Costs and Regulation

Let's distinguish two forms of regulation, reflecting the statist vs. Hayekian distinction. One option is to make the undesirable activity illegal. The alternative is to make it costly. More generally, we can regulate activities either by using the blunt instrument of the law, or else by the more subtle manipulation of market forces. I think the latter will often be preferable.

A major advantage of the market is the sheer efficiency brought about by the informational sensitivity of price signals. Greenies want to help the environment, but often don't know how best to achieve this. Some proposals seem to have mainly symbolic value, as their slight good consequences may be outweighed by the time and effort put into them, especially when opportunity costs are taken into account. PC claims that recycling is such an example:

[W]hen used items have real value -- Ferraris for example -- they don't need to be 'recycled,' they get sold. 'Recycled' is what happens to stuff with no value, or with so little value only a government regulation can make enough people care.

This is deceptive, however, because our current pseudo-market externalizes environmental costs. Price and cost thus come apart in a way that's far from ideal. However, if only we were to stop subsidizing polluters, then perhaps prices really would signal value.

(N.B. In response to these externalities, we must take care to tax the right thing. The Greens want to "link car registration charges with fuel efficiency", so as to "reward people who bought “environmentally sensible” cars." But this seems to fetishize a 'means' over the 'end'. What really matters here is the fuel use itself, not the efficiency with which it's used. So, as Kiwi Pundit points out, we would do better to increase fuel taxes instead. This direct approach will indirectly incentivize such derivative goods as fuel-efficiency anyway. But it avoids various inefficiencies that would arise from confusing the means and ends in this case.)

Brad Templeton explains how buying energy efficient cars or home solar panels could actually be "bad for the environment, compared to the choice of buying carbon credits, which is to say bribing existing polluters to cut back their output":

The answer, right now, is that it’s far easier and cheaper to reduce pollution by cutting output at the big polluting factories and power plants. A dollar spent there does an order of magnitude more to cut pollution than a dollar spent on personal PV panels or a personal hybrid car.

Markets are thus important because prices signal information about ease and efficiency, and so can help us to identify how we can do the most good. Or, as Brad puts it:

A working credit system (and I’m not ready to make the final claim that we have one) creates a market that focuses the money on the places where you can get the most bang for your buck in pollution reduction. A working credit system means you don’t work on your own house because you can spend the money getting somebody else’s far less efficient house in order first. Sometimes people justify their own solar panels or Prius by saying that they want to do something, and they can’t do anything about the big power plant. But with a credit system that’s exactly what they can, and should do — until the markets change and it makes sense to spend money on your own car.

Internalizing costs through the market is also superior to heavy-handed regulation in terms of human freedom. Consider my old post on urban sprawl: outward development imposes significant public costs, and statists in local government respond to this with zoning regulations to prevent or restrict the harmful activity of expanding development. A better solution might be to internalize the costs, say by requiring developers to pay for the requisite public infrastructure (presumably passing this along in the form of higher housing prices), and charging higher rates to peripheral real estate in order to meet the ongoing costs of sprawl.

This would give more people the freedom to live in suburbs if they so wish, without subsidizing their choice as our current pseudo-market does. If people want the suburban lifestyle enough to be willing to pay for the indirect costs, then why stand in their way? A market system, with true costs appropriately internalized, strikes me as an institution with great potential for enabling humanity.

Categories:

• economics
• politics
• law
• bioethics
• freedom