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Does the existence of pollution indicate that an outcome is inefficient?

No, the existence of pollution is a sign that it is costly to produce and consume something – but from that fact alone you can neither infer whether an outcome is efficient nor if a market has failed.  (in other words, pollution is a byproduct of other valuable activity)

To determine whether the outcome is inefficient one would need to understand the benefits and costs of cleaning up additional units of this pollution. If the resources used (broadly speaking) to clean up pollution cost more than the value created from cleaning it up, then in fact the pollution level could be efficient. In other words, even at positive (and perhaps high) levels of pollution, if the marginal benefits of cleaning up a little bit more equal the marginal costs of cleaning up a little bit more, then that outcome is efficient, even if regrettable. What are those costs? Well, they include both the direct costs of cleaning up and preventing pollution, but they also include a reduction in the beneficial activities which produce that pollution in the first place.

And no, just saying that “the pollution is horrible” does not change this outcome. If people really did in fact feel that pollution was horrible then they would be more than happy to forego other resources to reduce more pollution. And the existence of pollution is no more evidence that markets have failed than it would be to point to the pollution of the Post Office and say that government has failed.

It is nonetheless difficult to point to some arbitrary cost and claim that the market failed because it could not yet figure out a way to reduce that cost. Would you point to my inability to fly from New York to Europe in 1776 as a market failure? Would you point to the lack of existence of an iPad in 1980 as a market failure? Would you point to my inability to instantly communicate with someone on the other side of the planet on 1850 as a market failure?

Note too that just because the existence of pollution does not mean markets failed or that an outcome is inefficient does NOT imply the opposite! The existence of pollution does NOT mean markets are working either. Pollution is a cost, like any other, and it is awesome when we lower those costs. Discussions of market “failure” need to be a bit more nuanced than pointing to any undesirable cost and declaring that you are correct.

6 Responses to “What Does it Mean for Markets to “Fail?””

  1. Harry says:

    A friend used to scuba dive in the East River; he loved scuba diving. This was in the ’60s. The visibility was poor.

    Who knows who contributed to that condition?

    What comes to mind is the problem of the commons. The East River, being so far downstream, is a natural commons, and even if Mike Blumberg were to buy it, he would have an impossible time charging his upstream customers for the cost of cleaning it up.

    So we have municipal sewer authorities which charge, usually by water usage. As long as we have human activity, there will be pollution, and the system for deciding what to do with it will be imperfect.

    But that has nothing to do with free markets “failing,” as Wintercow points out.

  2. chuck martel says:

    What is pollution? The general idea seems to be that ANY alteration to the the natural environment (whatever that might be) is “pollution”. That would seem to indicate that virtually all human activity produces pollution, not just industrial processes, and some of this activity is enthusiastically accepted by society in general. Salt applied to icy roadways and aircraft de-icer inevitably find their way into streams and rivers but travelers welcome their use. On the other hand, a company that fails to faithfully record in detail the disposition of its paint inventory is subjected to incredible fines. The development of testing techniques that detect the presence of elements and compounds down to fractions of parts per billion has further confused the issue. People are alarmed upon discovering that there are 5 parts per billion of arsenic in their drinking water. Would they cancel a trip to China if someone told them that 5 serial killers were roaming the country?

  3. Harry says:

    Great point, Chuck.

    Speaking of paint, a local painter told me there new rules — I am not sure whether they are federal or state — governing exterior house painting that magnify the cost of painting several fold if you own an old house, and I think an old house is defined as pre-1990.

    His concern was that many of his potential customers could not afford to employ him. At least not in the above-ground economy.

    Just think of all the other unintended consequences. People forego painting their peeling windows, and the market value of their house goes down, pushing them under water or further under water, and the bank forecloses, adding perhaps to the toxic mortgages on the Fed’s balance sheet, out of concern that a toddler crawling in the shrubbery might ingest toxic paint scrapings left behind by a careless painter, who should have been told by a careless parent to put the scrapings in the trash. Maybe Sherwin Williams gets sued, again.

  4. Harry says:

    Sorry, Wintercow, but another point: “market” does not automatically imply free market. Cap and-trade is often described as a market-based system where governments create pieces of paper that have value, just like fiat money, which then trade freely or otherwise among private and public companies using carbon or carbon compounds. Robert Reich and others tout this as being market-based as if every freedom-loving person should be delighted.

    Speaking of other market failures, the latest rise in wheat prices is being blamed in part for another bad weather year in Russia. To the WSJ’s credit, they did dispassionately note that corn prices have risen from demand in the gasohol industry.

  5. Rod says:

    The environmental movement got much of its start from Paul Ehrlich, who preached that human habitation would destroy the earth as “the Population Bomb” exploded. Saving the Earth is thus the justification for any kind of tyranny one can dream up.

    The current concern over climate change presumes that the current state of the Earth and its climate are at a physical limit, and that it’s the mission of government to stop climate change as a step toward restoring the world to its natural, pristine state. That natural world would presumably restore the correct balance between mankind and the other species of life, as well as prevent such things as erosion. The Grand Canyon and the western United States has suffered enough! Time to protect our streams, rivers, lakes and oceans from stormwater runoff!

    The EPA is doing just that. The EPA has commanded the various state environmental agencies, including the Pennsylvania Department of Environmental Protection (DEP) to require all municipalities in the commonwealth to comply with as-yet-unwritten rules and regulations governing stormwater. The Municipal Separate Storm Sewer System program could require all municipalities to retrofit their stormwater facilities (such things as catch basins, detention basins, storm sewer inlets and outlets, for example) in a way that will prevent the runoff from running off. Additionally, all future land development will require the construction of ponds, underground and above-ground aquifer recharge structures and other facilities that will keep ALL of the runoff created by newly installed impervious surfaces (houses, blacktop driveways, additions, patios, etc.) on the landowner’s property. How one can do this or whether it can be done at all will not only cost everyone a ton of money, but it will also further limit the liberty citizens now enjoy in using their property.

    This is a big deal, possibly as big as cap and trade (a scheme in service of dubious science about climate change). What makes it really bad is that it’s already underway, after been decreed without legislative consent by the EPA’s regulators.

    In Pennsylvania last fall, a consortium of townships in the southeastern corner began to fight MS4, and they managed to get DEP to extend the deadline for municipalites to have their applications for NPDES permits (the permits that all PA municipalities must have to show compliance with erosion and sedimentation regulations) approved. The deadline moved from September 1 to July 1, on the assumption that no such NPDES compliance would be possible without the new regulations being published.

    And yes, New York state has to deal with this, too

  6. Michael says:

    An interesting question to ask, in relation to Chuck’s response, is if mankind a benefit to the environment. My answer is yes.

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