Economists, Environment, and Prices

An Illegitimate Claim!

Vipin P Veetil   

Environmental problems cannot be solved with the domain of economics by calculating appropriate prices (inclusive of social costs and benefits), because the implication of environmental changes are not only interspatial, but are also inter-temporal in character. Therefore to calculate “correct” prices subjective relative valuation of various generations are necessary, this is beyond the scope of positive economics. The intellectual domain of environmental issues is not the monopoly of economists.

Environmental issues maybe examined using one of two possible approaches: idealistic or materialistic. At the core of the idealist debate is a philosophical focus on the moral and ethical rightness of the relationship between man and nature[1]. The materialist debate, on the other hand, concerns itself with the material benefits and losses of such relationships. The distinction is critical because an analysis may be plagued by confusion if the parameters are not clearly drawn, as it is inappropriate to compare materialist pros (low price of goods produced by industries on the bank of Ganges as pollutants can be freely dumped into it) with idealistic cons (anger of Goddess Ganga for dirtying the river), and vice versa. The topic is inter temporal and inter spatial, where all ideals such as religions, morals, ethics, etc vary, the only thing that remains constant and can hence serve a solid foundation for a scientific discussion is the fact that humans exist and they desire to improve their standard of living[2].   

If we assume that we have inherited the earth from our ancestors and are not liable to our children, then all cost benefits analysis will be current in nature. In short our attitude will be one present in Keynes’s famous statement: “In the long run we are all dead”. If however, we assume that that we are borrowing the earth from our children, then our valuation of the environment will be infinity, because we will have to return it to them preserved (assuming that the rate of interest is zero!). The logical implication is that all economic activities should be such that no significant environmental damage is inflicted. Most economists tend to support the first proposition (though this may not be explicitly recognized), whereas many radical environmentalists propagate the second.

The environment is “a system comprising of the earth’s living things and the thin global skin of air, water, and soil which is their habitat… (humans have introduced into the) environment various artificial radioisotopes, detergents, pesticides, plastics (as a result of economic processes, leading to) environmental pollution (which) is the symptom of the resultant breakdown of environment cycles” (italics added) (Barry Commoner, 262). Environmental problems arise because of the existence of production or consumption externalities, whereby there is a diversion between private and social costs, the greater the diversion, the greater the problem. If a farmer and a cattle–raiser are operating on neighbouring properties, then a problem arises because the cattle-raiser does not include in her cost benefits analysis the cost imposed on the farmer when her cattle strays into the farming land to eat crops. Ronald Coase illustrated that regardless of the definition of the property rights, the socially optimal amount of cattle and crops will be produced if both agents bargain, hence including social cost and benefits into their analysis[3]. This is the cornerstone of environmental economics: the problem of pollution arises because social costs are not included in marginal cost benefits analysis, and the price of pollution hence arrived at is incorrect. Some environmental activists and ecologists feel that concepts such as the ‘price of ecology’ are mundane matters, and ways to banish all environmental problems under the term ‘externality’. The problem is not with the concept of the price, but with the fact that economists are far too often concerned with institutional methods of arriving at the so called ‘right price’ (considering marginal social costs and benefits) whereas environmentalists and ecologists are engrossed with ‘what is the right price?’

Environmental problems are best studied using the classical ‘prisoners dilemma’, however with significant differences. There are primarily two reasons for the dilemma of environmental pollution. First, sometimes the prisoners cannot communicate because there are too many agents and transactions costs approach infinity, for example if there are ‘n’ number of firms polluting a stream and ‘m’ number of people drinking water from it, it is not viable for each person to approach each firms or vice versa. Second, the prisoners have no way to assure that all would abide by the solution agreed upon by communication. If for example all ten residents of a city voluntarily agree to install ‘smog reduction device’ in their cars after discussions, they may not do so because each individual would say to herself ‘if I bear the cost of installing the device in my car, but others don’t follow suit, then I will be worse off because the smog level will not reduce’. Both these problems have been recognised by economist, including Coase himself: “In order to carry out market transactions it is necessary to discover who it is that one wishers to deal with, to inform people that one wishes to deal and on what terms, to conduct necessary negotiations leading up to the bargain, to draw up contract, to undertake inspections needed to make sure that the terms of contract are being observed and so on” (Coase, 110). It is important to develop appropriate institutions to deal with the problem of pollution. If the problem is regional, then it is best dealt by institutions similar to Panchayat Raj Institutions of India, where in the favour of equity regional communities may be granted their property rights. If the problem is global, like Global Warming, then international institutions are necessary to adequately address the issues. Though bargaining and price determination may be whenever possible left to regional organisations, higher bodies need to carry out extensive research so as to provide them information on the effects of various kinds of pollution, hence equipping the lower bodies to make an informed choice, because if information asymmetries exist then socially optimal decisions may not be made through the bargain[4].

(Abridged version of the paper)

REFERENCES:

Coase, Ronald. 1960. The Problem of Social Cost. In Economics of the Environment edited by Robert Dorfman and Nancy S Dorfman. 100-129. New York: W W Norton & Company, Inc.

Barry, Commoner. 1971. The Environmental Cost of Economic Growth. In Economics of the Environment edited by Robert Dorfman and Nancy S Dorfman. 261-283. USA: W W Norton & Company, Inc.

Bhagwati, Jagdish. 2004. In Defence of Globalisation. 135. New Delhi: Oxford University Press.

Varian, Hal R. 1999. Intermediate Microeconomics. Chapter 36. New York: W W Norton & Company, Inc.