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April 08, 2006

Some basics from the economics of pollution

I have taken to characterizing "keeping the bad stuff out" of user-contributed content resources as a pollution problem. What can we learn from the long-standing economics literature on pollution (traditionally about environmental pollution)?

For this entry, I'm going to quote some passages from an article I published on "Economic Incentives" in the Encyclopedia of the Environment (Marshall Cavendish, Tarrytown, NY, 2000):

When costly side effects can be ignored by a polluter, there will be too much pollution relative to a Pareto optimum. Several policies can give polluters an economic incentive to consider side effects when deciding how much pollution to generate. The three most important economic incentives are taxes, subsidies, and tradable permits. These all work by internalizing the externality, that is by making the polluter directly face the cost created by the pollution.

Taxes, subsidies, tradable permits: this is a pretty limited palette, though it does comprise most of what the environmental economics literature has comprised. Over time, I'll be suggesting other incentive-based approaches to pollution in user-contributed content resources, but for now will stick to these three:

Taxes. Since 1920 economists have recommended imposing a tax on polluting activity equal to the incremental social cost imposed by that activity (A. C. Pigou, 1920). Then as long as the social cost of the pollution is greater than cost of prevention or clean-up, the polluter will want to reduce the pollution, to the point at which the social benefits of further reductions are not sufficient to warrant the costs of obtaining the reductions. A Pareto optimum can be achieved.
Subsidies. Rather than impose a tax to discourage pollution the government can offer an equal subsidy per unit of reduction. A subsidy per pound of gunk reduced creates the identical incentive as a tax per pound produced: each pound of gunk eliminated raises profits by the amount of the subsidy or tax. The main difference between taxes and subsidies is distributional: the cost of control can be paid by taxpayers (through a subsidy), or by some combination of the factory's owner, workers and customers (through a tax).
Tradable permits. A very different approach to using economic incentives for environmental problems is to create a market in which the polluter must pay a price for the use of the formerly unpriced input (e.g., clean air). The usual method is for the government to issue permits for a fixed amount of gunk and to allow individuals and firms to buy and sell the permits. The fewer the permits the higher will be their market price. By controlling the quantity of permits the government can control the permit price so that the polluter has to pay the same amount per pound of gunk as it would under a tax or subsidy. Thus, all three methods can solve equivalently the problem of equating the costs and benefits of externalities, while using the polluter's self-interest to obtain the socially desirable level of control.

Another well-known point from the pollution economics literature, this one quite relevant for the prevalent approach of trying to design technical fixes to prevent information pollution:

One advantage of using these economic incentives is that a given level of pollution control can be attained at the least cost. For example, with tradable permits, the permits will be most valuable to polluters with the highest control costs; they will purchase the permits, while those with lower control costs sell their permits and reduce their pollution. This result contrasts with the use of emission standards: all polluters must to control to a given level, even though it will likely be cheaper to have some polluters control a bit more while others control an equal amount less.

In the article I also discussed several complications that change the way in which the above mechanisms work. These include uncertainties about the benefits or costs of control; market imperfections in the markets in which polluters operate; non-convexities caused by severe or irreversible harms. These all have analogues for information pollution as well. Of course, the discussion above is only in terms of the effectiveness of these methods for maximizing social efficiency; if the objective function puts weight on other factors as well, these approaches may work less well.

Posted by jmm at April 8, 2006 11:30 PM

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