The state of Minnesota, acting through Attorney General Lori Swanson, is suing 3M Co. for $5 billion in damages caused by the company’s disposal of chemicals called PFCs in ways that allegedly polluted sources of municipal water in Oakdale and adjacent areas. There is a lot of economics in all of this.
To start with, it is a textbook example of an external cost. One party, 3M, produced products that were useful to society. These could be sold at a price exceeding the sum of the costs 3M incurred in turning them out. However, because this production involved chemicals that had to be disposed of, and doing so affected ground water, there was a cost to people other than 3M or its consumers.
These costs accrued to people drinking water that allegedly harmed their health and the municipalities that spent money trying to get other pure water. Such costs not born by either producer or consumer are “external costs.” And they can have large economic effects.
One set of these effects involves fairness. Why should innocent people be made worse off because of how others run their business?
The second set of effects concern economic efficiency. When external costs like these are not controlled, society gets fewer of its needs and wants satisfied from a given use of resources than could be the case otherwise. Resources are wasted.
Note that this outcome is not a matter of debate within economics like, say, the question of how much lowering tax rates might increase output. It is instead like the gains from trade or the idea that voluntary exchange between different people, whether within or across national borders, can make both better off. It is part of a basic consensus on core ideas in economics.
To go steps further, consider a simple analogy: Dennis Mitchell has a bat and ball. Friends show up and they begin to play. Soon someone bats a ball through Mr. Wilson’s window. The broken window is an external cost of the fun children are having.
If no one can force such kids or their parents to pay for the window, too many ball games will be played too close to windows. Players will pay too little attention to taking care in deciding where the pitcher and batter should stand. However, as long as George Wilson is there to notice damage immediately and to march Dennis over to his parents, both fairness and efficiency can be maintained.
But what if the Wilsons don’t notice the broken window, perhaps in a spare bedroom, for days? What if nothing indicating which neighborhood boys playing in the vacant lot actually broke the window? This is an information problem. It is difficult to “make polluters pay” when you cannot connect a specific pollution outcome with a specific polluter action.
When there are PCBs on the bed of the Hudson River downriver from a GE transformer factory, the source is pretty clear. But take any given gram of nitrates in the dead spot in the Gulf of Mexico off the Mississippi River Delta — did it come from renter farmers spreading dairy manure on my south field? Or was it from an over-fertilized golf course near Des Moines? Or runoff at the barge terminal of a fertilizer plant at Sioux City? Or runoff from a feedlot south of Tulsa?
It might take George Wilson a week to notice a broken window under the eaves. But it may take 50 years before anyone notes GE’s PCBs or nearly as many before anyone can prove that 3M’s PFCs actually caused cancers or infertility. This means that those harmed years ago may not be around to sue today. It also raises questions about the liability of insurance firms that cover 3M. If the court rules for Minnesota, who must pay, the company that insured 3M the year the PFCs were disposed of? Or the one insuring it when the decision is handed down?
What if the window is badly cracked but no ball is in the yard? There are balls marked Biff, Joey and Peggy nearby and one with a faint D.M. under the hedge. Which hit the window? Could anyone prove that a given low-birth weight baby with subsequent health problems was due to PFCs in the water? Or was that case due to nutritional choices of the mother? Or to some chemical she was inhaling in her own workplace? Is a couple’s problems conceiving a child due to the water the mother drank or to the Agent Orange the father crawled through in the foothills of Vietnam’s Central Highlands?
The point here is that the simple case of George Wilson mowing his lawn exactly as Dennis’ ball sails right past him through the window is a rarity in real-world externality cases. “Information problems” are ubiquitous and hard to resolve with any certainty.
3M certainly did not mean to cause any cancer or infertility or to harm anyone in any way when they chose to dispose of waste chemicals in the way they did. Yet Dennis saying “But Mr. Wilson, I didn’t mean to break your window!” doesn’t mean that the Mitchells don’t have to pay the repair bill.
But what if Dennis has been repeatedly warned against playing ball on such a small lot? What if Joey and Margaret both said, “Dennis, we oughta go somewhere else?” What if there is a municipal ordinance against playing baseball anywhere other than an approved field? Should George then be able to say “Dammit Mitchell, you owe me an additional $50 above the hardware store bill because you just can’t keep that kid under control!” Should Dennis be hauled down to the station and fined for breaking municipal ordnance 135-100?
There also are questions about full conformity with regulations then in effect and about conflicting opinions within the company. What if some manager knew that the disposal method was questionable under law then in effect but that there was little chance of getting caught? Or if she knew there was a chance of polluting an aquifer but it was clear that the method chosen was legal under then-current regs?
What If one scientist among 100 thought it was a bad idea to dispose of PFCs in a particular way? Does that establish the culpability? What if it were 25 out of 100? What if they wrote out memos versus different people having different memories of what was said at meetings when half the jury members had not even been born?
The upshot is that external costs of pollution, broadly defined, pose serious challenges for modern technological societies. Fail to curb external costs and society overall is poorer and specific people within it get shafted. Control them with excessive or poorly thought out regulations, and again, society does not get as many of peoples’ needs and wants satisfied as might be possible. There might not be as many jobs. Productivity might not rise as fast.
Writing regulations requires information which is often highly incomplete. But so do libertarian approaches that rely on private lawsuits to correct for damages. We try to reach a political consensus on the best course and then we muddle through. Sometimes we do well and sometimes we fail spectacularly. And juries often face knotty cases like this one.