Externalities: Part II

Carbon and Covid

My previous post was about what the government should do. Focusing on that question would make sense if we were ruled by benevolent autocrats, philosopher kings, but we are not. The problems that prevent individual rationality from generating group rationality, of which externalities are an example, apply to decision makers in a political system as well as in a market system. In deciding whether to support a carbon tax the question is not whether there is some level of carbon tax that would provide net benefits and what it is. The question is whether the level of carbon tax that would come out of the political process would make us better off.

My first post to this substack discussed a recent article in Nature, Rennert et. al. 2022, currently being considered by the EPA as a possible basis for regulatory policy. The article offered an estimate of the social cost of carbon, the negative externality from producing a ton of carbon dioxide. I argued in the post, have argued at much greater length elsewhere, that the article depended on obviously unrealistic assumptions, all of which increased the calculated cost; one of them was that there would be no progress in medicine for the next three centuries. I expect the EPA to accept the cost of carbon calculated in Rennert, or something close to it, as the size of the externality.

If so, if we had a carbon tax, that is what it would be. If my criticisms are correct, it is probably several times too high.

How do I explain a collection of professional scholars producing a conclusion that depends on obviously unrealistic assumptions and a regulatory body accepting it? The explanation, as in my previous post, is that individuals do the wrong thing because they do not bear the costs and receive the benefits of what they do, making their interest different from our interests.

The authors of Rennert got the benefit of publishing a high profile article giving a result popular with people who matter to them, most of whom favor stronger action against climate change. The EPA regulators get power for themselves, improved opportunities to get bribes if they are corrupt, status and promotion if they are not. None of them bears a significant fraction of the cost or receives a significant fraction of the benefit of their decision. Like other people they act in their interest — which is not, save by accident, our interest. The same is true of the legislators who will vote for or against the carbon tax.

The voters who elect those legislators will bear costs and receive benefits of climate policy for their lifetime, longer if we include effects on their children and grandchildren. But finding out whether the law a politician votes for is good or bad is not costless — no candidate runs as the bad guy — and the benefit to the individual voter of paying the cost to find out is shared with the rest of the population, an externality in the U.S. of about 99.9999997%. It is not surprising that informed voting is under-produced.

It is possible that a carbon tax is desirable. But the test is not whether there is anything that the government could do that is worth doing. It is whether what the government would do is worth doing.

The Case of Covid

Consider the application of the same line of argument to Covid regulation — lockdowns, mask mandates, and the like. My precautions against catching Covid produce a positive externality, a reduction in the chance that I would catch it and pass the infection on to someone else, so I have a less than optimal incentive to take such precautions. But catching Covid is a substantial cost to me — before I was vaccinated I estimated about a 3% chance of dying — so it was in my private interest to take precautions, even if fewer than it was in our interest for me to take. If I bore half the cost of getting Covid and so received half the benefit of precautions, it was in my interest to take those precautions, and only those, whose benefit was at least twice their cost.

If we had philosopher king rulers that would have been a good argument for letting them require additional precautions, but we didn’t. The political actors who made the decisions, government medical professionals such as Fauci, state governors, FDA regulators, and the like, bore neither the cost of the precautions nor of their failure. We will probably never know whether the policies they set made us better or worse off, but the fact that Sweden, the one developed country that did not implement such policies, ended up with one of the lower figures for excess mortality, at least suggests that they may have made us worse off.