Oct. 29, 2009
As the debate over energy legislation heats up in the Senate in anticipation of the Copenhagen negotiations, legislators on both sides of the aisle are turning toward models of climate change and the economic impact of new legislation. Ignoring the climate models for the moment—while they are important, I have neither the space nor the expertise to comment substantively on them—a deeper look at the economic models shows that members of both camps use these tools to support dramatically different conclusions. This underlines the only fundamental truth of models: Their results are entirely dependent upon the assumptions made during their creation. This is problematic, since the assumptions behind economic models do not include accurate costs of inaction.
This miscalculation is not a function of the models themselves; rather, it is an illustration of a larger problem with the system of costs (prices) in our economic system. This is neither a new problem nor an issue that only concerns environmentalists. In fact, it is the basis for an entire branch of academia. The economics of public goods, and more accurately the environment, are devoted to examining how a system based on private property can accurately price damage to public property. Consider a basic environmental example: water pollution. Before the Clean Water Act, companies could dump pollutants into waterways—a practice most people would acknowledge as a negative impact—but because no one in particular owned the rivers, no one could force the companies to pay for the damage their pollution was causing. Thus, the goods that company sold were under-priced due to the “free” disposal of waste. The CWA attempted to correct this by forcing companies to internalize the costs of water pollution, and, where it is enforced, it has succeeded.
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