Mike and Me on Externalities

30 May 2008 at 9:15 am 7 comments

| Peter Klein |

Mike Moffatt responds to my post on externalities. I questioned the Pigouvian approach of using taxes as efficient remedies for negative externalities. I said if, say, carbon taxes are a good idea, then Pigouvian taxes on a range of activities that generate negative externalities should be even better. And what about Pigouvian subsidies? I rarely see members of the Pigou club explain what activities they would subsidize, at what rates, and with what resources.

Mike’s response, based on more detailed comments here, is interesting, but to my mind misses the main point. Pigouvian taxes aren’t perfect, Mike says, but neither are income taxes or excise taxes or any other taxes. Fine, I say, but the relevant comparison isn’t between Pigouvian taxes and other taxes, but between Pigouvian taxes and alternative institutions for dealing with externalities such as cap-and-trade, common-law tort remedies, etc.

Mike counters that tort-based solutions simply aren’t feasible when there are large numbers of potential victims and tortfeasors. “My wife has asthma that is set off by air pollution. This causes real damages to my family. Who do I sue?”

It’s a fair question. Suing for damages in that situaiton might be impossible. It could be one of those cases in which there is real harm, but, sadly, the harm isn’t actionable. We currently treat many cases of noise pollution, “view” pollution, etc. this way. On the other hand, it might be possible to sue particular local polluters. It depends on the specifics of the case.

Mainly, though, I’d sidestep the question by pointing out that proponents of a tort-based system — or any system — aren’t obligated to explain exactly how it would work in every case. That’s an unreasonable burden of proof. By analogy, advocates for privatization of public services shouldn’t have to explain, ex ante, exactly how the market would provide education, or first-class mail, or health care, or whatever. We can predict, based on our experience with market solutions in other settings, how those services have been provided in other times and places, and so on, that market participants will come up with reasonable solutions. Likewise, common-law remedies have proved remarkably effective at dealing with other property-rights issues (see Hayek, Leoni, etc.). They might work here as well.

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7 Comments Add your own

  • 1. aje  |  30 May 2008 at 9:56 am

    To some extent Mike’s question demonstrates the problem with Pigouvian taxes. The fact that he doesn’t know who to sue tells us more about the problem of trying to quantify externalities than about current institutional remedies. If we accept Demsetz’s argument about externalities becoming internalised once there’s an efficiency criteria for doing so, we can view legal disputes as being a step in this process. If we don’t know who to sue it implies that either (a) it’s not a massive problem. or (b) it is hard to prove culpability. If the latter than surely that undermines the case for regulation.

  • 2. Externalities . . . Again « The Everyday Economist  |  30 May 2008 at 1:39 pm

    [...] Klein says it best: Mike’s response, based on more detailed comments here, is interesting, but to my mind misses [...]

  • 3. Mike Moffatt  |  30 May 2008 at 4:47 pm

    “The fact that he doesn’t know who to sue tells us more about the problem of trying to quantify externalities than about current institutional remedies. If we accept Demsetz’s argument about externalities becoming internalised once there’s an efficiency criteria for doing so, we can view legal disputes as being a step in this process. If we don’t know who to sue it implies that either (a) it’s not a massive problem. or (b) it is hard to prove culpability. If the latter than surely that undermines the case for regulation.”

    That’s not what I meant (though I can see how you got that implication).

    What I meant was “how can I win in a court room against the guilty parties”.

    I’ll put it a different way:

    Every year in Canada there are 6,000 deaths from smog in Canada due to short-term exposure to air pollution, according to the Health and Stroke Foundation. We can identify the sourcesr of the pollution and we can identify some of the victims – go to a respiratory ward on a smoggy day and you will see them.

    If using the court system to reduce air pollution would work, then why aren’t “ambulance chasing” lawyers going to respiratory wards at hospitals during smog days? Either it’s because a) common-law remedies don’t work OR b) lawyers are irrational/stupid and leaving millions/billions of dollars at the table.

    Which is it?

  • 4. Dirk Friedrich  |  31 May 2008 at 3:11 am

    I’d opt for c):
    There is a law or federal regulation that permits the emission of air polluting stuff within certain limits. Insofar as the polluter complies with such regulation he cannot be sued successfully. At least that is how it works in the country I live.

  • 5. aje  |  31 May 2008 at 5:42 am

    “how can I win in a court room against the guilty parties”

    The purpose of a court room is to establish who the guilty parties are. If you cannot compile a convincing case that X causes Y and that the defendant has done X then it suggests one of two things. Either there is regulatory protection (as Dirk says), or we lack sufficient knowledge to understand the complexities of the issue.

  • 6. Mike Moffatt  |  31 May 2008 at 8:18 am

    “There is a law or federal regulation that permits the emission of air polluting stuff within certain limits. Insofar as the polluter complies with such regulation he cannot be sued successfully. At least that is how it works in the country I live.”

    That sounds a lot like California’s Prop 65. Or the McDonald’s coffee case:

    http://www.lectlaw.com/files/cur78.htm

    But keep in mind that the basis of these suits isn’t that property rights are being violated.. it’s that companies/individuals are violating some EPA/FDA/OEHHA standard.

  • 7. Dirk Friedrich  |  31 May 2008 at 8:55 am

    I am not sure if we talk about the same thing. Tort liabilities under German law require the tortfeasor’s doing to be unlawful. However, since one cannot act unlawful if one complies with federal emission guidelines there is no tort.

    So, even if one could prove that a certain polluter’s emissions have caused certain harm there would be no case that could be successfully pursued in court. Hence, there is no way for the (German) legal system to find ways dealing with polluters. Statutory law has “crowded out” judicial solutions to the problem.

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