How to Handle Pollution

...Those for whom cleanup is cheaper will continue to find it profitable to reduce pollution a great deal, while those for whom cleanup is more expensive will find it profitable to reduce pollution less...

...Aren't there respectable arguments against pollution taxes...

...Before turning to the core of his criticisms, I want to juxtapose Kelman's solid comprehension of the subject with the incompetence (my word, not his) he uncovers among 63 key participants in the environmental policy process...

...In the past my reply has been: "I honestly do not know of any article or book that intelligently counters the tax method...

...I would like economists to say: "You set the target by weighing the moral and material consequences...

...At last we have a work by an author who thoroughly understands the "economist's argument," yet has sophisticated qualms about it...

...In an age when my profession has earned a reputation for internal dissension over stagflation remedies, 1 have been especially eager to report to my classes the near accord on "micro-economic" issues of this kind...

...If one believes that people may justifiably oppose incorporating some additional previously unpriced but valued things into a system of prices and markets, and if one further believes that environmental quality is something that should not be so incorporated, then one has reason to be concerned '"4...

...Using economic incentives in environmental policy means bringing environmental quality into a system of markets and prices of which it previously has not been a part...

...Economists can help by emphasizing that nothing in economics automatically rules out completely eliminating a noxious substance...

...Kelman's own clear exposition of the matter belies the excuse often given that it is too complex and technical...

...If the tolerable level of a pollutant is judged to be zero, then it should be banned...

...A system of standards means that sources with widely differing cleanup costs must reduce emissions by the same quantity...

...After an above-zero target has been chosen by society, the means of enforcing it is not essentially an ethical matter...

...Despite at least a decade of articles and books developing the case for taxes instead of quotas, Kelman is justifiably astonished to find that very few of those he interviewed were able to explain it...

...Equally important, Kelman writes well and presents both sides in language easily accessible to the nonspecialist...

...heirs of Adam Smith, we learn to appreciate how self-interest constrained by competitive markets can promote social welfare with an "Invisible Hand...

...After hearing my presentation and reading the assigned articles and books, they quite properly ask, "Isn't there another side...

...These market influences can be demonstrated with a mathematical eleganceol great esthetic appeal...

...If one believes that equity considerations may justifiably play a role" Kelman is correct t hat we economists are often too quick to dismiss the serious reservations many have about incentives...

...So unanimous is the viewpoint that it always evokes suspicion among thoughtful students...

...Determining the resources to be devoted to stopping criminals is a separate issue...

...In this he certainly is successful...

...In my view, the moral force of the stand against pollution charges is mitigated once it is recognized that there are two distinct steps in dealing with any harmful effluent: First, policy makers must decide on a total target-the sum of emissions to be allowed by all polluters...

...The overwhelming majority of American environmental policy makers apparently have never made the effort to grasp the relevant economic concepts...

...I think many confuse the overall goal with questions of allocation because they fear that somehow a tax will be ineffective, that the target will be exceeded...

...Frequently, although not specifically in the special case of the use of charges in environmental policy, economic incentive approaches produce a situation where wealthier people choose to pay the charge and continue behaving as before, while poorer people, to avoid the charge, are the ones to change their behavior...

...It doesn't change the fact that here only a target of zero is acceptable...

...if you select a target greater than zero, we can recommend a tax to achieve it...

...The difference is that we would, in fact, want every person to refrain from crime...

...It would be hypocritical to brand these producers as unethical for fulfilling society's preference concerning this trade-off...

...Now I have a better answer...

...and occasionally they may have ethical costs greater than the gain in efficiency...

...This is not a valid objection to in-centivesassuch, though: The law should simply specify that the pollution tax be adjusted upward until the designated goal is achieved...

...Our training impresses on us the advantage of market forces...

...In a chapter entitled "Ethical Theory and the Case for Concern about Charges," he addresses four concerns: " 1. If a society uses economic incentives in environmental policy, it makes a social statement of indifference towards the motives of polluters in reducing pollution...

...Controversies invariably arise where reaching a zero target requires sacrificing some material output...

...If people may justifiably care about the motives others have for behaving as they do, and if one further believes that using economic incentives endorses self-interested behavior that one may not in the circumstances wish to endorse, then one has reason to be concerned with using economic incentives in environmental policy...

...His main purpose, though, is to show why we should be wary of the use of incentives...

...Nobel laureate James Tobin has written that although "any good second-year graduate student in economics could write a short examination paper proving that voluntary transactions in votes would increase the welfare of the sellers as well as the buyers," there are clearly reasons of principle for prohibiting the practice...

...Some economists have been alert to this trade-off...

...And in his important 1974 book, Equality and Efficiency: The Big Trade-Off, the late Arthur Okun of the Brookings Institution devoted a whole chapter to the conflict between "rights and dollars...

...It would be cheaper to obtain the same objective by using differential reductions for individual sources, so that those for whom it is cheaper to clean up cut their emissions more than the average amount and those for whom it is more expensive cut them less...

...In the end, Kelman's arguments notwithstanding, this economist remains convinced that pollution charges are better than quotas, all things considered...

...Kelman raises a spurious analogy with crime, noting that someone might ask: Why not tax crime, instead of making it illegal, because we know we can't really wipe it out altogether...

...Thus the moral considerations Kelman raises actually apply mainly to the first step-to deciding how much, if any, of a given pollutant we are willing to permit...

...Because many laymen who object to incentives are unaware of this, economists tend to believe that protests against getting things done through the free market are solely based on ignorance...

...Others argue that industrial growth is more crucial, especially to the poor, than a pure environment...

...A system of charges allows this...

...And, indeed, it is in picking a proper target that these sorts of moral concerns should be a factor...

...If a society uses economic incentives in environmental policy, it fails to make a statement stigmatizing polluting behavior "3...

...His primary insight, rephrased in economists' jargon, is that there is "an optimal domain for market incentives": Certain activities are best handled with them, others without them...

...But Kelman surely makes his central point clear: All things must be considered, and a decision is more difficult to arrive at than standard economic treatments pretend...

...The objective in environmental policy may be regarded as achieving some level of ambient air or water stream quality...

...By contrast, when we agree that our target for a pollutant should exceed zero, then we are saying that we are willing to let some producers go ahead and pollute because in our eyes their productivity justifies the accompanying environmental harm...

...is a brilliant, balanced critique of using incentives not only to combat pollution, but many other problems as well...

...If firms face a fixed charge for each unit of pollution, they will find it profitable to continue to clean up until the point where the marginal cost of further cleanup equals the charge...

...As Kelman points out, some people hold the view that it is wrong to weigh economic losses when deciding whether to permit pollution...

...Unlike the criminal, the businessman with a dirty smokestack is contributing a benefit that offsets his "crime...

...He writes: "At its simplest and most appealing, the case for using charges rather than standards in environmental policy is simply that it is better to achieve a given objective for less money rather than more money...

...Kelman reminds us that informed doubts are possible, and in some situations persuasive...

...Having proven his mastery of the tax approach's virtues, Kelman is able to analyze its ramifications from a position of strength...

...Different sources of a given pollutant present widely differing costs in reducing their emissions by a given quantity...

...The debate over charges versus quotas is relevant only to the issue of allocation-to achieving a target greater than zero that has been accepted by society...

...Steven Kelman's What Price Incentives...

...Kelman himself says, "In the specific case of environmental policy, the efficiency advantages of the approach may well be great enough to make it, on balance, merited...

...second, they must determine how to best allocate this total among polluters in terms of minimizing the overall social detriment...

...Nevertheless, Kelman is surely on target in saying that many economists have not sufficiently appreciated the damage that could be done by extending the sphere of incentives...

...To praise Kelman's book and concede that incentives may have undesirable consequences as well as benefits, however, is not to imply that he convinces me on the topic of pollution...

...Reviewed by Laurence S. Seidman Assistant Professor of Economics, Swarthmore Like many professors of economics, for years I have enjoyed comparing the instrument of environmental policy chosen by Congress-regulatory quotas (ceilings)-with the one preferred by nearly all economists-pollution taxes...