic policy. Administration supporters quickly asserted that the cuts are a good idea because states are more effective than the federal government to deal with pollution. Are they right?.
This answer of “sometimes yes, sometimes no” may be frustrating to some, but it is true in this case. Yes, in some cases states are better able to respond to pollution. But, given the scale of things in a modern economy, it often is not true.
Start with why we need to limit pollution in the first place. To many it seems obvious. If someone else fouls the air we breathe or the water we drink, we are harmed. Ditto if someone else’s activity harms the value of our property. Pollution is damage to one person for the benefit of another. It is unfair and unjust. This view predominates public thought — that the bad thing about pollution is that it involves a “tort,” the legal term for harm done by one person to another. And it is correct.
Pollution also has an economic efficiency aspect, however, and that can be enormous. In 1921, British economist Arthur C. Pigou demonstrated how an external cost like pollution, if not corrected, inevitably causes inefficient use of resources. It is not just a transfer, that the polluter gains while damaged party loses, it is that society as a whole gets fewer of its needs and wants satisfied from a given set of resources.
This was a vital insight, but the economic exposition of it is not hard. Undergraduates master it halfway through their first semester of microeconomics. Nor is it controversial within the discipline. Indeed, it is something that all economists agree on, whether they are politically Republicans or Democrats or New Classical or Keynesian in their economic views.
Yes, economists do disagree somewhat on the best responses to external costs, but there is no disagreement with the idea that uncontrolled externalities harm economic efficiency and make society as a whole poorer.
At the same time, economists recognize that information on which to base decisions is valuable, scarce and expensive to accumulate. Good information leads to better decisions and bad information leads to worse ones. People close to any specific problem usually know more about relevant factors than those far away. So the Catholic social thought principle of “subsidiarity,” of making decisions at the lowest level at which one can make good ones, can apply to resource allocation questions.
But Pigou’s fundamental insight that resources will be wasted when a decisionmaker reaps all the benefits but others bear some of the costs remains true. And it applies to governmental jurisdictions as well as individuals or companies.
Say a new copper mine will discharge water containing pollutants into lakes where other people grow wild rice. The pollutants will hurt rice production. If this is allowed to occur, the wild rice growers will suffer tort damages and the economy as a whole will be less efficient.
If one of the two sides does not have disproportionate political power, the state of Minnesota might indeed be the best level at which to seek a solution to this problem. Justice Louis Brandeis observed that “states are the laboratories of democracy” and a solution reached in St Paul may well be better than one decreed in Washington, D.C.
That is true, however, if the pollution only reaches the wild rice lakes. If it flows further on into Lake Superior or into border lakes that lead to Canada’s Hudson Bay, then Pigou’s insight will dominate. If Minnesota reaps the employment and other economic benefits of a new mine but Wisconsin, Michigan and other states and provinces down the watershed bear costs, then a policy forged in St Paul will not be optimal for U.S. society as a whole.
Ditto for agricultural runoff into the Rock River, a little watershed in southwest Minnesota that is highly impaired. Our farm lies in this basin. The area is small, only 60 miles or so of river before it crosses into Iowa where it then flows into the Big Sioux and then the Missouri rivers.
If excess nitrogen fertilizer or weed killer or simple sediment flows off of our farm into Chanarambie Creek and then into the Rock, my neighbors downstream suffer some harm. But add to this the runoff of many other farms, and most of the damage occurs in Iowa, South Dakota, Missouri and other states all the way down to Louisiana. The greatest damage is in the Gulf of Mexico.
Gov. Mark Dayton should be commended for wanting to limit such pollution. But economic theory and history both demonstrate that if Minnesota officials consider only costs and benefits to our state, with no federal involvement, the level of pollution abatement will be less than optimal for society.
The reason for having a federal pollution agency rather than leaving things to states is that pollution crosses state lines. Particulates from a power plant in North Dakota blow into Minnesota. Mercury and sulfur from coal burned in a plant at Becker, Minn. to light our house in St Paul, rain out over Wisconsin, Michigan, Illinois and other states to the east. When I flush my toilet, the waste is destined to pass St. Louis and Memphis eventually. Making entirely state-based environmental policy inevitably means that downwind and downstream cities and states will lose out. It also means that the U.S. economy as a whole will produce on balance, fewer goods and services from a given set of available resources that we could. As Americans, we will be poorer in real terms.
Add to this the complication that technology tends to expand the range and scope of environmental effects.
When I was a kid, people in Chandler, my home town, brought trash to the town dump. Some of it was burned and the rest occasionally pushed back with a bulldozer. And “going to the dump to shoot rats” was a diversion for teenagers with .22 rifles.
As long as the external costs of the town dump were the smell of burning garbage and a few rats running around, why should anyone meddle in Chandler’s business? But what if an implement dealer brought barrels of paint thinner and solvent? What if a gas station brought dozens of used oil filters? The dump was in a low spot through which water flowed when it rained. It was only a few hundred feet uphill from the creek that flowed to Edgerton and then Luverne and eventually Sioux City. So even 60 years ago, there were interstate external effects. And with more complex chemicals and businesses today, such effects can be much larger.
In that era, before extensive use of synthetic fertilizers, insecticides or herbicides, farm runoff was mostly soil particles or manure. These could do damage, but not as much as modern ag chemicals. Even the runoff from the Slayton golf course or the cemeteries probably was more benign in 1960 than now.
The idea of the state level being superior to the federal one for environmental protection decisions has a nice ring for many, but it has its dangers. In many ways we have improved the environment over the last half-century. But if you skew the incentives by returning all decisions to a level where there are cross-border externalities, we are going to move in the other direction. And we will all be poorer.