The Inescapable Reality of Economic Tradeoffs: Environmental Econ 101

HT over to Mark Perry @ Carpe Diem a few days ago.  Mark highlights the unintended (but perfectly predictable) consequences of environmental restrictions on new pipeline development in the Northeast part of the United States.  Mr. Perry asks the question:

 “Why is LNG coming 4,500 miles to Boston from the Russian Arctic when the US is the world’s No. 1 natural gas producer?

In the article, Mr. Perry links to a Boston Globe op-ed which subsequently  picked up on his theme:

To build the new $27 billion gas export plant on the Arctic Ocean that now keeps the lights on in Massachusetts, Russian firms bored wells into fragile permafrost; blasted a new international airport into a pristine landscape of reindeer, polar bears, and walrus; dredged the spawning grounds of the endangered Siberian sturgeon in the Gulf of Ob to accommodate large ships; and commissioned a fleet of 1,000-foot ice-breaking tankers likely to kill seals and disrupt whale habitat as they shuttle cargoes of super-cooled gas bound for Asia, Europe, and Everett.

On the plus side, though, they didn’t offend Pittsfield or Winthrop, Danvers or Groton, with even an inch of pipeline.

Massachusetts’ reliance on imported gas from one of the world’s most threatened places is also a severe indictment of the state’s inward-looking environmental and climate policies. Public officials have leaned heavily on righteous-sounding stands against local fossil fuel projects, with scant consideration of the global impacts of their actions and a tacit expectation that some other country will build the infrastructure that we’re too good for.

For this post I don’t simply want you to reflect on how bad this particular reality is (the failure to understand the nature of the tradeoff), I want you to reflect on both the necessity of the tradeoff and the reality that market-based tradeoffs are almost always going to be better than the results of a political tradeoff.  We understand that we live in a fallen world that suffers the curse of sin.  As Thomas Sowell says, scarcity is the first law of economics, and the first law of politics is to ignore the first law of economics.  The presence of scarcity in a fallen world necessitates tradeoffs, rationing and an ever-present opportunity cost to our actions.  In this case we could have had relatively safe pipelines with domestic production; instead we get much more environmentally destructive production by one of the world’s worst bad actors.  Not a good tradeoff from my perspective.

Yet I would argue that political tradeoffs are almost always going to lead to socially lower valued results than market tradeoffs.  Markets have an incentive structure that prices in the valuations of millions of consumers; politics has an incentive structure to shift the costs and then hide them from those paying the costs (the politically powerless) to provide benefits to the politically powerful.  In a world of rational ignorance (the world we all live in to various degrees), political solutions are almost always going to lead to a worse result.

22 thoughts on “The Inescapable Reality of Economic Tradeoffs: Environmental Econ 101”

  1. What are the exceptions in your opinion? I ask because you clearly have them in mind when you qualify with ‘almost.’

    Also, don’t we live in rational ignorance within markets as well? It seems that markets also have a tendency to shift costs off onto vulnerable people, creating problems we don’t care about because we aren’t aware of them.

    1. I can’t think of any exceptions but I didn’t want to rule them out.

      As for rational ignorance in markets, no. People have the incentive to become informed on any consumption choice that they take–they will suffer the full costs and receive the full benefits of any action (assuming property rights properly defined) that they take.

      1. Right, but I don’t have an incentive to know whether Nestle is treating its workers in, say, the Ivory Coast, well. In a lot of these cases, consumers in developed countries reap the benefits that are paid for through exploitation. There is a cost, but we are not usually aware of it, and we have no incentive to learn about it. Or do I mistake your meaning when you say ‘rational ignorance?’

      2. Theophilus,
        Without getting into the debate of how exploitative it is to work at under 15 years old (my Dad began work at 12 years old for the Dr. Pepper company–yes he lied about his age), I think its important to have perspective on this. How much of private markets transactions would fall into this exploitation narrative? Would you claim even 5%? I would make the case that almost all of the political decisions are going to be subject to these kind of negative realities. Market critics will point to the exceptions to the generally positive rule, whereas I think this case is illustrative of the general problem within the public sphere. And this is not a D/R issue; Mr. Trump is exploiting rational ignorance on steel tariffs right now. And he has already done it with Solar panels. As for what I mean by rational ignorance, see here:
        http://bereansatthegate.com/rational-ignorance-vs-ignorance-substance-vs-symbolism/

      3. I wasn’t going to contend that kids can’t work. I was more meaning things like the fact that children are being sold into slavery to work cocoa plantations, or the infamous conditions that the people who make our smart phones and t-shirts go through. Things that happen because we want cheap shirts and phones and cocoa, but that we could very easily be unaware of. But it looks like your definition of rational ignorance can only apply to political decisions, so my whole thought process is probably wandering from your point.

        I think we can both agree that a less-efficient market is a bad thing, but is markedly different from the kind of suffering that the market can be incentivized to inflict. We shouldn’t pretend, as you point out, that horrible abuse is the rule (although it is a persistent reality in some places) for markets. But I think that it’s unfair to equate market inefficiency and red tape to the kind of suffering that can at times spiral out of our free market.

        I think we agree, as long as when you say government decisions are subject to ‘these kinds’ of negative realities you mean unforeseen natural gas imports from Russia, not child slavery in the Ivory Coast.

  2. I think that political tradeoffs are motivated by public opinion and private interest groups than market tradeoffs will ever be. Because political tradeoffs are valued based on immediate payoff, they are far more disposed to being economically disadvantageous when compared to economic tradeoffs. While both can be used to manipulate outcomes, economic tradeoffs are far more objective in providing a cost benefit analysis than political tradeoffs will ever be.

  3. I do not quite see how it makes sense to not allow for this pipeline under the environmentalist mindset. The old adage of thinking globally and acting locally is thrown out the window here. They are thinking and acting locally. I understand that many people want us to stop using fossil fuels asap, but the market asap is much later than the idealist asap. It would be socially best for the market to act in its own time while we watch to see the amazing innovations that people come up with to overcome the social problems created by fossil fuel usage.

    1. And I think another part of the problem is that people don’t fully realize that the costs must be paid somewhere. You can redistribute costs in the short run and lower them in the long run, but you can’t avoid them. In this case, it may be convenient for these cities, but it’s mightily inconvenient for most of the other places listed here. I don’t know how much is hypocrisy and how much is just ignorance, but it’s perplexing either way.

      1. Does it have to be just ignorance and hypocrisy though? I’m not that creative but I can imagine situations where a trade-off with the market might be worthwhile to preserve something else. Conservation is often exactly that kind of proposition: Deliberately excluding certain areas or wildlife from exploitation is, of course, going to hinder the market, but it might also just be worthwhile. I feel like there can be other goals worth pursuing besides just growth, goals that the market is not good at meeting.

      2. @ Theophilus
        There may indeed be high valued tradeoffs, but the point I’m making is when those are done in the market process it is going to be more closely aligned with actual social welfare. For example, I applaud the Sierra Club and other environmental groups when they raise money to privately buy property to set it aside for conservation. When they pay the market price, they are matching their valuations with the millions of others out there in the market, and we know that they valued the non-use (in conservation) more highly than the rest of society valued the next best alternative. This is not so when those same groups lobby the government to purchase, or otherwise seal off property. Further, the underlying need that development of any property would meet does not go away with the elimination of one particular property being made unavailable, and the satisfaction of that need by the next available property may indeed, as in this case, lead to higher levels of environmental degradation due to its being less efficient than the first best solution (which is now hypothetically sealed off via government action).

      3. Sure, but buying the rights to prevent someone from doing something is not always a feasible solution, and the fact that someone might damage something else in their drive to exploit a resource doesn’t tell us whether their impulse to exploit the resource is a good one. It may be that by protecting rhinos we drive people to kill walruses to make up for the loss of ivory, but someone who is poaching these animals without regard for the biodiversity of the future is in the wrong either way. It may be beyond an African nation’s abilities to prevent someone in Greenland from going after endangered animals there, but that doesn’t tell us whether they should protect their wildlife.

        I also feel that this approach leaves the world vulnerable to exploitation by wealthy nations. No interest group in Swaziland is going to be able to outbid Nestle to protect their water. Government is the only recourse people without resources have to counter people who are better equipped than them. There are other concerns that ought to prevail over material calculations. The Sierra Club might be a viable option for a purely internal question in a developed nation, but stewardship is a global issue.

  4. “Does it have to be just ignorance and hypocrisy though? I’m not that creative but I can imagine situations where a trade-off with the market might be worthwhile to preserve something else. Conservation is often exactly that kind of proposition: Deliberately excluding certain areas or wildlife from exploitation is, of course, going to hinder the market.”

    One could make the case that some delicate areas should be off-limits to fossil fuel exploration, but only for NOW. In time, technology will make it possible perhaps to obtain those resources in a way that will not threaten the life that exists there.

    Why not wait? What is the rush NOW to drill in Alaska, or off the Atlantic Coast?

    It isn’t as if we lack resources currently. We can easily obtain those resources for the most part without jeopardizing pristine wilderness or the natural habitats of endangered life.

    Pick the low-hanging fruit now, and if we need to get that which is safely out of reach, we can do it later, when we have the proper tools.

    If we ignore the importance of protecting our most delicate and cherished natural lands, the market will have no incentive to do the right thing and find more human market-based solutions.

    And if we close to overlook the moral relevance of the pain, suffering, and violations of human rights that DO go on sometimes in the free market–as if 5% (or less) is a small amount, the small human cost of doing business–then the market will never have a need ever to do better.

  5. Jeff H (not me) said “For example, I applaud the Sierra Club and other environmental groups when they raise money to privately buy property to set it aside for conservation. When they pay the market price, they are matching their valuations with the millions of others out there in the market, and we know that they valued the non-use (in conservation) more highly than the rest of society valued the next best alternative. This is not so when those same groups lobby the government to purchase, or otherwise seal off property. ”

    If one takes that position to its logical extent, then slavery in the US should have been abolished not by an act of government, but by the purchasing the freedom of the slaves from their owners. That does not make any sense.

    That said, it did work on a small scale. Free blacks actually did purchase their own freedom, sometimes more than once from their unethical owners.

    1. I think your analogy only carries weight if you think there’s an objective morality to conservation. It’s convincing to people like me, but I think a lot of conservatives see stewardship of the environment as a different class of problem from the moral question of slavery, or even drug laws, because there is never an appeal to consequences when we’re talking about a law everyone agrees is morally right.

      1. I see your point; after all, no analogy is perfect. But if we are talking about private property and private property rights, foundational issues among conservatives today, the analogy holds.

        If one accepts the principle that it is morally wrong to use government to intervene, either through purchase or by act of government, into the issue of a citizen’s private property, one would have opposed both the Emancipation Proclamation AND the use of government money to buy up environmentally delicate rain forests.

      2. “But if we are talking about private property and private property rights, foundational issues among conservatives today, the analogy holds.”

        Right, except that the conservatives I know would say slavery was an invalid system a priori, and that because it does not allow some people (the slaves) to follow their own interests it is already an abuse that should be corrected. People can’t legitimately be property, owning another person is not a legitimate property right, so any system that supports that is invalid. Slavery in this case is like theft or murder, something government exists to protect us from, which makes it different from environmental exploitation (I’m assuming).

        I don’t think Haymond is saying it’s always wrong for the government to intervene, but that environmental questions are not in the category of issues that government is meant to address. So they reject slavery because it’s an absolute moral evil, and reject environmental policy because it is ineffective or counterproductive to what is really a pragmatic question, not a moral one.

        I probably align more on your side here, to be extra clear, I just don’t think anyone here is going to think your argument quite lines up with how they see it. Everyone here is pretty quick to denounce slavery, and not on the grounds of property rights.

  6. What do you think the main differences in the pipeline project would have been, had they viewed it within the scope of market trade-offs?

  7. Good analysis of the situation and application of tradeoffs to political decision-making. My question is to what extent, if any, should the United States act as a leader by setting the example to other countries, that we should not be abandoning policies to protect the environment for cheap production methods?

  8. There is clearly a difficult tradeoff in this situation, but are there any steps that could be made to preserve this project and its benefits while paying more mind to and diminishing the destruction that it has caused to the environment? The way the article describes the damage done to animal habitats does not seem like a justifiable level of stewardship of nature.

  9. Any tradeoff is going to be difficult. Market-based tradeoffs are always better than political-based tradeoffs. But they can’t just out off the costs and pretend that they just never have to be paid. Eventually they will have to be dealt with.

  10. Tradeoffs obviously usually leave someone feeling hurt or feeling like injustice done to them. Regarding the environmental attack in the polar ice caps, I would argue that the pipeline will eventually bring more good to humanity than harm. And shouldn’t we be seeking to always improve standard of living within reasonable tradeoffs?

    1. What kind of good? Why do you make that argument? I think the people who disapprove think that laying down that kind of infrastructure encourages us to expand our reliance on energy sources that are unsustainable and contribute to the degradation of the environment we share. What good are you leveraging against that?

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