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The Trump administration’s proposal to cut the Environmental Protection Agency’s budget raises the question of what is the optimal geographic area to cover with some economic policy. Administration supporters quickly asserted the cuts are a good idea because states are more effective than the federal government in dealing with pollution. Are they right?

Yes, in some cases states are better able to respond to pollution. But, given the scale of things in a modern economy, it often is not true.

Start with why we need to limit pollution in the first place. To many, it seems obvious. If someone else fouls the air we breathe or the water we drink, we are harmed. Ditto if someone else’s activity harms the value of our property. Pollution is damage to one person for the benefit of another. It is unfair and unjust. 

Pollution also has an economic efficiency aspect. In 1921, British economist Arthur C. Pigou demonstrated how an external cost, such as pollution, if not corrected, inevitably causes inefficient use of resources. It is not just a transfer that the polluter gains while a damaged party loses, it is society as a whole gets fewer of its needs and wants satisfied from a given set of resources.

This was a vital insight that all economists agree on, whether they are politically Republicans or Democrats or New Classical or Keynesian in their economic views.

Yes, economists do disagree somewhat on the best responses to external costs, but there is no disagreement with the idea that uncontrolled externalities harm economic efficiency and make society as a whole poorer. And it applies to governmental jurisdictions as well as individuals or companies.

Say a new copper mine will discharge water containing pollutants into lakes where other people grow wild rice. The pollutants will hurt rice production. If this is allowed to occur, the wild rice growers will suffer tort damages and the economy as a whole will be less efficient.

If one of the two sides does not have disproportionate political power, the state where the mine and wild rice are located might, indeed, be the best level at which to seek a solution to this problem. Justice Louis Brandeis observed that “states are the laboratories of democracy” and a solution reached in Bismarck or St. Paul may well be better than one decreed in Washington, D.C.

That is true, however, if the pollution only reaches the wild rice lakes. If it flows further on into Lake Superior, then Pigou’s insight will dominate. If Minnesota reaps the employment and other economic benefits of a new mine but Wisconsin, Michigan and other states and provinces down the watershed bear costs, then a policy forged in one state will not be optimal for U.S. society as a whole.

Economic theory and history both demonstrate that, if one state’s officials consider only costs and benefits to their state with no federal involvement, the level of pollution abatement will be less than optimal for society.

The reason for having a federal pollution agency rather than leaving things to states is that pollution crosses state lines. Particulates from a power plant in North Dakota blow into Minnesota. Mercury and sulfur from coal burned in a Minnesota plant rain out over Wisconsin, Michigan, Illinois and other states to the east. Making entirely state-based environmental policy inevitably means that downwind and downstream cities and states will lose. It also means that the U.S. economy as a whole will produce, on balance, fewer goods and services from a given set of available resources than we could. As Americans, we will be poorer in real terms.

Add to this the complication that technology tends to expand the range and scope of environmental effects.

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When I was a kid, people in my hometown took trash to the town dump. Some of it was burned and the rest occasionally pushed back with a bulldozer. And “going to the dump to shoot rats” was a diversion for teenagers with .22 rifles.

As long as the external costs of the town dump were the smell of burning garbage and a few rats running around, why should anyone meddle in our little town’s business? But what if a farm implement dealer brought barrels of paint thinner and solvent? What if a gas station brought dozens of used oil filters? The dump was in a low spot through which water flowed when it rained. It was only a few hundred feet uphill from the creek that flowed eventually to Sioux City, Iowa, and then on past Omaha and St. Louis to the Gulf. So even 60 years ago, there were interstate external effects. And with more complex chemicals and businesses today, such effects can be much larger.

In that era, before extensive use of synthetic fertilizers, insecticides or herbicides, farm runoff was mostly soil particles or manure. These could do damage, but not as much as modern ag chemicals.

The idea of the state level being superior to the federal one for environmental protection decisions has a nice ring for many, but it has its dangers. In many ways, we have improved the environment over the last half-century. But if you skew the incentives by returning all decisions to a level where there are cross-border externalities, we are going to move in the other direction. And we will all be poorer.

 

 

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St. Paul economist and writer Edward Lotterman can be reached at bismarck@edlotterman.com.

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