What is Environmental Politics?. Elizabeth R. DeSombre
externalities is key to avoiding or addressing environmental problems. Because of the nature of environmental problems as externalities, finding ways to accomplish the same underlying goal without creating the externality is likely, at least initially, to cost more. That is because of the “unpriced” aspect of externalities. If there is no cost to putting sulfur dioxide into the air, then burning coal to produce electricity gets all the benefits of the electricity for those who produce or use the electricity without their having to pay for the downsides of that coal burning. Generating electricity in a way that doesn’t create sulfur dioxide emissions requires either using a different, more costly, input in areas where coal may be cheap or installing “scrubbers” to take the sulfur dioxide out of the emissions; those scrubbers have a cost and also make the electricity generation less efficient. Producing electricity in a different way is therefore likely to be more costly; if that were not the case, the change would have likely already been made. (That’s the upside of the unintended aspect of externalities: because you’re not trying to create them, if it were possible to do the thing you’re trying to do just as easily without creating them, you’d be happy to do it.)
That additional cost means that people or businesses are not likely to change their behavior to avoid creating externalities of their own accord. Policy can therefore play a central role in making that change happen; in many countries power plants are required by law to remove the sulfur dioxide from their emissions. But in the same way that people or businesses resist deciding on their own to stop creating externalities, they are likely to oppose policy action to prevent them from creating externalities. That’s where politics comes in – the struggle among different people with differing opinions on what should be done. The question of what businesses or people should be required to do, or prohibited from doing, is a political decision.
The economist Ronald Coase argued that externalities can sometimes be addressed without policy intervention. His logic rests on the important observation that externalities are reciprocal. They connect at least two different actors: the one creating the externality and the one it affects. One of the examples he uses is the effect of a cattle ranch next to a farm; the straying cattle can trample the crops and cause damage to the farm. That damage is an externality; it is unintended and the rancher doesn’t suffer any cost from the straying cattle unless someone creates a rule that requires the herder to compensate for, or prevent, the damage. As is obvious, there would be no damage to the crops without the straying cattle. But, as Coase also points out, it is also true that “there would be no crop damage without the crops.”1 In other words, the rancher is affected by the presence of the farmer as well as the other way around.
This reciprocal relationship means that, in the same way that the farmer is negatively affected by the behavior of the rancher, the rancher would be negatively affected by having to change her behavior to avoid the damage her cows are doing to the crops. If there is value in ranching, to the rancher or to the community, then simply requiring the rancher to stop creating the externality may not be the best collective solution.
The most common way to address problems created from externalities is to regulate the action that is producing them. The rancher, in this instance, could be compelled to fence her property or be required to pay compensation for any crop damage. The reciprocal element of externalities creates opportunities to address these unintended consequences in ways other than governmental intervention, however. The farmers could work together to put up a fence to keep the cows out. If the cost of the fence was less than the cost of the damage from the cows, it might be worthwhile to the farmers to work together to put one up, especially if there were no existing rule that prevented the rancher from causing damage. The farmers could even pool their money to offer a certain amount to the rancher to persuade her not to buy another cow. For the farmers, again, this solution would be worthwhile if the amount of damage avoided would be greater than the cost they would have to pay. For the rancher, it would be worthwhile to take money in return for not getting another cow if the amount earned from the cow would be less than the amount the farmers offered. There might be a situation in which both parties are better off than either would be without that privately agreed solution.
Depending on your perspective, creating this type of solution might not appear “fair.” It may not seem reasonable that a farmer who is being harmed by someone else’s activity should have to be the one to take on the cost of preventing the problem. But what Coase is pointing out is that, in the absence of a political solution that regulates the rancher, the farmers still have some ability to improve their situation on their own. And, to the rancher, a newly created set of farms that affect her ranching operations also might not seem “fair.”
“Coasian” solutions to the problem – addressing externalities without government action – do have some conditions that need to be met before they are likely to happen. First, everyone needs to have full information about the costs and the benefits of the externality and any potential solutions to it. Second, any agreement that the parties reach needs to be enforceable; if the farmers pay the rancher not to get another cow and the rancher gets one anyway (and there’s no recourse), this type of solution will not be pursued in the future. Third, what Coase calls “transaction costs” – the difficulties and actual costs of pursuing the solution – need to be minimized.
Even if the conditions Coase outlines are not likely to be met in most cases of environmental externalities, there are some important implications of his argument. First, working to improve those conditions can be useful not only in their own right but because they can help communities be more willing to address environmental externalities on their own. Reducing transaction costs – perhaps by holding a neighborhood meeting and providing childcare – can make it easier for the sufferers of an externality to organize. Making information transparent is a good thing in its own right and can help the process of figuring out what the best solution collectively would be. Doing these things can also make communities less resistant to policy to address the externalities in the first place, because they better understand both the actual long-term costs and benefits of changing behavior and the underlying environmental problem.
Finally, implicit in the Coase Theorem is the idea that we don’t necessarily want to aim for a situation in which no externalities are produced at all. That sounds counterintuitive: if externalities are negative, wouldn’t we want them to be eliminated? But the activity that creates externalities frequently has value, and efforts to reduce the externalities produced will also reduce the amount of that activity. Electricity generation frequently causes environmental damage, but electricity is central to important endeavors. A manufacturing plant that produces pollution may be making life-saving medical equipment. Stopping electricity generation or manufacturing in order to prevent the externalities they create would not be a good solution. So even when regulations are created through a political process to manage the problem of externalities, it is likely that externalities will not be entirely eliminated. That is especially true because those who are responsible for creating the externalities will participate politically to minimize the harm they experience from any changes required to minimize the externality.
The excess cost from what people refer to as “internalizing externalities” (in other words, from making the producer of the externalities bear a cost from creating them) may be only in the short term. Over time, the cost of preventing externalities will likely decrease. Innovation can create new ways to accomplish the same goals at a lower cost, and that kind of innovation is likely to happen when many industries need to minimize the pollution they create because of new rules. The initial cost the industry or business may have to bear from regulation is real – and is the reason these actors may fight against regulation – but over time the costs may decrease.
Collective Action Problems
Another reason people don’t experience most of the effect of the externalities created by their activities is that environmental problems tend to be collective action problems. In other words, one person’s contribution to air pollution is shared by the community that experiences it. The individual polluter might feel the effects of some of the pollution, but most of the effects are felt by others.
Another aspect of what it means to be a collective action