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The Inescapable Reality of Economic Tradeoffs: Environmental Econ 101

20 Feb 2018

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.