Few important economic questions are all or nothing. Rather, the issue usually is ‘how much.’ A recent letter to the editor serves as an example: ‘Not only will going green, along with the proposed cap and trade, destroy commerce, trade and industry, but consumers also will experience gigantic increases in the costs of goods and services.’
Well! While it is not clear exactly what the writer means by “going green,” we sure wouldn’t want those terrible outcomes.
But the issue is more complicated than going green or not going green.
Such all-or-nothing thinking is common, however.
When the question of limiting greenhouse-gas emissions arose during the 1992 United Nations Conference on Environment and Development in Rio de Janeiro, President George H.W. Bush, who was no dumbbell, expressed his support for such limits “as long as it does not hurt the U.S. economy.”
A decade later, his son’s administration followed the same line of thinking when asserting that limiting CO2 emissions inevitably would “cost 5 million jobs.”
There often are tradeoffs between limiting pollution and producing goods and services. But the tradeoffs are not binary — limit emissions and destroy the economy versus do nothing at all.
The choices instead are usually how far to go along some scale.
How much would it cost to limit emissions by 5 percent? What about by 10 percent, 20 percent or 30 percent? And what benefits are there at each of the same series of possible reductions?
An economic principle known as “diminishing marginal returns” applies here.
The first hour spent studying for a test adds more to a student’s score than the fifth hour.
Going from 0 to 10 pounds of fertilizer per acre adds more to corn output than going from 190 pounds to 200.
If you rank possible improvement projects for your home, the first $500 spent will do more to improve its appearance or livability than going from $99,500 to $100,000.
The gain to a developing country’s productivity from spending an additional $10 million moving kids from illiteracy to elementary-school completion is greater than the gain from spending the same amount to increase college graduations.
The cost of technology needed to improve a motor vehicle’s gas mileage from 20 miles per gallon to 25 mpg is less than moving the mileage of a vehicle with the same capabilities from 40 mpg to 42 mpg. The phenomenon is so common that one could go on and on.
The same sort of decreasing marginal productivity, or its flip side, increasing marginal cost, applies to government policies to improve life expectancies, reduce harm from pollution and many other efforts: The first increments are cheap. Succeeding increments get progressively more expensive. But one can choose how far to go along a spectrum rather make a stark choice to do nothing or do everything.
While incremental costs trend upward, the value of benefits usually trends downward.
The public health benefits of population-wide vaccinations for common diseases are many times larger than the costs.
The benefits of safe drinking water in urban areas similarly outweigh costs, but not by as wide a margin as vaccinations.
Benefits of access to appendectomies or basic obstetric services also outweigh the costs, but not by as great a margin as safe water.
But the benefits of spending on aggressive prostate cancer treatments to raise men’s average life expectancies from 80 years to 80 years plus three months probably fall below costs.
In some cases, the “costs” are negative.
If we could get past obstinate opposition to use emissions taxes to control all sorts of pollution problems rather than mandating specific technologies, we could achieve greater emissions reductions and still have more money left over to produce other goods and services to meet society’s needs.
If anything, it is our refusal to adopt effective measures that impoverishes us rather than the fact that there are cost-effective alternatives to achieve environmental improvement.
Regardless of approach, there always are choices of degree.
Take Minnesota’s approach of mandating specific amounts of renewable electricity by specified dates. Should it be 25 percent by 2020 or 40 percent by 2012? The range of possible dates and amounts is infinite.
Economists’ first choice would be a tax on polluting sources of electricity. Here, the question is how high the tax should be on each of a series of harmful emissions.
The next-best choice, tradable permits, means one must choose how many permits to issue and whether or not permitted levels should be ratcheted down or up over time.
Experts can argue projected costs and benefits of limiting pollution, building highways or educating preschoolers.
Despite their estimates, the final choice will be a question of how much rather than just yes or no.
© 2009 Edward Lotterman
Chanarambie Consulting, Inc.