The Trump administration’s proposal to cut the Environmental Protection Agency’s budget deeply raises the question of the optimal geographic area for some economic policy. Administration supporters assert that the cuts are good because states are more effective than the federal government in dealing with pollution. Are they right?
Sometimes yes, sometimes no. That answer can be frustrating but is true in this case. Yes, in some cases states are better able to respond to pollution. But given the scale of a modern economies, they often are not.
Consider why we should limit pollution in the first place. To many the answer 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.
A bad thing about pollution is that it involves a “tort,” legalese for harm done by one person to another. This view predominates public thought. It is correct.
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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, where the polluter gains while a damaged party loses. Society as a whole gets poorer, with fewer of its needs and wants satisfied from a given set of resources.
This is a vital insight, but the economic exposition of it is not hard. Nor is it controversial within the discipline. All economists agree on it, whether they are Republicans or Democrats, or New Classical or Keynesian in their economic views. Economists may disagree, though, on the best responses to external costs.
At the same time, economists recognize that information for making decisions is valuable, scarce and expensive to accumulate. Good information leads to better decisions and bad information to worse ones. People close to any specific problem usually know more about relevant factors than those far away. So the principle of “subsidiarity,” an idea rooted in Catholic social thought that says we should make decisions at the lowest level at which one can make good decisions, can apply to resource-allocation questions.
Still, Pigou’s fundamental insight remains: Resources will be wasted when a decision-maker reaps all benefits but others bear some costs. And it applies to governmental jurisdictions as well as to individuals or companies.
Say a new mine discharges polluted water into a river that others use for drinking water. The pollutants could affect human health. If allowed, the water drinkers will suffer tort damages. The economy as a whole will be less efficient.
If neither sides has disproportionate political power, the state where the mine and downstream consumers are located might indeed be the best level for a solution. Justice Louis Brandeis observed that “states are the laboratories of democracy.” A solution in Boise may well be better than one decreed in Washington, D.C.
That is true, however, if the pollution reaches only the downstream water supplies within the state. If it flows further, say into a larger river that flows across state lines, then Pigou’s insight will dominate. If Idaho reaps the employment and other economic benefits of a new mine but Oregon, Washington and other states and provinces down the watershed bear costs, then a policy forged in one state will not be optimal for U.S. society as a whole.
Ditto for agricultural runoff into a little, highly impaired watershed in southwest Minnesota. Our farm lies there. The area is small, only 60 miles of river before it crosses into Iowa and eventually reaches the Missouri river.
If excess fertilizer or weed killer or sediment flows off our farm, then neighbors right downstream suffer damage. 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.
Our state’s governor commendably wants to limit such pollution. But economic theory and history both demonstrate that if one state’s officials consider only costs and benefits to their state, with no federal involvement, the level of pollution abatement will be less than optimal for society.
Pollution crosses state lines. Particulates from a power plant in North Dakota blow into Minnesota. Mercury and sulfur from coal burned in a Minnesota to light our house in St. Paul, rain out over Wisconsin, Michigan, Illinois and elsewhere to the east. When I flush my toilet, the waste passes St. Louis and Memphis eventually. Making all environmental policy state-based 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.
We have improved the environment in many ways 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.
St. Paul economist and writer Edward Lotterman can be reached at firstname.lastname@example.org.