On Tuesday I wrote about EPA’s new mercury emissions rule, and lamented the state of our discourse on environmental issues. I followed that post with a discussion of the appropriate role for economic analysis in environmental regulations. Today I want to bring our mercury discussion to a conclusion and offer a critical view of cost-benefit analysis (CBA), provide an alternative economic rational for pricing externalities, and close with an appeal to ethics-based decision making.
In environmental and health regulations, CBA assigns monetary values to human life and health so that the benefits and costs can be compared. A major flaw in CBA is the methods used to determine these values.
Because there is no market for human health and happiness – one cannot buy the right to a life – CBA attempts to determine these values by asking individuals what they would be willing to pay to remain healthy and free from harm. CBA then aggregates these values to determine what society is willing to pay for the benefits of environmental protection.
But relying on any individual to accurately respond to scenarios in which he attempts to value his life in monetary terms is a deeply flawed analytical approach. Bias is unavoidable (based on income, background, education and so on), and it is deeply suspect that an individual is capable under a hypothetical situation to value her own life. Consider just two scenarios: ask me to value my health and I may give you a dollar value (as an experiment); ask me what my family’s health is worth, and how much I’d pay to keep them from getting sick, and I’ll punch you in the nose. Second, ask me how much I’d be willing to pay to remain healthy after I am diagnosed with leukemia. I believe you’d receive a dramatically different response.
Further, these questions about pollution and risk are societal decisions, not individual decisions. Asking an individual what she would pay to keep herself free from harm is much different than asking what she would pay to keep society from harm, or what she thinks society could afford to prevent harm. The scale is vastly different between the individual, with her limited means, and society as a collective, and I suspect that an individual would be willing for society to pay a great deal more to keep all members healthy.
So the values that CBA assigns to the “benefits” of environmental protection are derived from what I and many others argue are deeply flawed methods.
Another critical error I see in the CBA analysis of the mercury rule is that its proponents fail to understand that opportunity costs cut both ways. This is an alternative perspective on CBA that I haven’t seen elsewhere. Consider: We have allowed a major industry to free-ride for at least 50 or 60 years, since we first realized that mercury emissions were accumulating in the environment and causing harm. During this time, industry has not had to pay the true costs associated with their economic activities. We know there is a cost to mercury emissions, because we are arguing about it now. Take that cost and apply it retroactively for five decades.
The problem with free-riding goes beyond the failure to recognize and collect the costs associated with industry’s negative externalities. The real issue is foregone opportunity costs and the misallocation of resources. The coal-fired power industry has operated under unfair market conditions for decades. By not paying the true costs associated with their activities, they have operated in a subsidized environment, and on an unlevel playing field. Let me ask: if for the past 50 years electricity from coal was priced to include the costs of its resulting pollution, what would the energy market look like today? Would the market price of coal have been sufficiently higher to allow competing industries to arise? Would the curve of technological development and innovation in alternative energy sources bent sharply upward? What competing industries may have arisen to challenge coal and to provide substitute means of energy production?
All the mercury rule does is correct a major market failure: Government is finally requiring the coal-fired power industry to account for the costs of the negative externalities associated with their activities. And still industry gets a free ride: No one is accounting for the costs to mitigate the damage already done to the environment and public health.
Lost in the debate on EPA’s mercury rule is any discussion of our ethical obligations as a society to the well-being of ours and future generations. Here we are at Free the Commons! writing three posts on CBA because economics and electricity costs are the dominant focus of the mercury debate, overriding all other considerations. Economic analysis has a role – an important role – in helping the public and our decision-makers understand choices between competing policies and options. But economic analysis should never have been afforded the role it plays today of primary determinant in what is and is not acceptable environmental policy. Economic analysis has distracted us from our responsibilities as adults, as members of a community, as caretakers and stewards of the environment. And our continued shortsightedness will cost us far more than we gain if we fail to recognize the need – not economic choice, but need – for a healthy, unimpaired, and productive environment.