Economists understanding and statement of the environmental problem are likely to contrast from those of economists not trained with economic reasoning. One difference is that a layperson is likely to favor a program of direct regulation, in which the scarce resource to be controlled is directly limited by the government. Economists are likely to oppose that solution because it does not achieve the desired objective at the lowest cost possible in total resources regardless as to who pays those costs. As an alternative to direct regulation, economists will probably favor some type of market incentive program.
A market incentive program is a program that stimulates people to reduce their consumption of the scarce resource to be controlled having the price reflecting the negative externality (the result of a decision that is not taken into account by the decision maker). The reason for this difference between the laypersonÆs and economistÆs view of policy is that regulation does not leave it up to people to adapt their budget to the regulation, taking to account a marginal costs/ marginal benefits analysis.
Equating marginal costs with marginal benefits is fundamental to achieve the highest benefit and lowest cost from a resource, making the policy as fair as possible to each individual separately, adjusting peopleÆs needs to environmental needs. A conservationist would basically focus on the environmentÆs need, not taking into account how much damage (cost) could it cause to the society.
A better way of contrasting the difference between economistÆs and environmentalistÆs view is through the following example. Say we have two cities in which we want to lower water consumption. LetÆs call them city A and city B. Assuming that city A consumes 100 gallons of water a day and city B 200 gallons, one way and probably the most common way to reduce consumption by 30 gallons, with a direct regulatory program, is to force everybody to lower consumption by 10 percent.
Now, probably it will cost more to one city to reduce water consumption than another. Assuming city AÆs necessity of the current amount used is very big while BÆs is almost none, direct regulation will be causing a higher cost to the society than required. ThatÆs why economists found a more efficient way of solving the problem.
The way economists would deal with regulation would be as follows. One way is a tax incentive program in which government imposes a tax amount in the scarce resource to control consumption. In our example, economists would tell government to start charging taxes on the water consumed. Instead of prohibiting the consumption, economists stimulate people to lower their consumption, each one by their own measurement, depending on how necessary is the resource for the individual. Voluntarily, in our example, city B would lower its consumption by much more than city A, since it is willing to spend more to obtain its water.
Acceptable Pollution
It has been said that ôthere is no such thing as acceptable pollutionö. That definitely was not an economistÆs statement. As we discussed before, the best way to get out of any decision with the most out of it is by equating the marginal cost with the marginal benefit, therefore, this would be applied even by a fundamental necessity to the environment: the reduction of the pollution level.
Dealing with pollution the way most lay people would, which is by terminating all the possible vehicles to pollution, would cause a waste of general resources, because the benefits from spending more on a program will be worth more than the cost that of expanding the program, or the savings from a reduction of expenditures on a program, will be worth more than the gains that will be lost from reducing the program.
Considering an example, letÆs assume marginal benefits of a program exceeds its marginal costs. Even tough apparently that is very beneficial, that would in reality mean that we could invest more in the program, by investing less in some other program whose marginal benefit doesnÆt exceed its marginal cost, with a gain to society as a whole.
We might question, still, the fact that lowering pollution is so important to society, that any cost would at least equates benefits, once we are dealing with common health of society, which is threatened by various kinds of polluters.
The truth is, in reality, people donÆt evaluate their lives as high as we would have thought, even though they donÆt necessarily do it consciously. Proof the fact that many safety features are available for cars and many more could be produced on a higher demand, but people are not willing to pay for these features. Even anti-lock brakes, proven to be very efficient, is not a standard feature, and is not requested as an option by a huge amount of consumers.
Conclusion
An economist is expected to focus on market incentives, while an unskillful environmentalist could utilize an inefficient policy to the society as a whole. The thought of exterminating every source of pollution available should be considered very carefully, since its cost is very high until the point that might possibly exceed its benefits. The issue of environmental programs is complicated and requires a careful reflection before being applied, especially by equating marginal costs with marginal benefits.
