The notion that a zero pollution objective is not necessarily ideal policy is one of the more difficult concepts for environmental economists to convey. After all, if pollution is bad shouldn’t we design policy to completely eliminate it? Many of us are drawn to the field based on a genuine concern for the environment and the belief that economics provides a powerful tool for helping solve environmental problems. Yet we are often in the position of recommending policies that appear on the surface to be anti-environmental. How can these observations be reconciled? The answer lies in understanding scarcity: we have unlimited wants, but live in a world with limited means. Economists in general study how people make decisions when faced with scarcity. Scarcity implies that resources devoted to one end are not available to meet another; hence there is an opportunity cost of any action. This includes environmental policy. For example, funds used by a municipality to retrofit its water treatment plant to remove trace amounts of arsenic (a carcinogen) cannot also be used to improve local primary education. Environmental economists are tasked with recommending policies that reflect scarcity of this type at the society level. For both individuals and societies scarcity necessitates tradeoffs, and the reality of tradeoffs can make the complete elimination of pollution undesirable. Once this is acknowledged the pertinent question becomes how much pollution should be eliminated. How should we decide? Who gets to decide? To help provide answers economists use an analytical tool called cost-benefit analysis.
Cost-benefit analysis provides an organizational framework for identifying, quantifying, and comparing the costs and benefits (measured in dollars) of a proposed policy action. The final decision is informed (though not necessarily determined) by a comparison of the total costs and benefits. While this sounds logical enough, cost-benefit analysis has been cause for substantial debate when used in the environmental arena (see the online debate between Lisa Heinzerling, Frank Ackerman, and Kerry Smith). The benefits of environmental regulations can include, for example, reduced human and wildlife mortality, improved water quality, species preservation, and better recreation opportunities. The costs are usually reflected in higher prices for consumer goods and/or higher taxes. The latter are market effects readily measured in dollars, while the former are nonmarket effects for which dollar values are not available. In addition to complicating the practice of cost-benefit analysis (dollar values for the nonmarket effects must be inferred rather than directly observed) this raises ethical issues. Should we assign dollar values to undisturbed natural places? To human lives saved? To the existence of blue whales and grey wolves? If we decide such things are too ‘priceless’ to assign dollar values we lose the ability to use cost-benefit analysis to inform the decision. What then is the alternative? How do we decide? Who gets to decide?
Environmental economists tend to favor cost-benefit analysis in the policy arena because of the discipline and transparency it provides in evaluating policy options. It is easy to evaluate absolutes. Most would agree that reducing nitrogen contamination of groundwater wells, limiting the occurrence of code red ozone alerts, and preserving habitat for grizzly bears are worthy goals. Determining the relative merits of any one of these compared to the others, or compared to non-environmental goals such as improving public education, is much more daunting. Because policy making is ultimately about evaluating the relative merits of different actions some mechanism is needed to rank the alternatives. Without the discipline of cost-benefit analysis it is not clear how the interests, claims, and opinions of parties affected by a proposed regulation can be examined and compared. Criterion such as ‘moral’ or ‘fair’ do not lend themselves well to comparison and are subject to wide ranging interpretation. Who gets to decide what is moral or fair? Cost-benefit analysis is far from perfect, but it demands a level of objectivity and specificity that are necessary components of good decision making.
To begin this post I described an apparent contradiction: environmental economists who consider themselves ‘environmentalists’ will on occasion recommend environmental regulations that do not seek to completely eliminate pollution. Hopefully it is now clear that this is really not a contradiction. Environmentalists come in many forms, including activists, lobbyists, spokesmen, natural scientists, and even economists. Economics provides a structured framework for evaluating outcomes absent hype and advocacy. Cost-benefit analysis is a part of this. By using the tools of their field environmental economists can contribute unbiased information that can lead to better policy decisions, and ultimately better environmental outcomes.