I have posted before about oil refining and how environmental regulations have played a role in where we currently are in regards to refining capacity. Typically I am usually called some sort of shill or some such for the oil industry (disclosure: I don’t work for the oil industry directly or indirectly and AFAIK I don’t hold any oil stocks–although the various funds that comprise my 401k might). The problem is that many people who support enviornmentalism and environmental regulations seem to be afflicted with some sort of bizzare malady that they can’t admit to themselves the obvious facts.
What justifies environmental regulations and laws in regards to pollution in general? It is that there are costs that the firms that emit pollution are not bearing. If I own a plant that emits pollution chances are the losses in terms of environmental degredation are not part of the costs that I incur. As such I produce too much of the good(s) in question and there is too much pollution. Laws and regulations to address this concern are ideally supposed to get me to realize these costs and to take them into account in terms of production decisions. The term in economics for this is called internalizing these external costs.1
Now, basic ecnomic theory tells us that internalizing these costs will increase the costs of production. The marginal cost will increase. And increase in the marginal cost for a competitive industry will increase the price. Further, this increase in cost will reduce output. I don’t see why this is questioned since we aren’t talking some cutting edge economic theory here, but standard neo-classical theory of the firm here. Further, since costs are increasing and output declining here it is likely that one or more of the inputs will also be reduced. Thus, it is not inconceivable that labor inputs also decline along with output. Again this is not shocking or controversial. In fact, I’ll go even further here. The reduction in output, some of the inputs and the increase in price are precisely the goals of the environmental regulations and laws.
Now whenever this is pointed out there is usually a respones like, “Oh that is just the industry’s talking points, they are all lies!” While the industry in question might be exaggerating or even outright lying in terms of the magnitude of the impact there will quite likely be adverese impacts in terms of profits, employment, investment and output. To argue against this is to argue against the very efficacy of the environmental regulations and laws themselves. The whole point of the environmental laws and regulations is to have precisely this effect because costs are not being borne by the party that is imposing the costs. Think of it this way, when people dispute the claims that I have laid out above what they are saying is the following.
- Prices wont go up.
- Input demand wont change.
- Output wont change.
- Profits wont change.
- But because of magic or something there will be less pollution.
Now if your are thinking that sounds irrational that is because it is irrational. It is the environmentalists version of intelligent design. We can’t explain, we don’t know how it happens, and don’t bother us with questions about data, evidence and so forth, we just now a miracle happens in there somewhere.
Now all that being said, this does not mean that environmental laws and regulations are by definition bad. Remember, the reason for environmental laws and regulations is that there are costs that are being incurred by those who are not generating them. What all this does say is that our environmental policy should be based on reason and evidence and not some whacked out religious notions held by environmentalists.
1These external costs (and/or benefits) are typically called externalities in economics. The reason these costs (and/or benefits) are called external is that they are external to the firm’s cost function and hence are not part of the calculus for production decisions.