Let there be light

Ezra Klein talks sense on CFLs:

I'm not really sure how I feel about the light emitted by energy savings bulbs (so far as I can tell, the main problem is that they burn out really quickly), but I'd really prefer to purchase them in a world with carbon auctions. If it turns that I do love the soft glow of carbon-chewing, incandescent bulbs, I'd like to be able to simply pay the extra cost and buy them. Alternatively, I can decide to go with the environmentally friendly, cheaper option. But one nice effect of actually factoring the carbon into the price is that I can make the choice effectively carbon neutral -- I can pay more for my incandescent bulb and also pay for the carbon in it, or pay less for my CFL bulb and save due to its low carbon footprint. As it is now, if I want to go with incandescent, my only option is to screw over the environment and free ride on the externalities. There's no real way to sin responsibly.

The environment doesn't care if you use more efficient lightbulbs, or make more judicious use of less efficient ones. Regulatory solutions that mandate efficiency often have significant rebound effects: because they lower your expenditure on electricity or gas, you drive more frequently or leave more lights on. That can eat deeply into the gains from the regulation; I've seen estimates for CAFE standards as high as 50%, but 20-30% seems more likely. (CAFE standards also, ironically, put more cars on the road; manufacturers sell subcompact cars cheap to people like teenagers who otherwise might not be able to afford a car, because they increase the average efficiency of the fleet).

A tax, on the other hand, makes people better off by letting consumers choose whether they want to use more efficient bulbs; turn on fewer lights; or to cut their carbon consumption somewhere else. But efficiency regulations are easier to pass because the non-cash costs are invisible (until people realize their new lightbulbs are horrible, by which point the incandescent manufacturing industry will be dead as a doornail.) And Pigovian solutions don't satisfy the expressive desire for a political statement, as Bryan Caplan notes:

Non-economists are much more anti-market than economists. If we told them that the economic way of thinking is consistent with (or better yet, justifies!) their anti-market prejudices, we'd be more popular.

But is this an intellectually sound way to bridge the divide between economists and non-economists? I think not. If we explain the concept of externalities properly, non-economists will continue to give us the cold shoulder. Here's why.

1. The concept of externalities relies entirely on economists' standard notion of willingness to pay. If people are willing to pay to preserve a rare species of monkey, there may be an externality. If no one cares, there's no externality. The upshot is that the concept continues to slight non-economists' concerns about fairness, intrinsic value, equality, etc.

2. If an externality exists, the economically efficient solution is normally a tax or subsidy. That's it. But non-economists are usually looking for an excuse for government to ban or nationalize. At minimum, non-economists want to use hands-on regulation - not just add a tax and say "OK, problem solved."

Someone who uses an externalities argument to justify e.g. existing (or stricter!) EPA regulation doesn't really understand the argument.

The difference between "hands-on regulation" and taxation is the reason I prefer Barack Obama to Hillary Clinton. I do not pretend that Obama is perfect, but he is much less likely to favor increasing regulatory authority; his solutions tend to focus on transparency and simple rule changes rather than massive new apparatuses for extending state power.

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Megan McArdle is a columnist at Bloomberg View and a former senior editor at The Atlantic. Her new book is The Up Side of Down.

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