Resources get wasted when a society does not develop effective ways to manage the damage that can occur when the economic activities of one person or company harm another -- what economists call "external costs."
It is inevitable that this will happen in modern technological societies, particularly ones with dense populations. Every person will do something that affects someone else adversely to one degree or another. When the potential, or actual, harm is nontrivial, economic efficiency suffers. A society's living standards can be reduced by adopting bad policies or increased by adopting good ones.
In managing these costs, information is key.
In practical terms, such damages can never be reduced to zero. The objective is to reduce them to levels that minimize waste of resources and preserve some degree of fairness in terms of who benefits and who bears costs. Unfortunately, any policy to reduce the harm to society as a whole from uncontrolled external costs is harder to implement when there is great uncertainty about the true costs or benefits of the harm done or the measures to reduce it.
Take a minor issue that is becoming a major one. In the past six months, there have been five major accidents involving rail cars carrying crude oil. The recent one in Casselton, N.D., involved the spill of 400,000 gallons of crude oil and an intense conflagration. Luckily, the wreck occurred outside of town; the fire would have been impossible for local fire departments to control if it had happened in any of the urban areas that crude trains now traverse. The 47 deaths in a similar accident in July in Lac-Megantic, Quebec, is not a worst-case scenario.
The policy question is turning out to be the design standard for tank cars. The historic norm for nonpressurized liquids is DOT-111, a design first brought out in the 1960s. The design has proven vulnerable to punctures in derailments; at least 18 of 20 cars in the North Dakota accident were punctured even though the train was going only about 40 miles per hour at the time of the collision.
There are safer designs, including those for pressurized gasses. These are required for cargos deemed more hazardous than crude oil itself.
Crude oils vary greatly in characteristics, but while all are flammable, most were not thought to pose a danger of explosion or fireballs. Lac-Megantic and Casselton are proving that assumption false.
Should car designers 50 years ago have paid more attention to crash survivability? At the time, pipelines and trucks had reduced railroad haulage of crude oil and refined products to near zero. More attention was paid to safety factors for cars that would haul propane or anhydrous ammonia, but oil transport by train was a dying business.
Much of the time, the DOT-111 cars would be filled with nonhazardous cargoes such as clay slurry.
Should the Federal Railroad Administration have been more alert to the fact that oil from North Dakota's Bakken formation has components that are much more inflammable than other crudes?
This is the agency that is supposed to issue guidelines as to what substances can be hauled in what cars, but it does not have a mandate or funding for lots of scientific testing. Nor has the National Transportation Safety Board devoted a great deal of effort to planning in rail.
Rail transport of crude, and of ethanol, has burgeoned over the past several years. But little attention was paid to possible increased hazards. Libertarians and others who favor minimal government argue that the shippers or the cargo or the railroads themselves have an incentive to know hazards and take steps to reduce them since they will have to pay out large settlements after a disaster. And if they are asleep at the switch, the insurance companies that sell them coverage should prod them, since they also have something at stake.
But this hasn't happened.
So neither the regulatory agencies tasked with railroad safety nor the private companies with much to lose have been very active in heading off this problem. Both groups suffered from incomplete information and both had little incentive to make up for that lack until disastrous accidents brought the matter to public attention.
Still, crude transport by rail poses unknown hazards. Similarly, there are other cases where we know hazards exist but don't know the efficacy of measures to abate them. More than 400 years ago, it was clear that when some copper ores were exposed to air and then water passed through them, acids would be formed that would damage streams. A third of a century ago, I worked on an ag development project in areas of the Peruvian highlands that have been heavily mined since the late 1500s. Acid drainage from old mines is a pervasive problem throughout the zone. And similar toxic drainage occurs on nearly every continent.
Mining companies argue that we now have the technology to ameliorate the problem by sealing off waste-rock tailings from water infiltration and with other measures. But these abatements will have to last for centuries. How sure are we that these will work as promised?
That is a big issue for mining areas from Minnesota to Montana to Arizona where opening new copper mines is now viable due to high world prices. But in many areas it may harm other sectors, including recreation and tourism. How sure do we have to be of the odds to make a bet?
Europe hews more closely to the "precautionary principle" that one should not adopt a new technology until one has a high degree of certainty in the outcomes -- intended or unintended, positive or negative. That is behind their restrictions on genetically engineered crops. New York has a near-ban on fracking because of uncertainty about its external costs, while neighboring Pennsylvania is permissive. But Europe, as a result, could have costlier food than the U.S.; New York could have less employment and economic development than Pennsylvania. Does precaution contribute to higher costs, lost development and fewer jobs?
Lack of knowledge is not unique to environmental policy. Businesses and households also deal with it every day. But it renders policymaking more complicated than it may seem on the surface.
Economist Edward Lotterman teaches and writes in St. Paul, Minn. Write him at email@example.com.