Freeman

ARTICLE

Environmental Regulation: Just as Bad as Any Other

Private Property Rights Best Allocate Resources

AUGUST 01, 1994 by GREGORY CHRISTAINSEN

Dr. Christainsen is a professor of economics at California State University, Hayward.

Two sweeping studies of government regulation and deregulation, respectively, have been published in recent years. The findings of these studies deserve to be better known. The studies also merit attention for what they did not say about environmental regulation.

The first study, by Robert Hahn and John Hird, was published in the Yale Journal on Regulation in the winter of 1991. It surveyed all of the major benefit-cost studies on regulation that had appeared before the authors wrote their article. The authors concluded that in only two areas, the environment and highway safety, could one plausibly argue that the benefits of regulation had outweighed its costs. It should be emphasized that, with respect to the areas outside of the environment and highway safety, the authors were not claiming that regulation had had no benefits. They were claiming, however, that in light of its costs, people generally would have been better off if regulation had not occurred.

The second study, by Clifford Winston of the Brookings Institution (Journal of Economic Literature, September 1993), surveyed areas where significant deregulation has taken place, such as airlines and trucking. Environmental deregulation was not studied because little such deregulation has occurred. In every single case examined by the author, however, deregulation was found to have had net benefits.

It should be pointed out that the article in the Yale Journal was written before the Clean Air Act Amendments of 1990. Even before that legislation went into effect, Paul Porthey of Resources for the Future estimated that the amendments would impose costs far in excess of their benefits. The annual costs were estimated to be on the order of one-half percent of the entire U.S. gross national product, a huge impact for one piece of regulatory legislation. When this legislation is considered in conjunction with other environmental measures (noted below) that were not considered in the Yale article, it seems very likely that environmental regulation has had the same overall impact as other regulation. In other words, it has been generally harmful.

The authors of the Yale article are well aware that benefit-cost estimation is a very imprecise science, especially so in the case of the environment. The likelihood that various measures will improve, or harm, human health simply is not known. There are also serious philosophical questions that can be raised about the relevance of benefit-cost estimates for public policy decisions. However, the research findings are in some cases so dramatic that basic conclusions can nevertheless be drawn about the efficacy of regulation.

Any net benefits from environmental regulation prior to 1990 seem to have been due primarily to air pollution standards for factories. Estimates by Myrick Freeman of Bowdoin College indicate that emissions standards for new trucks and automobiles have probably had costs well in excess of their benefits. Virginia McConnell of the University of Maryland has found that the performance of vehicle inspection and maintenance programs—for example, smog tests for used cars—has been even more dismal. According to Freeman, it is likely that water pollution control efforts have also failed to pass a benefit-cost test.

Numerous other examples can be given of perverse environmental regulation. It now appears that the “Superfund” toxic-waste program will cost more than the government bailout of failed savings-and-loan associations. The activities of the California Coastal Commission, which regulates the use of one of the most valuable coastlines in the world, cannot pass a benefit-cost test. Notwithstanding some recent court decisions that have narrowed its scope, the Endangered Species Act has emerged as one of the most economically destructive pieces of regulatory legislation ever passed.

Even factory air pollution control has not been nearly so efficient as it could have been because firms are not always allowed to use the least-cost method of emissions abatement. It is still the case, for example, that firms must use abatement technologies dictated by the U.S. Environmental Protection Agency, regardless of their cost.

On the other hand, there has been limited progress in reforming the control of air pollution. A factory may now, for example, be able to pollute somewhat more than it formerly could if it can find, and pay, another factory to pollute somewhat less (so as to compensate for the increased pollution of the first factory).

Factories have incentives to enter into such arrangements insofar as one factory can abate pollution more cheaply than another. Suppose one factory could abate some pollution at a cost of $50,000. Suppose a second factory in the area could abate the same amount of pollution at a cost of $40,000. Under such circumstances, if the first factory paid the second factory $45,000 to undertake the abatement in question, both factories would be better off by $5,000. That is, the first factory would save $5,000 by paying the second factory instead of abating the pollution itself. The second factory would gain $5,000 by receiving a payment in excess of its (relatively low) abatement costs. The air quality in an area can thereby be maintained at lower overall cost than would have been the case under the old rules; in the past, factories were not allowed to make such agreements.

It would be a mistake, however, to conclude that, as a general principle, regulation can be successfully reformed or undone without fundamental changes in the structure of government itself. For every case of reform or of outright deregulation, several examples could be given of new regulation that is exceedingly harmful. The 1990 Amendments to the Clean Air Act, for example, require that a certain number of vehicles in cities with dirty air run on alternative fuels, whether or not improved air quality could be had in a cheaper way.

The problems go much deeper than calls for “regulatory reform” or “reinventing government” would suggest. After all, the negative impact of regulation under the existing form of government is simply a mild version of the ills of socialism. That is, when governments attempt to direct the use of resources, they are subject to two major difficulties: (1) they are subject to perverse political pressures (what economists call “the public choice problem”); and (2) even when government officials are well-intentioned, they cannot have all the information necessary to make efficient decisions. (This is what Austrian economists refer to as “the knowledge problem.”)

Limiting Government

The structure of government itself must therefore be changed so that its power to direct resources is limited or eliminated. A modest proposal would involve restoring respect for property rights under the Fifth and Fourteenth Amendments to the U.S. Constitution. Prior to the Great Depression, the U.S. Supreme Court would consider the impact that regulation had on property owners and whether it was “essential” for a “legitimate public purpose.” Under such “strict scrutiny,” as the Court called it, regulation was often struck down as unconstitutional.

Such a stance limited regulation’s excesses. Especially after 1937, however, the Court refused to interpret the Fifth and Fourteenth Amendments in the same way. Now, regulation can pass constitutional muster without the necessity of taking the interests of property owners into account, unless it involves the outright confiscation of land, or unless it drives the value of the property to zero.

A more radical suggestion for constitutional change would be to deny government the power to regulate the use of property altogether. From this perspective, environmental problems could be addressed, not by restricting the rights of existing property owners, but by establishing new property rights to the natural resources in question. If groundwater basins were converted into private property, for example, the new property owners could sue anyone who polluted them.

In a similar vein, environmental organizations could be given title to members of various endangered species. For example, an ornithological society could own the bald eagles in an area. If a bald eagle were shot, the society would be owed compensation, which it might use for, say, a breeding program. On the other hand, the society would be liable if an eagle killed or maimed a lamb of a sheep ranch owner. To be sure, there would be enforcement problems, just as there are enforcement problems if a species is covered by the Endangered Species Act. The main point of such changes is to reduce conflict in society. People could not legally undertake actions that would directly harm the person or property of others unless they paid compensation.

As matters stand, opposing parties are encouraged to engage in political conflict to promote their interests. A political gain to one party constitutes a loss for the opposing party. For example, once bald eagles have been declared an endangered species, sheep ranch owners must stand idly by as birds maim their lambs. The ranch owners are not entitled to compensation.

Economists are just beginning to understand why governments habitually fail, and they have only begun to appreciate the importance of private property rights for the allocation of resources. Natural resources are no exception to Jefferson’s maxim: The government is best that governs least.

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August 1994

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