Archives For environment

I’ve previously tiraded about paternalism in my beloved Chicago. I won’t beat that dead horse, but I just can’t ignore the latest liberty restriction imposed by our esteemed aldermaniacs. The members of the aldermen’s Buildings Committee recently voted to extend the city’s smoking ban to performers in theatrical productions.

What a freakin’ embarrassment.

The aldermen remind me of the administrators of my Baptist high school, who routinely censored student theatrical productions. Lest we offend our more sensitive brethren (i.e., those who might give money to the school), we were required to refer to the elderberry wine in Arsenic and Old Lace as sassafras tea. The big dance in Meet Me in St. Louis became a banquet. I’m not kidding. Good Baptists don’t drink or dance.

Not surprisingly, the censored productions lost a bit of their zip and we performers looked like idiots. But there was an even more negative result. A large proportion of my classmates, long forced to adhere to a ridiculously stringent code of conduct, eventually turned into wild heathens. The continual top-down control wore on them until they could take it no more and they rebelled, throwing out the baby of Christian belief itself with the bathwater of one particular brand of Baptist fundamentalism. It’s tragic, but it’s an inevitable result of overly stringent conduct restrictions.

This is one of the reasons I oppose smoking bans: they make smoking more attractive to the most impressionable folks out there, rebellion-prone youngsters. I also oppose them because they remedy no genuine technological externality. People who choose to go to an establishment that permits smoking have decided to accept the risks, inconveniences, and benefits (yes, for some folks there are some) of a smoking-permitted zone. The owner of the property at issue has every incentive to maximize the attractiveness of her venue by selecting the optimal smoking policy.

When it comes to censoring smoking in theatrical productions, these arguments are even stronger. A ban on portrayals of smoking was the end of the slippery slope in the film Thank You for Smoking, in which an anti-Tobacco senator tried to order Hollywood to doctor old movie star portraits so that the actors’ cigarettes were replaced with innocuous items like candy canes and chopsticks. The notion that the government would try to censor art (and history) as part of its anti-smoking crusade seemed ridiculous enough to evoke a few laughs. Now it’s for real, and it’s bound to create more smoking rebels.

With respect to externalities, any theatre patron who is offended by onstage smoking — either because of the “risk” presented (by the way, there’s not one) or the message conveyed — can ask in advance whether the production involves smoking and can spend his entertainment dollars elsewhere if he’s so inclined. People routinely decline to see plays that involve offensive elements. (Should the Board of Aldermen protect the easily offended from The Vagina Monologues?)

Theatre critic Terry Teachout had it right in this weekend’s WSJ:

To perform “[A] Streetcar [Named Desire]” without cigarettes, or “Twelve Angry Men” without a smoke-filled jury room, is to insult the intelligence of audiences who come to see these well-known plays expecting to see them performed as written. … Such a ban isn’t unconstitutional — but it’s stupid, which is even worse. It makes Chicago look like a backwoods burg full of philistine pols with nothing better to do than mind other people’s business. … [S]ince when did Carl Sandburg’s City of the Big Shoulders turn into Nannytown, U.S.A.? As for those Chicagoans who don’t care to have their nostrils brutalized by the smell of a lone cigarette burning halfway across a crowded theater, they have an inalienable right of their own — the right to head for the nearest exit. I urge them to exercise it and leave the actors to go about their stage business undisturbed.

Well said.

Friday’s WSJ documented an effect of ethanol mandates:

Rising costs for agricultural commodities are making their way up the food chain into the food you eat. Thanks to rising demand for corn-based ethanol, corn prices have nearly doubled during the past year. That’s raised costs for corn products, like the ubiquitous high-fructose corn syrup that’s used to flavor everything from Apple Jacks to Yoplait Yogurt. It’s also raised costs for livestock and poultry, which are fed corn, and for crops like soybeans, which farmers are replacing so they can grow more corn.

Yesterday, the Labor Department reported February prices for “crude foodstuffs and feedstuffs” were 18.8% above year-ago levels. Food companies are starting to pass those higher costs on — wholesale consumer food prices were 6.8% above year-ago levels. Today’s report on consumer inflation will probably show higher prices at the checkout line, too.

These higher prices might not be a bad thing if we were getting some environmental benefit from increase ethanol use. But as Jerry Taylor and Peter Van Doren have shown, we’re not.

Farmers, of course, are benefitting. And we Americans like farmers — so much so that we throw subsidies their way despite the fact that U.S. farm households earn about 11 percent more on average than non-farm households. Unfortunately, the subsidy inherent in ethanol mandates disproportionately impacts the poor, who spend a larger percentage of their incomes on food. Doesn’t that seem like a perverse sort of redistribution?

Unfortunately, the situation is likely to persist. Midwestern farmers constitute the sort of discrete and insular group that organizes well to curry legislative favors. Food consumers, by contrast, are pretty widely dispersed and difficult to organize. And since the costs of ethanol mandates (increased food prices) are diffuse while the benefits (increased profits for farmers) are concentrated, farmers will be much more likely to lobby for their preferred outcome.

I say we require ethanol to stand on its own two feet, and if it can’t, let it fail.

Let Ethanol Fail

Thom Lambert —  5 February 2007

The recent State of the Union address, in which President Bush called for an almost 500% increase in alternative fuel consumption by 2017, once again turned the nation’s attention to the various elixirs that promise to make the U.S. “energy independent.” The closer we look, though, the less appealing the leading alternative fuel — ethanol — appears to be.

In The Ethanol Boondoggle, appearing in the current issue of the Milken Institute Review (free registration required), Jerry Taylor and Peter Van Doren persuasively catalogue ethanol’s shortcomings. Among the deficiencies they cite are the following:

Ethanol requires massive government subsidies. The U.S. Department of Agriculture estimates that ethanol costs $2.53 per gallon to produce in the United States — far more than the cost of conventional gasoline. The stuff would never make it to the pump but for massive government subsidies. Indeed, the 2006 subsidies amounted to about $1.05 to $1.38 per gallon, or 42 to 55 percent of ethanol’s wholesale market price. While ethanol proponents contend that these subsidies are needed to level the playing field with oil, whose production is also subsidized, the facts suggest otherwise. The 2006 subsidies for oil production amounted to about 0.3 cents per gallon. Moreover, as Taylor and Van Doren note,

the proper remedy for an objectionable subsidy is its elimination, not the imposition of a countervailing subsidy. The riposte that oil subsidies are impossible to eradicate, thus necessitating a “second-best” response of counter-subsidy — is hardly persuasive. Oil subsidies have been eliminated in the past — most recently, during the Reagan administration.

Ethanol’s environmental benefits are nil. Most folks seem to believe that ethanol, produced from pretty green corn fields in the Midwest, must be better for the environment than that ugly black stuff the gurgles under desert sands. But the facts suggest otherwise. First, ethanol creates more smog than conventional gasoline. In Ethanol in Gasoline: Environmental Impacts and Sustainability, published in the Renewable and Sustainable Energy Reviews, Prof. Robert Niven concluded that burning E10 (fuel that’s 90% conventional gasoline and 10% ethanol) actually increases emissions of total hydrocarbons, non-methane organic compounds, and volatile toxins. Substitution to E10 thus increases both smog and ambient concentrations of toxic chemicals. And the situation is worse for E85, the 85 percent ethanol fuel that’s being pushed by GM and is widely available in the Midwest.

But what about greenhouse gases? Ethanol fares no better. Niven’s review found that burning E10 rather than conventional gasoline reduces greenhouse gas emissions by only 1 to 5 percent, and that switching to pure ethanol would provide only a 12 percent reduction in such emissions. While 12 percent sounds pretty substantial, that figure doesn’t account for the increased energy required to produce ethanol. Once we run additional tractors to cultivate the corn, fire the boilers required to distill it into alcohol, and fuel the trucks needed to transport the stuff around the country (ethanol is corrosive and can’t be transported in pipelines), any reductions in greenhouse gas emissions disappear.

Finally, we must consider non-air quality environmental effects. Profitable corn production requires tremendous quantities of fertilizer, pesticides, and water. And, of course, more land will have to be devoted to corn production. Increased ethanol use therefore promises to increase water pollution (from farm run-off), destroy wildlife habitat, and reduce biodiversity.

Increased ethanol production will increase food prices. Since rules kicked in last year requiring that reformulated gasoline use ethanol rather than MTBE, corn prices have skyrocketed. Last Monday’s price of $4.05 per bushel was double the price from a year ago. This development has huge implications for the food supply, for corn is in just about everything we eat. As an article in last Monday’s WSJ explained,

Corn goes into more than a bowl of cornflakes. It’s in your bacon and eggs — corn gets fed to hogs and chickens. High-fructose corn syrup sweetens soda, salad dressing and, if you look at the label, probably your cough syrup. In his book “The Omnivore’s Dilemma,” author Michael Pollan relates that he asked University of California, Berkeley, biologists to pass a McDonald’s cheeseburger through a mass spectrometer. They found 52% of its carbon content started out as corn.

As one analyst colorfully put it, “If you look at cattle and hogs and chickens, what they really are, are devices for turning low-value corn into high-value meat.” Raising the price of corn therefore raises the price of many, many food products. Since Americans spend 15% of their income on food (as opposed to 9% on energy), and since poor people spend an even higher percentage than that, ethanol mandates may have large and regressive negative economic impacts. Outside the rich U.S.A., the situation may be even worse — poor Mexicans are reeling as the price of tortillas has doubled in response to America’s ethanol mandate.

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Despite ethanol’s shortcomings, many insist on viewing the alternative fuel glass as half-full. As an article in last Monday’s WSJ noted:

But even as the outlook for alternative energies darkens, some analysts see a more positive outcome from the latest turbulence: a forced redirection of resources toward alternative fuels that are more efficient and sustainable than the current batch. These analysts see an analogy in the dot-com bust of 2000. The bust cleared out some of the worst ideas and least-efficient companies in the tech arena, allowing deeper-pocketed investors to consolidate operations and emerge leaner to make the Internet an even more powerful force in the world economy. They believe a similar scenario will play out in the alternative-fuels market.

There is, of course, a massive difference between the dot-com bubble of 1998-2000 and the current exuberance over alternative fuels in general and ethanol in particular: in the Internet bubble, bad ideas were allowed to fail. The same should be true for alternative fuels. If the government stays its hand and allows oil prices to rise to reflect scarcity, political turmoil, etc., entrepreneurs will compete against each other to find alternatives. And if the government doesn’t muck things up trying to “pick the winner,” the alternative fuel that emerges will be cost-effective.

But enterprising entrepreneurs are not going to invest in new technologies if the government commits us to an ethanol solution. With the huge subsidies noted above (and a 54-cent per gallon tariff against imported ethanol), that’s exactly what it’s doing. Given that the benefits of the government’s actions are concentrated on a powerful minority and the costs are spread throughout society, this outcome is practically inevitable. But the vast majority of us would be much better off if the government would allow ethanol to fail, or at least require it to pay its own way.

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UPDATE: An editorial in today’s (Tuesday’s) NYT acknowledges that increased ethanol production threatens to drive up food prices. As usual, though, the Times has a simple solution to the tradeoffs problem: “What we will need to change is the size of our appetites.” Problem averted — whew!

In January, Washington, D.C. will join the nearly 500 cities nationwide that have thwarted the free market’s accommodation of heterogeneous preferences and have ordered private property owners to forbid their invitees from engaging in otherwise legal behavior. I am speaking, of course, of Washington’s forthcoming smoking ban.

The Washington Post was gracious enough to permit me to explain on its website why I think this is a bad idea. A longer version of the argument — which should be wholly familiar to regular TOTM readers — is here.

(By the way, TOTM’s policies permit this sort of shameless self-promotion.)

The Perils of Paternalism

Thom Lambert —  28 August 2006

According to Bar None, an op-ed by Jack Turner in today’s NYT, “history shows that, however commendable the reasoning, efforts to control how people drink — or eat, or smoke — tend to backfire.” I’ve made a similar argument in discussing smoking bans.

Advocates of such bans (often citing the work of “norms scholars,” such as Larry Lessig and Dan Kahan) frequently defend the bans on grounds that they alter social norms. The argument is that smoking bans provide a de facto community statement that public smoking is unacceptable and thereby embolden non-smokers to confront smokers who are inconveniencing them. Facing heightened public hostility toward their habits, smokers are likely to revise their preferences regarding smoking. Thus, by making smoking more socially costly, bans reduce the number of smokers.

Of course, this is a good thing only if actual social utility is increased by reducing the incidence of smoking. Ban advocates assume that it is for the obvious reason that smoking carries serious health risks. But ban advocates generally are not in a position to judge the cost side of reducing smoking, for they do not know the degree of utility smokers experience by smoking. Smokers themselves, who these days are aware of the risks of smoking, appear to believe that the benefits they experience from the activity outweigh the costs. It is thus not at all clear that social welfare will be enhanced by eliminating smoking.

But even if it were clear that society would be better off with less smoking, this sort of “norm management” may be a bad idea. Sweeping smoking bans may actually increase the incidence of smoking. A large percentage of smokers acquire the habit at a young age, and they frequently do so because smoking is “cool.â€? Smoking is cool, of course, because it’s rebellious. The harder anti-smoking forces work to coerce people into stopping smoking, and the more they engage the government and other establishment institutions in their efforts, the more rebellious — and thus the “cooler” — smoking becomes. As an empirical matter, then, it is not clear whether sweeping smoking bans — highly intrusive regulatory interventions — actually reduce the incidence of smoking in the long run.

Nazi Germany may provide an example of this sort of “norm backlash.” According to a report in the British Medical Journal, “Germany had the world’s strongest antismoking movement in the 1930s and early 1940s, supported by Nazi medical and military leaders worried that tobacco might prove a hazard to the race.” It bombed:

German smoking rates rose dramatically in the first six years of Nazi rule, suggesting that the propaganda campaign launched during those early years was largely ineffective. German smoking rates rose faster even than those of France, which had a much weaker anti-tobacco campaign. German per capita tobacco use between 1932 and 1939 rose from 570 to 900 cigarettes a year, whereas French tobacco consumption grew from 570 to only 630 cigarettes over the same period.

While this post hoc evidence is admittedly anecdotal, it’s consistent with Turner’s point that paternalism tends to backfire. Norm managers proceed at their own peril.

Want to save endangered species? Turn them into private assets. So argues Barun Mitra in today’s NYT.

In Sell the Tiger to Save It, Mitra observes that our thirty year-old conservation policy, which prohibits harm to individual tigers and the trading of tiger products, has failed to increase the tiger population. The problem, Mitra argues, is that the prevailing prohibitionist approach fights markets rather than harnesses them:

[L]ike forests, animals are renewable resources. If you think of tigers as products, it becomes clear that demand provides opportunity, rather than posing a threat. For instance, there are perhaps 1.5 billion head of cattle and buffalo and 2 billion goats and sheep in the world today. These are among the most exploited of animals, yet they are not in danger of dying out; there is incentive, in these instances, for humans to conserve.

So it can be for the tiger. In pragmatic terms, this is an extremely valuable animal. Given the growing popularity of traditional Chinese medicines, which make use of everything from tiger claws (to treat insomnia) to tiger fat (leprosy and rheumatism), and the prices this kind of harvesting can bring (as much as $20 for claws, and $20,000 for a skin), the tiger can in effect pay for its own survival. A single farmed specimen might fetch as much as $40,000; the retail value of all the tiger products might be three to five times that amount.

Yet for the last 30 or so years, the tiger has been priced at zero, while millions of dollars have been spent to protect it and prohibit trade that might in fact help save the species.

A property rights-based approach to conservation similarly offers greater protection for elephants, as Zimbabwe’s experience reveals. (See also here.)

Unfortunately, our own Endangered Species Act, which places severe development restrictions on any property providing habitat for listed species, turns endangered critters (and flora) into liabilities. The result is the regrettable “shoot, shovel, and shut-up” syndrome.

Yesterday, the U.S. Supreme Court issued a fractured decision in consolidated appeals raising the issue of which wetlands come within the ambit of the federal Clean Water Act (“CWA�). The wetlands at issue were next to drainage ditches that, when full of water, would eventually flow into navigable waters. The record did not establish whether the connections between the wetlands and the drainage ditches were continuous or intermittent, or whether the ditches contained continuous or merely occasional flows of water.

Deeming those missing facts irrelevant, the Army Corps of Engineers (the agency the CWA charges with granting “dredge and fill permits� for wetlands) determined that the wetlands were within the scope of the CWA. A five-justice majority found that determination to be hasty and voted to remand the cases for further consideration of whether the wetlands at issue were within the CWA’s reach. The five justices disagreed, though, on the proper standard to apply. Justice Scalia, joined by Chief Justice Roberts and Justices Thomas and Alito, articulated one test; Justice Kennedy set forth a less stringent test (which the lower court will presumably apply on remand).

The New York Times is unhappy with the Court’s judgment but insists that “it could have been much worse� if Justice Scalia had garnered a fifth vote in favor of his “very restricted view of the Clean Water Act.� The Times insists that Justice Scalia’s test for what constitutes a covered wetland is “largely invented�; that the views of the Scalia-led plurality amount to “judicial activism�; and that Justice Kennedy’s alternative test, presented in a “careful opinion,� is laudably “moderate.�

The Times is wrong on all these points. Continue Reading…

The folks over at Lawyers, Gun$, and Money are chiding me for ignoring (or, as they say, never having heard of) positive externalities. A couple of days ago, I criticized a NYT editorial calling for the federal government to “throw its weight behind” private efforts to develop alternative fuels. My main point was that the best thing the government could do would be to let energy prices rise in response to forces of supply and demand. High prices, I argued, have spurred — and will continue to spur — private investment in alternative technologies. Government incentives to encourage R&D, I argued, could cause firms to make investment decisions aimed at appropriating government money rather than at pursuing the most fruitful avenues of research.

According to the folks at Lawyers, Gun$, and Money, this argument ignores the positive externalities (i.e., benefit spillovers) associated with research into alternative fuels: Because such research is likely to create public benefits that cannot be appropriated by the people doing the research, it is proper for the government to subsidize the research.

While I agree that research on alternative fuels likely does create positive externalities, I still believe the best policy is laissez-faire. If the mere existence of positive externalities could justify government subsidization of the process that creates them, the government would be subsidizing a heck of a lot of stuff. Seriously, think about it. All sorts of activities create benefits not appropriable by their creators, but the government subsidizes only a fraction of them. Now, one might argue that the externalities at issue here are so substantial that subsidization is warranted, but I’m not so sure. To see why I’m skeptical consider some insights from the Austrian and Public Choice schools of economics.

First the Austrians. A fundamental and profound insight of the Austrians (e.g., F.A. Hayek) was that the information necessary to determine how resources ought to be allocated to maximize social welfare is not given to anyone in its entirety. (See, e.g., here.) An implication of this insight is that centralized bureaucrats simply don’t know how the economy should develop — e.g., which technologies should ultimately dominate. Given their ignorance, bureaucrats should act modestly, attempting not to determine end states (i.e., how productive resources ultimately get allocated) but to create the sorts of institutions that allow markets to flourish. Markets, then, will generate prices that convey the information necessary to allocate resources their highest and best use.

Next, Public Choice. Theorists from that school have helped us see that individuals do not stop acting as rational self-interest maximizers when they step into the public square. Governmental power is a commodity to be bought and sold, as is government largess. An upshot of Public Choice theory is that a government that routinely doles out goodies is likely to be captured by well-organized interest groups, to the detriment of the general public. Interest groups that stand to gain from government hand-outs will reallocate resources away from production toward lobbying.

So it seems there are at least three relevant sources of potential welfare loss here: (1) the allocative inefficiency that occurs because of positive externalities, (2) the inefficiency resulting from bureaucratic mistakes in determining how productive resources should be allocated, and (3) the allocative inefficieny and deadweight loss that result when businesses chase after government hand-outs.

With respect to alternative fuels research, my hunch (and it’s admittedly a hunch) is that the last two potential welfare losses are, taken together, greater than the first. There’s huge money to be made by developing alternative fuels and, consequently, lots of private resources are being funneled toward such efforts. If government starts “throw[ing] its weight” around now, as the NYT suggests that it do, it’s likely to adversely affect how R&D dollars are spent. Governmental incentives are narrowly targeted, and legislators and bureaucrats at this point simply don’t know what’s the proper target. I’d rather see them stay out of the business altogether and let those closest to the action determine how productive resources should be allocated. Those folks will tend to send resources in the right direction, unless they’re distracted by the possibility of a governmental handout, in which case they’ll expend resources on lobbying (deadweight loss) and tailor their research efforts toward getting government’s goody.

It’s a strange day when the New York Times advocates corporate tax breaks. It’s an even stranger day when I dissent from that recommendation. Well, today must be a strange day indeed, for they did, and I must.

The upshot of today’s editorial, Let Them Go Green, is that the federal government should “throw its weight behind� (i.e., subsidize) private efforts to develop alternative energy technologies. Specifically, Washington should use “loans, grants, or targeted tax breaks� to encourage companies to develop alternative fuels.

Why? As the Times observes, this sort of investment is already occurring at an unprecedented rate. Goldman Sachs, the Times notes, has recently invested over $1 billion in alternative fuels, and it is not alone: “Goldman is only one of a growing number of investment and manufacturing enterprises chasing emerging technologies that could help provide the alternative energy sources that politicians from President Bush on down say they want and that the country will certainly need in years to come.� Indeed, the Wall Street Journal recently reported that venture capital is pouring into alternative energy technologies.

This is happening, of course, because of high and rising oil prices. That’s the way markets work. When the price of a commodity rises enough, enterprising entrepreneurs scramble to develop a cheaper substitute for that technology, and investors provide them the capital to do so. Thus, high energy prices will lead to increased investment in alternative technologies without government intervention. The Times complains that “a tax credit to encourage wind power is set to expire next year, at a time when high energy prices are raising interest in that clean technology,� but isn’t that as it should be? If high energy prices are pushing entrepreneurs into new technologies, why should the government try to do so?

Look, I’m all for tax breaks. But I’m not for industrial policy – i.e., policies where the government picks which industries to encourage/subsidize. When the government tries to pick winners, it tends to screw things up. If government money is on the table, businesses are likely to make investment decisions aimed at appropriating that money, not at responding to market forces.

The best thing the government could do to encourage appropriate development of alternative fuel technologies would be to let energy markets work. Let oil prices do their thing, and entrepreneurs will develop the technologies necessary to avert any future crisis.

As the Times notes, “Investing is about the next big thing.� Entrepreneurs and investors know that. They don’t need government “encouragement� to tell them what that “next big thing� is.

An article from yesterday’s W$J sheds some light on the organic community’s anger over Wal-Mart’s decision to begin selling organic products. A few weeks ago, I accused Wal-Mart’s critics of wanting to keep price-sensitive consumers out of the organic “club.� The article in yesterday’s Journal suggests that that’s part of the story, but that the critics might also have a legitimate gripe. Examined closely, though, even that concern is unfounded.

To be sure, much of the opposition to Wal-Mart’s foray into organics is motivated by a desire to exclude. Consider, for example, the remarks of Michael Pollan, author of The Omnivore’s Dilemma and a leading Wal-Mart critic. Regarding Wal-Mart’s plan to sell organics at a small mark-up over conventionally grown food, Pollan writes: “To say you can sell organic food for 10 percent more than you sell irresponsibly priced food suggests that you don’t really get it.�

That statement just reeks of elitism. What is “irresponsibly priced food�? (Food that poor people can afford?) And what do these price-slashers “not get�? (That the organic label is largely just a status symbol?) Pollan’s focus on Wal-Mart’s pricing suggests that his real concern is to keep the hoi polloi from enjoying “responsibly priced� (i.e., expensive) organic food.

But the Journal article suggests there’s more to the story. Continue Reading…

Marty Feldstein has an interesting idea about how to reduce America’s oil consumption, but I’m not quite ready to sign on.

In an op-ed in yesterday’s WSJ, Feldstein proposed a “cap and trade� system for gasoline. Under the proposed system, the government would set a limit on the amount of gasoline Americans could purchase annually and would then allocate rights to purchase that amount of gasoline. Each household would receive some number of tradeable gasoline rights (“TGRs�), and consumers would have to “spend� one right (in addition to the actual cash purchase price) for each gallon of gasoline purchased.

Feldstein argues that his system, which resembles the emissions trading system that governs sulphur dioxide emissions under the Clean Air Act, would create incentives for Americans to reduce their gasoline consumption and would “raise[] the income of a majority of households,� which could conserve gasoline and sell their excess TGRs to high-volume consumers such as businesses that use trucks.

While I’m all in favor of utilizing market mechanisms in regulatory programs (e.g., the Clean Air Act’s sulphur dioxide program), I’m not convinced Feldstein’s idea is a good one.

Most importantly, Feldstein never tells us why we need government intervention here at all. High gasoline prices already provide an incentive to reduce gasoline consumption, and households that conserve are already rewarded for doing so. As our current situation “worsens� (i.e., as gasoline prices increase further), these incentives and rewards will grow without government intervention.

Now, Feldstein may believe the price mechanism doesn’t provide strong enough incentives to conserve. That would be true if gasoline consumption involved negative externalities that are not already accounted for by existing gasoline taxes (more about this below). But federal and state gasoline taxes, though smaller than those in Europe, are pretty sizeable, and Feldstein offers no evidence that they are too small to account for any externalities involved in gasoline consumption. Thus, Feldstein’s proposal seems to lack a justification.

But even if we assume that gasoline consumption involves negative externalities that are not already addressed by existing taxes, is Feldstein’s proposal the best way to reduce consumption to optimal levels? Maybe not.

First, consider the goal of a regulation governing fuel consumption. Like most other economic activities, consumption of gasoline involves decreasing marginal benefits (i.e., the per-gallon benefit of gasoline consumption decreases as individuals consume gasoline for less important purposes) and increasing marginal costs (i.e., the per-gallon cost of gasoline consumption increases as gasoline becomes more difficult to produce). The optimal amount of gasoline consumption would be that at which the marginal cost and marginal benefit of consumption are equal. Consumption of each gallon beyond that point would create costs in excess of benefits; stopping consumption before that point would forego a net benefit. Policymakers’ goal, then, should be to get us to this “bliss point� at which marginal costs equal marginal benefits.

Absent externalities (i.e., if individual consumers bore all the costs and benefits of their consumption decisions), individual economic actors attempting to maximize their welfare would consume to the bliss point without government intervention. If there are negative externalities, though, consumers will avoid some of the marginal costs of their consumption decisions and will thus tend to consume “too much� – i.e., to a point beyond the bliss point.

So how could policymakers motivate consumption to the bliss point? They would have at least two options. One would be Feldstein’s: Set the total level of consumption to equal the bliss point, allocate consumption rights equal (in the aggregate) to that point, and allow individuals to trade those rights among themselves. Another option would be to tax gasoline consumption, setting the tax equal to the cost the consumer is not personally bearing when she makes her consumption decision (i.e., to the size of the externality).

Each regulatory option presents difficulties. The tax option requires regulators to estimate the degree of divergence between individual marginal cost and total marginal cost. Such estimation is obviously difficult and, in practice, would undoubtedly involve a bit of guesswork. Feldstein’s cap-and-trade approach would not require such estimation, but it would require policymakers to make equally – or perhaps more – difficult decisions. First, they’d have to determine exactly where the bliss point occurs (i.e., at what point should we cap total gasoline consumption?). In addition, they’d have to determine how to allocate consumption rights initially. Coase tells us that the ultimate allocation probably doesn’t matter from an efficiency standpoint (assuming that bargaining costs are sufficiently low, as Feldstein suggests they would be), but the initial allocation issue does raise difficult distributional questions that would undoubtedly generate lots of political wrangling and the associated deadweight loss.

So which approach is superior? That’s a tough question. At this point, I’d support neither, for I’m not convinced (and Feldstein did nothing to convince me) that our total consumption of gasoline is beyond the bliss point – or, put differently, that gasoline consumption involves externalities that are not accounted for by the sizeable taxes already in place.

If I were convinced that substantial externalities existed, I might favor Feldstein’s proposal over a tax system. It would likely involve greater administrative costs, for estimating the bliss point and determining how to allocate rights is likely more difficult than estimating the size of the externality. Critically, though, it would not increase the revenue of the government, which tends to respond to every revenue increase with an even greater degree of spending on wasteful social programs.

In the end, I suspect that the revenue-neutral effect of a cap-and-trade system is what ultimately persuades Feldstein, who says his “best guess is that the increased revenue from a higher gasoline tax would be … likely to finance additional government spending, just as it does in Europe.� God forbid.

The New York Times is worried about Wal-Mart’s plan to sell organic food. One would think that fans of organic would be happy about this development. It means that organic products will be available more cheaply at Wal-Mart, which is planning to sell organic products for just 10% more than conventionally grown food, and it’s almost certain to lower organic food prices elsewhere. First, competition with Wal-Mart will lower prices. In addition, Wal-Mart’s entry into the organic sector will expand organic production, thereby permitting producers to achieve greater economies of scale.

The Times, though, worries that Wal-Mart’s entry into the organic food market will pollute the label “organic.” It’s concerned that Wal-Mart will affix the organic label to foods that, while produced using organic methodologies, are grown on large, non-local farms. In other words, it’s not enough that the food be produced without chemical fertilizers, insecticides, pesticides, etc. Those factors — the ones that might have some environmental and/or health effect — are only part of what organic means. The Times explains: “People who think seriously about food have come to realize that ‘local’ is at least as important a word as ‘organic.'”

So let me get this straight. The Times wants to insist on an organic standard that (1) has nothing to do with the environmental effects of producing the food or the health effects of eating it and (2) cannot be met cheaply (i.e., by obtaining economies of scale). Wonder why that is. One possibility is that the Times wants to protect the small farmer and sees the organic label as a means of doing so (although one assumes that people concerned about small, local farmers could just buy foods labeled “locally produced.”) A more plausible theory is that the Times wants to preserve the organic label as a status symbol. After all, if you can reserve the organic label for food products that can’t be cheaply produced, then you can ensure that those products are reserved for “people who think seriously about food” — i.e., not the commoners who shop at Wal-Mart.