Ag & Environmental Potpourri

by Levi Russell

As the cow herd in the US has expanded over the past few years, it's interesting to look at these changes at the macro level. David Widmar over at AgEconomists.com has a great discussion of the size of beef cattle operations in the US. Carl Zulauf at FarmDoc Daily looks at economies of size in the dairy industry and its implications for dairy support policies.

My UGA colleague Adam Rabinowitz discusses some important issues on row crop policy over at our new Food, Agriculture, and Resource Economics blog.

Matt Bogard summarizes some research on the effects of speculators on commodity markets.

Bruce Yandle provides a discussion of the situations in which businesses actually prefer more stringent regulations, specifically environmental regulations. 

Unintended Consequences of Environmental Regs

by Levi Russell

Over at the Texas Ag Law Blog, Tiffany Lashmet provides a discussion of the history and current state of the Waters of the United States (WOTUS) rule in relation to ag. Her post is very informative and I suggest you check it out. Here's a slice:

Rescinding a rule already promulgated is not as simple as it may sound.  The EPA has published a new proposed rule in the Federal Register, which essentially seeks to codify the rule as it was prior to the 2015 EPA rule being passed (and, due to the 6th Circuit stay, the approach currently in place across the US).  Specifically, the proposed rule would rescind the 2015 approach and codify an approach consistent with the Rapanos Supreme Court decision, applicable case law, and other longstanding agency practices. 

Now, notice and comment rulemaking will take place, which will allow the public to offer input on the new proposed rule.  This period is open through August 28, 2017.  After that, the EPA plans to conduct a “substantive re-evaluation” of the definition of WOTUS and conduct notice and will likely propose a new rule after property notice and comment rulemaking occurs. [Read new proposed rule and comment here.] 

Meanwhile, the 2015 rule is not in force anywhere in the United States, as the 6th Circuit stay remains in place.  Thus, currently, the definition of WOTUS is governed by the pre-2015 rule that got us the complex decision in the Rapanos case.  Unfortunately, until a new rule is promulgated, landowners are left with trying to interpret the Rapanos decision in order to know whether federal permits are required on their land.

Over the past couple of years I've been thinking about the costs associated with regulation like this. Certainly the intent of environmental regulation of agriculture is to internalize the external costs associated with the production of agricultural goods.

For example, we value the food and fiber produced by modern agricultural practices, but their production entails such things as water and air pollution, soil erosion, and other economic "bads." Environmental regulation is intended to curtail the production of those bads by ensuring that producers bear the cost of producing them. However, no policy is perfect and it is reasonable to think that some of the costs of regulation might be borne by consumers rather than producers.

To examine that question, I recently finished up a working paper examining the relationship between EPA regulation and relative food cost. You can read the whole thing here (and I'd appreciate any feedback), and here's the abstract:

Cost-benefit analysis of agri-environmental regulation is limited in the sense that it only examines the effects a single regulation will have on the public and polluters. Further, important mechanisms through which the public might bear part of the cost of regulation are not examined. This paper uses new data that allows for examination of regulation by a specific government agency on a specific industry to determine whether and to what extent relative food costs are affected by regulation of agriculture by the Environmental Protection Agency (EPA). The index allows for an examination of the overall effect of regulation, which is an important addition to the existing literature. Findings indicate that the costs of EPA regulation have not been borne solely by producers and that relative food costs would be lower now if EPA regulation had not increased over time.

Does Public Choice Describe Political Reality?

by Levi Russell

Ben Southwood, Head of Research at the Adam Smith Institute, recently wrote a piece for Jacobite Magazine in which he argues against the applicability of public choice theory to politics in Western democracies. Below I quote Southwood at length and explain in detail where I think his analysis goes wrong. The overarching theme is this: Southwood seems to think (erroneously) that public choice is about ill intent or corruption on the part of politcians. In fact, it is merely about the application of rational, individual choice frameworks of economics to the study of politics. Politicians may have the best of intentions, but the limitations of collective action and opportunities to maximize their own benefit (as we all try to do, even if that sometimes entails benefiting others we care about or with whose interests ours align) in the political sphere lead them to act in ways that are inconsistent with an idealized view of politics.

In his description of public choice, Southwood starts off well, but understates the predictive power of public choice theory.

Public choice is true on the margin—that is: people’s actions in politics and government tend to be affected by self-interest—but if you predicted what people did using only or mainly public choice you’d get it wrong nearly every time, at least in the modern West.

In fact, public choice theory can predict the actions taken by politicians, bureaucrats, and voters well, if not perfectly. Politicians may have altruistic motives, but they cannot effectuate their agendas without acting in ways described by public choice theory. Southwood's first example is voting:

Start with voting. Voting is an extremely widespread behavior in Western societies. A third or two fifths of adults will turn out even for the most trivial local elections. Eighty per cent might turn out for a major contest. But public choice cannot explain this.

Your vote has a tiny influence on the outcome of most elections. The chance of an individual voter deciding an American presidential election is about one in sixty million (ranging from one in ten million in some swing states to about one in a billion in Texas or California). If you only care about the election’s impact on your own personal prospects, then the election would need to be worth about a billion dollars to you personally. Elections often make trillions of dollars worth of difference overall, but rarely more than thousands or hundreds to individuals or their families.

This is a complete misunderstanding of public choice theory on voting. The cost-benefit analysis of voting for an individual is straightforward if we account for the social dimesion. People turn out to vote because they and their peer group believe it is part of their civic duty. The cost of voting is small relative to the benefit of signaling to one's peer group that we care about our civic duty. The fact that an individual vote is highly unlikely to affect an election simply doesn't matter.

Southwood goes on:

In public choice theory politicians stand for elected office not in order to enact a program, based on their views and convictions, but in order to maximize their personal power. To do so, they maximize votes at elections. This claim is also a familiar conventional wisdom to the point of cliche: politicians are unprincipled schemers who will do anything for votes.

There's a lot to unpack here. The first sentence gives the impression that politicians' desire to enact a program "based on their views and convictions" precludes their intent to maximize personal power. On the contrary, the former is dependent on the latter! Immediately after their elections, presidents and prime ministers are often said to have a "strong mandate" if they win more votes than expected. This "mandate" is said to give them political leverage to implement their agendas. All of this is orthogonal to their status as "unprincipled schemers who will do anything for votes." They may be unprincipled schemers, or they may be very well-meaning people. The fact is, if they want to implement the policies they think best, they have to work the system. The idea that politicians are evil might be a popular shorthand for public choice theory, but it doesn't represent the theory itself.

Southwood continues:

Public choice also predicts that officials are easily lobbied: they can be bought by rent-seeking special interests. But the literature is almost unequivocal: the source of campaign funds makes little difference to campaigns or policies. The fact that the decisions politicians make affect how trillions of dollars are spent, and yet firms spend figures in the low billions on elections caused a famous economics paper to ask “Why is there so little money in US politics“?

Again, Southwood starts off fine. Campaign donations, lobbying, and the revolving door more generally are all ways certain interest groups can influence politicians. The literature, specifically the paper he cites, does find that campaign donations only influence legislators' votes in some cases. However, this doesn't include lobbying and other rent seeking behavior. There is a revealed preference component here; even if interest groups are not "buying votes" with campaign funds or lobbying firm fees, they apparently see some value in spending several billion dollars per year (at the federal level) on it. We can't observe a counterfactual world in which there is no "money in politics," so it's difficult to know precisely how much impact campaign funds and lobbying have on legislator's behavior. Finally, there is a point to be made here about marginalism. It's true the US federal budget is in the trillions. However, the votes held in any single legislature will only affect this budget at the margins, not halving or doubling the budget year to year.

Public choice is fundamentally not about corruption or other criminal behavior; it's simply economics applied to political problems. Oftentimes, it's about incentive and information problems specific to the political world that result from the constraints we face in human interaction. Regulation can indirectly benefit special interests incentivizing rent seeking behavior, some laws can give politicians the power to benefit themselves personally, and arbitrary enforcement can create confusion and uncertainty. Even popular and well-meaning politicians understand the poor incentives they sometimes face.

Environmental Law Tradeoffs for Ag

by Levi Russell

Tiffany Dowell at Texas A&M has a great, concise blog post about a recent circuit court decision that will undoubtedly increase costs associated with environmental regulation of farms. As usual, I encourage you to read the entire post, but here's an excerpt:

Environmental groups, led by Waterkeeper Alliance, argued that CERCLA and EPCRA do not allow the EPA to exempt anyone from reporting requirements if there are releases over the statutory reportable quantity.  Further, the environmental groups claim that the rule is arbitrary in treating waste on farms differently than similar waste in other places, such as at a zoo or a slaughterhouse, which would not be exempted from reporting.  On the other side, the National Pork Producers Council also filed suit, albeit for a very different reason.  The Council claimed that the CAFO exception is not allowed because it was based upon the public’s desire for information, rather than based upon the purpose for which the statute was enacted–facilitating emergency response.

...

Now that the rule containing the farm exemption is no longer in place, under federal law, farms that may emit hazardous substances from animal waste above the threshold amount are legally required to report such emissions.   One major problem, which was noted by the court, is that there has been no determination of how these emissions should be measured.  It is unclear how farmers are expected to know whether their emissions are above reportable quantity, or how they are to measure them for reporting.  It may be that some operations can simply file an annual notice of continuous release if the releases are “continuous and stable in amount and rate.”  Hopefully, the EPA will offer some additional guidance documents in light of this ruling.  Operations for which this may be an issue should consult with their attorney to determine what steps to take.

A few things to note here:

1. The exemption was not for large animal feeding operations, it was for regular farms. With that exemption gone, farmers will be subject to significant regulatory uncertainty and cost.

2. That uncertainty and cost will fall disproportionately on small farmers. While this type of regulation will apply to larger farms, it will be difficult, at least in the short run, to know exactly where the threshold is. How many cows/hogs/chickens/etc does it take to create 100 pounds per day of ammonia or hydrogen sulfide? It will also complicate investment decisions for small farmers.

3. There's clearly an industry concentration vs environmental quality tradeoff here. A public concerned with the continued existence of the "family farm" would be smart to consider this tradeoff.

4. Tiffany notes that public comment played a role in the circuit court's decision, implying that interested parties can have some say in the regulatory process, at least when regulations are challenged in the courts. I suspect this will be a losing battle for ag in the future if the public continues to grow more concerned about these issues.

Potpourri

by Levi Russell

Here's a collection of articles I've read over the last week or so.

David Henderson on Thoma on potential changes to banking regulation.

Economist Allan Meltzer recently passed away. Here and here are two commentaries on his work.

A major contribution of another recently-deceased and well-known economist William Baumol is discussed here.

Don Boudreaux has a fantastic post on the importance of Econ 101. Here's a short excerpt:

To put the point a bit differently, ECON 101 instills the good habit of looking past stage 1, which is the stage at which most non-economists stop their investigations of economic consequences.  ECON 101 prompts those who grasp it to look also to stages 2, 3, and 4.  More-advanced economics courses – all the way to ECON 999 – teach that in theory there is also the possibility of stages 5, 6, 7, …. n.  Awareness of these theoretical possibilities is, of course, useful.  But awareness of stages 5, 6, 7, … n is either meaningless or, worse, practically dangerous without also an awareness of stages 2, 3, and 4.  And nearly all economic ignorance in the real world is simple unawareness of stages 2, 3, and 4.  (It’s also mistaken to conclude – as Kwak concludes – that awareness of stages 5, 6, 7, …. n regularly nullifies policy conclusions drawn from awareness of stages 1 through 4.)

Here's a great piece at Cato on the Net Neutrality issue.

Economics blogger Jim Rose corrects Noah Smith's oft-repeated claim that the economics profession was, until recently, dominated by right-wingers and libertarians.

A Discussion of Cost-Benefit Analysis

by Levi Russell

One of my favorite economics blogs is Cafe Hayek. Don Boudreaux, professor of economics at George Mason University, does a great job of using the economic thought of Alchian, Buchanan, Coase, Demsetz, and others to criticize popular fallacies and the perspectives of other professional economists.

Recently Boudreaux posted a couple of discussions on cost-benefit analysis. Below I reproduce key segments of these posts.

Boudreaux is clearly a fan of cost-benefit analysis, but he has a unique take on precisely who is best positioned to conduct such an analysis:

In this light, the benefit of moving consistently in the libertarian direction is that, to the extent that this movement is successful, one result is that both the number and the reliability of cost-benefit analyses increases. In the absence of the FDA and its prohibitions, each individual – with or without the consultation of his or her physician (as he or she chooses) – would make a series of personal cost-benefit analysis, throughout time, regarding various medical options.

This decentralized process of cost-benefit analyses would be on-going. Every hour of every day, each of many individuals would be doing his or her own cost-benefit analysis. And because each of these cost-benefit analysts would, unlike those who conduct cost-benefit analysis on government programs, (1) have more of his or her own money on the line, and, more significantly, (2) have his or her own health at stake, the results of these countless cost-benefit analyses would be much more reliable than are the results of unavoidably only occasional and information-thin cost-benefit analyses conducted on the overall effects of FDA policies and other government actions.

So, yes, by all means let’s have more – and more trustworthy – cost-benefit analysis. One of best means of achieving this happy result in matters of Americans’ health care is to abolish the FDA. To support the retention of the FDA – to support the retention of this agency’s current ability to prevent Americans from using whichever medical products they individually choose – is to oppose maximum possible cost-benefit analyses.

He follows that post up with another example:

Let me put this last point somewhat differently: if the income gains, from a minimum wage, captured by some people are to be counted as ‘benefits’ to be weighed against the losses of other people – and if these gains can in principle be so high relative to the losses that the minimum wage passes a cost-benefit test that then is used to support the minimum wage – then there is flung open a Pandora’s box of utilitarian horrors.

For example, someone (call him CB) might propose that the state prohibit the employment of all blacks under the age of 20. CB would correctly point out that, while his policy would obviously have some losers, it would also produce winners – namely, the wages of non-black, mostly young workers will increase as a result. And he’d be correct. I can also imagine that, in reality, the measured increase in the aggregate pay of this policy’s winners would be larger than the measured decrease in the aggregate pay of its losers (especially if we confine “losers” only to the black teenagers who lose jobs). Yet who would counsel that we should, therefore, withhold judgment on CB’s proposed policy until a cost-benefit analysis is conducted? Who would think it to be “libertarian” or “one-sided” or “unscientific” to prejudge as unacceptable a policy of prohibiting the employment of blacks under the age of 20?

Here are a couple of related short posts:

This one, by Jon Murphy, one of Boudreaux's PhD students, tackles the issue of aggregation in cost-benefit analysis. Another by Roger Meiners at the Property and Environment Research Center examines the use of cost-benefit analysis by the Environmental Protection Agency.

Expert Advice and Optimal Policy

by Levi Russell

Is it possible to bring expert opinion to bear on policy without the current system of administrative bureaucracy? That was the question on my mind when I read this post by my former colleague Tiffany Dowell at Texas A&M. The specific case discussed in Tiffany's post is a jurisdictional dispute against the Army Corps of Engineers (an administrative bureaucracy charged with enforcing much of US federal environmental policy) regarding a provision of the Waters of the United States (WOTUS) rule.

I won't get into the specifics of the WOTUS rule here. The point I want to make is broader, namely that we are not using courts as much as we could to accomplish policy goals. Currently at the federal level, the Executive branch has broad powers to interpret legislation, to write regulations that are legally binding for everyone, and to enforce those regulations without much interference from the Judicial branch.

The problem is that administrative bureaucracies have little incentive to consider potential unintended consequences and do a poor job of accounting for the costs of regulations. If, to fix these relatively poor incentives, the power of the bureaucracies is reduced, where would it go? Some of it could go to the Legislature and the rest might be entrusted to the Judicial branch directly. These two branches might do a better job of enforcing things like non-point- (in the case of the Legislature) and point-source (in the case of the Judicial branch) pollution since they're more directly bound by public scrutiny (Legislature) or hundreds of years of nuisance law (Judiciary).

What about expertise? Don't the administrative bureaucracies bring a lot of brain power to these regulatory problems? Definitely, but such expertise is often called on in legislative committees and on the witness stand in court cases. It doesn't require one to be flippant about environmental problems to suggest that there are, potentially, better institutional models to deal with things like pollution and environmental quality.

Is Corruption an Issue in Antitrust?

by Levi Russell

Antitrust has been a big issue in agriculture recently. The Bayer-Monsanto merger, the dairy industry settlement last year, and a relatively new suit regarding chicken price fixing have been consistently making headlines. Here at FH, I've been critical of the standard perspective on market contestability (here and here) and the tension between economic regulation and antitrust policy. In this article on the Stigler Center's blog, William Shughart applies public choice theory to antitrust enforcement. His basic point is that antitrust enforcement is just as susceptible to capture as other forms of regulation. Below are some excerpts, but I definitely encourage you to read the whole piece. It's pretty short.

Standing on the shoulders of at least one giant, my former colleague and frequent co-author the late Robert Tollison, I laid out the special interest group basis of antitrust in Antitrust Policy and Interest-Group Politics (Quorum, 1990). That book documented the political pressures brought to bear on antitrust law enforcers, including those of congressional oversight committees and the competitors of antitrust defendants, that shape enforcement outcomes at every stage of the process. The rent-seeking and rent-defending efforts of the parties involved in both public and private antitrust lawsuits are consistent with Olson’s Logic. The antitrust authorities, no less than regulatory authorities, are vulnerable to capture by the collective interests of groups having the most salient stakes in antitrust law enforcement outcomes.

It is tempting to think that antitrust law enforcers—and the judges who rule on such matters—are immune from the self-interested motivations of ordinary mortals, that the parties involved look only to the “public’s interest” by protecting consumers from the depredations of profit-seeking business enterprises. A review of more than a century of the actual practices of applying the relevant laws points in the opposite direction.

Antitrust is economic regulation and, as such, is amenable to scholarly evaluations of it within the same analytical framework. If not, scholars will continue to bemoan antitrust’s failures rather than seeing them as the predicable outcomes of an understandable political process, helping to explain the secular rise and fall of activist intervention against mergers and the behaviors of so-called dominant firms both at home and abroad.3)

Antitrust bureaucrats, judges and the parties who can bring the laws to bear to their own benefit are rational actors, not Madison’s fictional angels able to shed their parochial interests in the courtroom. The evidence is clear. Chicago School scholars, if anyone, should take off their rose-colored glasses.

Ostrom on Herbicide Resistance Management

by Levi Russell

I thought I'd share an interesting article I ran across last month on community-based approaches to herbicide resistance. The authors focus on the work of Elinor Ostrom as they evaluate the history of community-based solutions to common-pool resource problems and discuss how these solutions might be applied to herbicide resistance. Here's an excerpt from the conclusion:

What is to be done? First, we can recognize the wisdom of the Nobel Economic Sciences Prize Committee for awarding Elinor Ostrom part of the 2009 prize in economics for “for her analysis of economic governance, especially the commons.”—Oliver Williamson deservedly shared the prize for his “analysis of economic governance, especially the boundaries of the firm". There is now a rich body of research on managing common pool resources that can inform community-based approaches to resistance managements. Second, to organize to prevent herbicide resistant weeds, farmers and other stakeholders do not have to start from scratch. The multiple examples of community-based programs to control mobile insects and invasive weeds illustrate that farmer groups—in collaboration with and assistance from the research and extension communities—have organized effectively to overcome barriers to collective action problems. There is legal and administrative precedent as well as institutional memory that could aid farmers in developing resistance management programs based on programs they are already familiar with and which have a record of success. The particulars of herbicide resistant weed management will certainly differ from such insect and invasive weed programs. Insect biology and movement differs in spatial and temporal dimensions from that of weeds. And insect eradication programs have at times relied on mandatory area-wide spraying or practiced area-wide sterile insect releases. While both these actions took discretion out of the individual farmer’s hands, they were actions that farmers collectively accepted. Other organizational arrangements may also serve as useful examples. Endres and Schelsinger (2015) suggest that drainage districts perhaps provide a structure that can be replicated for effective community-based herbicide resistance programs.

The Nirvana Fallacy in Healthcare Economics

by Levi Russell

RegBlog, a great source for regulatory info, published an opinion piece about three weeks ago by Allison Hoffman. a law professor, on the potential for an Obamacare rollback by Republicans. Reading the essay, I recognized several errors of economic logic that I thought I'd point out here. I'm not an expert in this field, but I'm a firm believer that the economic way of thinking properly applied can provide much-needed clarity. As with any other post on FH, I invite others to correct me on any of the following if I miss something important.

The first two-thirds of the post is essentially an exercise in Harold Demsetz's Nirvana Fallacy. Yes, of course people could have more accurate information about treatments and could do a better job choosing good doctors. Does that mean the government should step in? Of course people are generally healthier when they don't pay the marginal cost of care; the cost/benefit calculus is skewed by the fact that the cost is near zero. Of course diseases are caused, to some degree, by things outside of our control. Does that imply the government can control those things or can necessarily make better decisions than we can?

Professor Hoffman then takes on a few individual proposals. She acknowledges that health savings accounts (HSAs) benefit some people, but complains that they are only beneficial for those with "surplus income." Her lack of a concrete example exposes the flaw in her critique. Suppose you are faced with two options for employer-provided healthcare: (1) a traditional "insurance" plan with a premium of $500 monthly and copays for doctor visits or (2) a catastrophic plan with a premium of $200 and an HSA with a contribution match up to $3,000 per year. The HSA allows you to save money for later when your monthly expenditures are lower than what you save. Comparing the two, it's trivial to point out that if I choose (2) I have $300 in "surplus income" to put into the savings account (plus the match!). Certainly some people don't have employer-provided health insurance, but the ACA was quickly making such policies tremendously expensive.

Hoffman later discusses tax credits, tax deductions, and other premium support programs proposed by Republicans. She criticizes one plan that would give a $2,100 tax credit to anyone between the ages of 35 and 50 for medical costs. Her criticism is that this credit would not cover a Bronze ACA plan which costs $4,200 per year. Assuming her figures are correct, this criticism seems empty to me. The credit would probably work well for a lot of people (especially those with low incomes) in scenario 2 above. The fact that it doesn't work with a choice-limiting, 3rd party payer program like the ACA isn't necessarily proof that the tax credit is bad. Perhaps it means choice-limiting 3rd party payer programs are inefficient.

Finally, Professor Hoffman criticizes reform proposals on the basis that the vouchers, credits, or deductions will grow at a rate at or below inflation, which is below historic rates of growth of healthcare costs. Unlike many, many other goods and services (even those produced in "non-contestable" industries), those that are heavily subsidized by the government like education and healthcare increase in cost much more rapidly than inflation. It's possible that reducing the government's role in healthcare will make that industry operate more like other industries, thus lowering costs. I'm sure there are reasons to think otherwise, but federal and state governments have had a lot of control over healthcare markets for at least 7 decades. Perhaps we should try something different.

How Do We Fix Rent Seeking?

by Levi Russell

Over at the ProMarket blog, Asher Schechter summarizes some key arguments made at the recent ASSA meetings on rent seeking, antitrust enforcement, and inequality. The post is quite long (for a blog), so I'll just comment on some key paragraphs and leave the rest to the interested reader.

“In all areas of economics, the rules of the game are critical—that is emphasized by the fact that similar economics [sic] exhibit markedly different patterns of distribution, market income, and after tax and transfers income. This is especially so in an innovation economy, because innovation gives rise to rents—both from IPR and monopoly power. Who receives those rents is a matter of policy, and changes in the IPR [Intellectual Property Rights] regime have led to greater rents without having any effects on the pace of innovation,” said Stigltz.

 Stiglitz's complaint about rents from innovation is telling. As I've discussed previously here at FH, if we take a dynamic view of competition, the rents (i.e. profits in excess of all costs) from innovation are merely an inducement to continue innovating. The value of the innovations themselves are still determined by the consumer and the "monopolist" is still incentivized to create what the public wants.

So, taking his last claim at face value, what would explain increasing profits to innovators without concomitant increases in innovation? I don't buy the intellectual property argument. More likely, it's the seemingly unceasing increase in regulation in so many industries. It explains reductions in the pace of innovation because it restricts entrepreneurs from doing what they believe is best for customers. It explains increasing profits because it keeps out new entrants and potentially pushes out smaller competitors.

Both Stiglitz and Deaton agreed that tougher antitrust enforcement is “incredibly important” in reducing inequality (an argument that was explored at length in ProMarket as well), rejecting claims that diminishing the role of government and regulation is the key.

What to do about increasing concentration? Ramp up antitrust enforcement, of course! The problem here is that a move back to the old ways of measuring market power, namely concentration indices, don't accurately capture market power. The work of Israel Kirzner, Harold Demsetz, and William Baumol bear this out. Stiglitz and Deaton seem to want more (or at the very least, not less) regulation, and more antitrust enforcement. The problem is that regulation creates barriers to entry that enhance market power of incumbents!

Campaign finance reform, he said, “would reduce the current selection of Representatives and Senators who are beholden to deep pockets. It’s hard to be elected to Congress or to stay elected without support from well funded interest, and that’s as true in recent years for the Democrats as for Republicans. Congressmen and Congresswomen are the farm team for K-Street.”

Another phrase for "campaign finance reform" is "abridgement of the first amendment." If we're concerned about the power of K Street Lobbyists (and I think we should be), it seems reasonable to address them directly, rather than through potentially damaging the freedom of political speech. If you want to reduce K Street's influence, the most direct way to do so is to reduce the scale and scope of power of the administrative bureaucracy and the legislature.

I'd love to hear readers' thoughts on these selections or on any other topic discussed in the article linked above!

Entry Regulation - Public Interest or Public Choice?

by Levi Russell

Don Boudreaux at his Cafe Hayek Blog points to a great article which comprehensively measures the effects of entry regulation - regulations associated with starting a business - that I thought I'd share.

The article does a great job explaining the three primary theoretical reasons for regulation:

1) the public interest view, which states that regulation is used by governments to correct for the many, many market failures existing in private markets

2) the public choice view, which states that regulation primarily serves politically-well-connected interest groups and that the public at large is inept to curtail these favors because of poor incentives and information problems associated with political decision making

3) another public choice view, which states that regulation benefits politicians because politicians are able to extract payments from private interests in exchange for not passing or exempting said private interests from the regulation

So what do the authors of the paper find? Here's the abstract:

We present new data on the regulation of entry of start-up firms in 85 countries. The data cover the number of procedures, official time, and official cost that a start-up must bear before it can operate legally. The official costs of entry are extremely high in most countries. Countries with heavier regulation of entry have higher corruption and larger unofficial economies, but not better quality of public or private goods. Countries with more democratic and limited governments have lighter regulation of entry. The evidence is inconsistent with the public interest theories of regulation, but supports the public choice view that entry regulation benefits politicians and bureaucrats.

The first 5 pages of the article go into a bit more depth about the three theories listed above and specifically how their analysis leads to the conclusions they draw.

On Regulatory Cost-Benefit Analysis

by Levi Russell

I recently ran across a fantastic article in Regulation magazine written by George Washington University regulation expert Susan Dudley. The article, entitled "OMB's Reported Benefits of Regulation: Too Good to Be True?" tackles an issue not often raised in policy discussions: What are the assumptions underlying cost-benefit analysis of regulation? Dudley explains in detail the way in which benefits are counted and how the scope of the analysis differs for benefits and costs. A single benefit category, reductions in fine particulate matter (PM 2.5), is responsible for the bulk of benefits calculated by OMB.

Given this focus on fine particulate matter, it would make sense that the science on the harm caused by PM 2.5 would inspire a lot of confidence. On the contrary, Dudley writes:

The OMB identifies six key assumptions that contribute to this uncertainty in PM2.5 benefits estimates. One assumption is that “inhalation of fine particles is causally associated with premature death at concentrations near those experienced by most Americans on a daily basis.” The EPA bases this assumption on epidemiological evidence of an association between particulate matter concentrations and mortality; however, as all students are taught, correlation does not imply causation (cum hoc non propter hoc), and the agency cannot identify a biological mechanism that explains  the  observed  correlation.  Risk  expert  Louis  Anthony  Cox raises questions as to whether the correlation the EPA claims is real. His statistical analysis (published in the journal Risk Analysis) concludes with a greater than 95 percent probability that no association exists and that, instead, the EPA’s results are a product of its choice of models and selected data rather than a real, measured correlation.

Another  key  assumption  on  which  the  EPA’s (and therefore the OMB’s) benefit estimates hinge is  that  “the  impact  function  for  fine  particles  is approximately  linear  within  the  range  of  ambient  concentrations  under  consideration,  which includes concentrations below the National Ambient Air Quality Standard” (NAAQS). Both theory and data suggest that thresholds exist below which further  reductions  in  exposure  to PM 2.5 do  not yield changes in mortality response and that one should expect diminishing returns as exposures are reduced to lower and lower levels. However, the EPA assumes  a  linear  concentration response  impact function that extends to concentration below background levels. The OMB observes, “indeed, a significant portion of the benefits associated with more  recent  rules  are  from  potential  health  benefits in regions that are in attainment with the fine particle standard.”

Based  on  its  assumptions  of  a  causal,  linear, no-threshold relationship between PM 2.5 exposure and premature mortality, the EPA quantifies a number  of  “statistical  lives”  that  will  be  “saved” when concentrations of PM 2.5 decline as a result of regulation. If any of those assumptions are false (in other words, if no association exists, if the relation-ship is not causal, or if the concentration-response relationship is not linear at low doses), the benefits of reducing PM 2.5 would be less than estimated and perhaps even zero.

Further, as the OMB notes, “the value of mortality risk reduction is taken largely from studies of the willingness to accept risk in the labor market[where the relevant population is healthy and has a  long  remaining  life  expectancy]  and  might  not necessarily apply to people in different stages of life or health status.” This caveat is particularly important in the case of PM2.5 because, as the EPA’s 2011 analysis reports, the median age of the beneficiaries of these regulations is around 80 years old, and the average extension in life expectancy attributable to lower PM 2.5 levels is less than six months.

 It's clear that there are some serious, objective problems with the way some benefits of regulation are calculated. Dudley concludes:

The OMB’s role is to serve as a check against agencies’ natural motivation to paint a rosy picture of their proposed actions. While it cannot ensure that agencies consider all the possible consequences of an action in their analyses, it should try to ensure that the boundaries of those analyses are set with some regard to objective science. When a few categories of benefits that have questionable legitimacy puff up benefits by a five-fold margin or more, that does not appear to be the case.

Beyond the objective, scientific questions concerning the benefits of regulation, analysis of the costs are important as well. In my recent piece in Perspective, a magazine published by the Oklahoma Council of Public Affairs, on the costs of environmental regulation of agriculture, I point to the fundamental uncertainty facing regulators. This uncertainty is not accounted for in the cost calculations of the regulations they enforce:

The uncertainty and compliance costs associated with these regulations represent serious concerns for producers. Recent surveys of row crop producers, cattle producers, and feedlot operators indicate that future environmental regulation is a top concern for their businesses over the long term.
...
This is not to say that regulators are ill-intentioned. They face a highly complex and difficult problem: implementing the will of Congress for the betterment of the American people. The knowledge and information required to regulate even one industry is immense. Not only is it costly to obtain the information necessary to pass effective regulations, regulators can’t be sure that unforeseen unintended consequences won’t diminish the effectiveness of their rules or cause more harm than good. Proposed measures to ensure effective regulation that is not overly burdensome, such as sunset provisions that would require regulations to lapse on a periodic basis, have been put forth but have not been implemented widely. Other propositions include less federal and more local and state control over environmental policy and greater use of common law courts to deal with environmental problems. Both of these proposals acknowledge the information problems inherent in the regulation of agriculture.

There are significant political hurdles to overcome if we are to inject more scientific and objective analysis into regulatory cost-benefit calculation. Knowing how that calculation is done is a crucial first step; Susan Dudley's article is a great way to inform the public so we can get the reform ball rolling!

Nudging the Nudgers with Better Regulatory Policy

by Levi Russell

A recent law blog post by Brian Mannix (hat tip to David Henderson for the link) discusses the significance of the Congressional Review Act (CRA) during a presidential transition period. In a nutshell, the CRA allows congress to overturn a regulation written by an agency in the executive branch with a bare majority in each house until the 60th day after it is issued. Of course, like a bill, the president can veto, in which case congress must come up with a 2/3 majority to override the veto. Given that most presidents wouldn't want to stop their own branch of government from implementing regulations, the CRA doesn't often come into play. However, since Republicans control both houses and the incoming president is a Republican, there are some interesting things that could happen given the Republicans' ostensible preference for less regulation. Mannix has some interesting examples in his post so I suggest reading it.

What interested me was a specific line in the post:

Note that the CRA mechanism is distinct from the proposed REINS Act mechanism.  Under REINS, Congress would need to approve of major regulations before they become effective; under the CRA rules become effective if Congress refrains from disapproving.

This got me thinking about behavioral economics and the idea of "nudges." An example of a nudge is a change to the rules that makes the "best" option the default. Often nudges are suggested as part of government policy, but that's not always the case. An oft-repeated example is to make 401k enrollment with your employer the default option while still providing an "opt out" opportunity for those who don't want to contribute to a 401k.

Looking again at the last sentence in the quoted text above, the REINS Act strikes me as a great example of "nudging the nudgers." That is, imposing a rule on those in the executive branch who are in charge of making and enforcing rules based on legislation. Specifically, the REINS Act would make the default position "no new regulations" and only those that passed additional scrutiny by elected representatives would actually be issued. I argue that, at least potentially, the REINS Act would lead to better regulation for a couple of reasons:

1) There would be more oversight by elected representatives of the regulatory process than there is currently.

2) Massive regulations like those written based on Dodd-Frank or the Affordable Care Act would probably be issued more slowly since the regulations would have to be approved by Congress. This would give us a chance to see how the initial regulations actually play out rather than relying on speculative cost/benefit analysis (side note - most regulations aren't subjected to cost/benefit analysis anyway).

Additionally, the REINS Act could reduce the problem of passing on more authority to the executive branch than it was designed to have. This problem arises when Congress passes a very general bill (which is more likely to garner enough votes to pass than a very narrowly-written bill) empowering the executive branch's bureaucracy to write regulations that are less likely to be in line with the will of the people.

The REINS Act was passed in the House last year and is currently sitting in the Senate. It would be great to see more discussion of this bill, but perhaps I just missed it. I'd love to read your thoughts in the comments below!

Bonus: Here's a great article on "nudging the nudgers."

Note that the CRA mechanism is distinct from the proposed REINS Act mechanism.  Under REINS, Congress would need to approve of major regulations before they become effective; under the CRA rules become effective if Congress refrains from disapproving. - See more at: http://www.libertylawsite.org/2016/11/17/midnight-mulligan-the-congressional-review-act-rides-again/#sthash.dJwa6OFY.dpuf

Ignoring Positive Externalities

by Levi Russell

Recently ag economist Jayson Lusk visited UGA to speak on the future of food and the "food movement." One great point he made is that food is quite abundant now relative to any time in the past, and yet there is a very lucrative book and movie industry built around concerns with our food supply. Certainly our food system is far from perfect, but absolute poverty on a global scale has been curtailed dramatically.

A question from the audience particularly interested me: what about externalities related to our current food production methods such as pollution? Lusk's answer was very good. He acknowledged the existence of both negative and positive externalities in food production. He went on to state that both should be considered when designing policy. It certainly seems to me that a lot of attention is paid to the negative externalities associated with food production in the policy world and in the economics profession; relatively little attention is paid to measuring the positive externalities such as the fact that on average Americans spend only about 10% of their disposable income on food and are free to pursue all sorts of other interests.

This discussion reminded me of a paper I read awhile back. It's ungated, and I encourage you to read it if you're interested in this stuff. Here's the abstract:

This paper criticizes the treatment of externalities presented in modern undergraduate economic textbooks. Despite a tremendous scholarly push-back since 1920 to Pigou’s path-breaking writings, modern textbook authors fail to synthesize important critiques and extensions of externality theory and policy, especially those spawned by Coase. The typical textbook treatment: 1) makes no distinction between pecuniary and technological externalities; 2) is silent about the invisible hand’s unintended and emergent consequences as a positive externality; 3) overemphasizes negative externalities over positive ones; 4) ignores Coase’s critique of Pigouvian tax “solutions;” and 5) ignores the potential relevance of inframarginal external benefits in discussions of policy “solutions” to negative externalities. Aside from presentations of “The Coase Theorem” excerpted from only 4 pages of Coase’s voluminous writings, it is as though the typical textbook author slept through nearly a century of scholarly critique of Pigou.

Can Plows Create Mountain Ranges?

by Levi Russell

According to the EPA, the Clean Water Act does not require a permit for normal agricultural practices including the following:

Normal farming, silviculture, and ranching practices. Those activities include plowing, seeding, cultivating, minor drainage, and harvesting for production of food, fiber, and forest products.

Upland soil and water conservation practices.

Agricultural stormwater discharges.

Return flows from irrigated agriculture.

Construction and maintenance of farm or stock ponds or irrigation ditches on dry land.

Maintenance of drainage ditches.

Construction or maintenance of farm, forest, and temporary mining roads.

That sounds pretty comprehensive to me, but the EPA and US Army Corps of Engineers has apparently decided to circumvent their own rule. A report released by the Majority Staff of the Senate Committee on Environmental and Public Works claims that

Landowners will not be able to rely on current statutory exemptions or the new regulatory exemptions because the agencies have narrowed the exemptions in practice and simply regulate under another name.  For example, if activity takes place on land that is wet: 
- plowing to shallow depths is not exempt when the Corps calls the soil between furrows “mini mountain ranges,” “uplands,” and “dry land;”
- discing is regulated even though it is a type of plowing;
- changing from one agricultural commodity constitutes a new use that eliminates the exemption; and 
- puddles, tire ruts, sheet flow, and standing water all can be renamed “disturbed wetlands” and regulated. 

This expansion of jurisdiction is apparently not what the EPA previously claimed it would be. If farmers are required to get permits to cultivate the soil, I'd bet on a couple of things:
1) the average farm size will grow dramatically as smaller farmers go out of business very quickly;
2) food prices will rise, or will fall more slowly than they otherwise would.

I doubt the average person looking at this situation would call those outcomes "good" but they're highly likely in my opinion. As Public Choice theory indicates, the EPA is not a residual claimant with regard to its policies, so its incentives are not as well-aligned as are the owner of the typical non-monopoly firm. Further, the EPA has plenty of incentive to increase the quantity of work for its employees and lawyers. This question remains: Will the farm lobby be able to keep their exemptions?

Monopoly Concerns with Baysanto

by Levi Russell

The recent merger of DuPont/Pioneer with Dow and the acquisition of Monsanto by Bayer have sparked a lot of discussion of market concentration, monopoly, and prices. A recent working paper published by the Agriculture and Food Policy Center (AFPC) at Texas A&M University written by Henry Bryant, Aleksandre Maisashvili, Joe Outlaw, and James Richardson estimates that, due to the merger, corn, soybean, and cotton seed prices will rise by 2.3%, 1.9%, and 18.2%, respectively. They also find that "changes in market concentration that would result from the proposed mergers meet criteria such that the Department of Justice and Federal Trade Commission would consider them “likely to enhance market power” in the seed markets for corn and cotton." (pg 1) The paper is certainly an interesting read and I have no quibble the analysis as written. However, some might draw conclusions from the analysis that, in light of other important work in industrial organization, are not well-founded.

The first thing I want to point out is that mergers an acquisitions can, at least potentially, result in innovations that would justify increases in the prices of the merged firm's products. To the extent that VRIO analysis is descriptive of firm's behavior with respect to innovation, we would expect that better entrepreneurs would be able to price above marginal cost. Harold Demsetz made this point in his 1973 paper Industry Structure, Market Rivalry and Public Policy. The authors of the AFPC study point this out as well, but the problem is that, even though we have estimates of potential price increases due to the mergers, it is very difficult to determine whether any change in price in the future is actually attributable to market power or simply due to innovation in the seed technology.

Secondly, the standard models of monopoly assert that pricing above marginal cost is at least potentially a sign of a firm exercising market power. Here, articles by Ronald Coase and Armen Alchian are relevant. I provided a discussion of the relevant portions in a previous post so I'll just briefly summarize here: pricing above marginal cost is an important signal that the current market demand is potentially not being met by the firms in the industry. It's a signal to other potential investors that entering the industry might be worth it. Further, there is an issue of measurement. Outside observers may calculate fixed cost, variable cost, and price and determine that a firm is pricing above marginal cost. However, there may be costs of which said observers are unaware. For example, there may be significant uncertainty (which is not the same as risk) about the future prospects of the industry. This is certainly possible in the biotechnology industry since the government heavily regulates firms in this sector. This is not to say that such regulation is bad or should be removed, simply that it presents costs that are difficult for outsiders to calculate.

Finally, I want to examine one part of the analysis in the AFPC paper. On pages 10 and 11, the authors write (citations deleted):

A market is contestable if there is freedom of entry and exit into the market, and there are little to no sunk costs. Because of the threat of new entrants, existing companies in a contestable market must behave in a reasonably competitive manner, even if they are few in number.

Concentrated markets do not necessarily imply the presence of market power. Key requirements for market contestability are: (a) Potential entrants must not be at a cost disadvantage to existing firms, and (b) entry and exit must be costless. For entry and exit to be costless or near costless, there must be no sunk costs. If there were low sunk costs, then new firms would use a hit and run strategy. In other words, they would enter industry [sic], undercut the price and exit before the existing firms have time to retaliate. However, if there are  high sunk costs, firms would not be able to exit without losing significant [sic] portion of their investment. Therefore, if there are high sunk costs, hit-and-run strategies are less profitable, firms keep prices above average costs, and markets are not contestable. 

I submit that under this definition, scarcely any industry on the planet is contestable, yet we see prices fall in many industries over time, even in those we would expect to have significant sunk costs and in which we would expect incumbents to have significant cost advantages over new entrants.

 Image source.

It's true that we sometimes must make simplifying assumptions that are at odds with reality to forecast future market conditions. However, some might infer from the AFPC paper (though I stress that the authors do not) that something must be done by anti-trust authorities to unwind the mergers and acquisitions under discussion. To infer this would be to commit the Nirvana Fallacy. To expect anything in the real world (whether in markets or in the policymaking arena) to be "costless" is an impossible standard.

It will be interesting to see what becomes of these mergers and whether seed prices move sharply upward in coming years. What is certain is that there is tremendous causal density in any complex system, such as the market for bio-engineered seed. Thus, policymakers should be humble and cautious about applying the results of theoretical and statistical analysis in their attempts to better our world.

Farmers as Environmentalists

by Levi Russell

This morning in my daily ag reading I came across an article entitled "Greens Make Green." The author lays out the case for the farmer-as-environmentalist better than I've ever seen, so I thought I'd share it here. The underlying economic argument here is that there is great incentive compatibility between farmers (who are interested in long-term profits) and environmental sustainability. Do you find it compelling? Let me know in the comments.

In truth, farmers and environmentalists should be allies. The environmental and agricultural communities have more in common than conventional wisdom might suggest. Both desire to preserve our planet and its resources for future generations. I am not shy about saying farmers are the original environmentalists.

To a person, every farmer I have ever met is driven by an ethical obligation to protect the environment. They view themselves as stewards of the land. And for good reason: Nearly all want their children and grandchildren to carry on the tradition. Cousins Scott and Tom Deardorff II reflect the common theme of sustainability that connects the past to the present and future. Founded in 1937 by patriarch and great-grandfather W. H. Deardorff, Southern California-based Deardorff Family Farms has dedicated four generations to refining its environmental craft. For nearly eight decades, the Deardorff family has been driven by the relentless pursuit of improvement, pioneering many farming practices aimed at increasing productivity while reducing their reliance on natural resources.

Today, Scott and Tom have not only embraced but expanded the family legacy of stewardship. For example, they have invested heavily in the latest water-saving technologies, including drip irrigation and state-of-the-art weather stations and soil moisture monitors. The cousins have also curtailed the use of fertilizer and pesticides on their organic vegetable farms through innovative soil fertility programs and integrated pest management systems. And they recently completed construction on a cooling and packing facility that meets the highest green building standards in the country.

Multigenerational farms like theirs are the heart and soul of agriculture in the West and across the country. They are the very embodiment of sustainability. We should be so lucky as to entrust all our natural resources to the collective care of such thoughtful stewards.

If you can't bring yourself to buy the moral argument, at least consider renting the financial one. Farmers are business owners. They are motivated by sustainable profit. Their businesses are dependent on healthy soil and clean water, both of which lead to stronger yields and higher quality products. The math is quite simple: An environmentally healthy farm can deliver sustainable profits, while land that has been abused will one day cease to produce anything. Furthermore, inputs like fertilizer and pesticides are expensive; a business that doesn't minimize operating costs won't stay in business very long. Clean air, soil, and water are all outcomes supported by environmentalists. So why do so many continue to paint farmers as the enemy?

In his farewell address, President Eisenhower famously warned the nation against "unwarranted influence .  .  . by the military-industrial complex." Today we see the maturation of an environmental-industrial complex, defined by multimillion-dollar global enterprises closely integrated with academia and government regulators implementing environmental programs.

Like a storyline out of Mad Men, environmental activists have channeled their inner Don Drapers, fomenting fear of business and industry, and of human activity generally, in order to build a database of committed donors. It is an ingenious business model, used by corporate America since the early 1920s, when Gerard Lambert stigmatized halitosis to sell Listerine. Marketers have long understood that fear is a powerful motivating tool.

Every cause needs a bad guy, a threat that must be put down. For Listerine, it was bad breath. For too many environmental organizations, farmers—cast as the pillagers of Mother Earth—have served as compelling bogeymen (typically referred to as "corporate agriculture," "industrial agriculture," or the like) to alarm the 98 percent of Americans who aren't farmers.

We are all motivated to some degree by self-interest. Farmers are motivated by the love of farming and social good that comes from providing healthy food, and they are also motivated by the desire to succeed financially. Environmental activists working in big organizations aren't all that different. There is no doubt that most choose a career based on a commitment to environmental values and a desire to do good. And there is also no doubt that another motivation, and one that is entirely defensible, is the financial reward and career security that these organizations can provide.

Unfortunately, in the public debate, it is perfectly acceptable to point to farmers' financial motivations and equally unacceptable to acknowledge the financial motivations of environmental advocates. Those in private enterprise who are targeted by the policy and political initiatives of the environmental lobby ought to be more vocal about that.

If one can acknowledge the reality that the environmental lobby is motivated not only by the values of environmentalism, but also by the financial rewards of growing a motivated donor base, one might ask whether it would benefit these organizations to ever declare a problem solved. After all, while committed donors might feel good upon hearing such an announcement, they would also have one less reason to contribute.

Nowhere was this more in evidence than during the opposition waged against Senator Dianne Feinstein's compromise California drought legislation in 2014, which culminated in a joint-letter from multiple organizations slamming her bill.

Not one to seek the ire of environmentalists, the senator candidly responded—as quoted in the San Francisco Chronicle—that they "have never been helpful to me in producing good water policy." She went on to lament, "I have not had a single constructive view from environmentalists of how to provide water when there is no snowpack."

The practice of environmental protection and the business of environmentalism are two sides of a scale. Our nation's natural resources have benefited from much that has come from the former, but today the scale is weighted too much to the latter. It is the business side of environmentalism that produces the political targeting of agriculture.

It should stop. We share a common aim: to safeguard the planet for its people, animals, and plants. Imagine how much good could be accomplished if all farmers, regardless of size, whether conventional or organic, were accepted and embraced as partners for environmental protection. Now that is a narrative I know Don Draper could sell.

Tom Nassif is president and CEO of the Western Growers Association.

Anti-Trust vs Regulation: The Case of Baysanto

by Levi Russell

Bayer's impending purchase of Monsanto is all over the news lately. As is typical in these situations, the conversation centers around concerns of increasing market power and monopoly profits. Regular readers might expect me to focus on the notion that industry concentration doesn't necessarily imply welfare losses, but I'm not.

It seems to me that the relationship between anti-trust legislation and regulation is an under-discussed issue in these cases. Agribusiness firms are heavily regulated by three of the most powerful regulators in the US: the FDA, the USDA, and the EPA. Many regulations function as fixed costs, implying that there are economies of scale in regulatory compliance. Thus, the greater the regulatory burden placed on firms in an industry, the greater the inducement to merge.

These regulatory economies of scale militate directly against the goals of anti-trust policy. The latter, perhaps as an unintended consequence, gives us fewer and larger firms while the latter attempts to reign in these cost-saving mergers in the name of competition. If we're going to seriously discuss regulation and anti-trust, we need to be cognizant of the interplay between them.

Of course, there are plenty of problems with the regulatory revolving door and other public choice issues to deal with as well. On this front, it seems fairly obvious that the incentive to rent-seek is positively correlated with the prize being offered. Perhaps this is an argument for less power vested in the administrative state and more power returned to the courts.

Pigovian Prices

by Levi Russell

An interesting exchange occurred last month between two economists/bloggers. Stephen Gordon, an economics professor at Université Laval in Canada, wrote a column on the concept of a carbon tax price. In it, he argues:

As the Conservatives should really know by now, market-based approaches to reducing GHG emissions are more efficient than regulations. It’s better to let households and firms make their own priorities in response to price signals instead of having them imposed by the government. And the extra upside of market-based approaches like carbon taxes or cap-and-trade is that some of the costs of the policy are transformed into government revenues that can be used to compensate vulnerable groups or even to reduce other taxes.

So it seems that Professor Gordon equates a price with a tax. Hoover Institution economist David Henderson responded, taking Gordon to task for his apparent confusion of a price with a tax.

But carbon already has a price, or, more exactly, multiple prices. Natural gas has a price; oil has a price; coal has a price. And their prices are related to the valuable carbon component of those fuels because it’s carbon that makes those fuels valuable. Just as there’s no such thing as a free lunch, carbon is not free.

So why does Professor Gordon claim that taxing carbon means “putting a price on carbon?”

I can only speculate because I don’t know him, but here’s what I’m willing to bet dollars to doughnuts on: he calls a tax a price in order to lull the reader into thinking that it’s not a tax. Later in the piece he admits that it’s a tax but in his first mention, which sets the stage, he doesn’t.

Gordon later responded:

A market price is what a consumer has to pay in order to purchase a good or service. In contrast, a tax is, er, what a consumer has to pay in order to purchase a good or service.

This is one of those cases of a distinction without a difference. Unless you’re the sort of person who reads the fine print on the pumps at the gas station, you probably don’t know what the market price of gasoline is, and even if you do, you probably don’t care — at least as far as it affects how much gasoline you buy. What really matters is the total you have to pay. So when the focus is on how carbon taxes work to reduce greenhouse gas emissions — as mine was — then there’s not much point in using up column space to make the price-tax distinction. (Although if you want to play this game, think of a carbon tax as the price governments charge for degrading a communally owned resource.)

It's interesting to note here that neither Henderson nor Gordon are getting at the fundamental difference between prices and taxes. Prices, to one degree or another, transmit information about the relative scarcity of resources. If the price of a good rises, consumers of the good are incentivized to use it more frugally while producers are incentivized to produce more of it. It doesn't really matter whether the initial cause of the price rise was a reduction in supply or an increase in demand; what matters is the incentive the price change has on behavior.

One might be tempted to argue that a tax can be used to correct market prices when they don't reflect all relevant information. Indeed, this is the Pigovian paradigm that has existed in the profession for nearly 100 years. However, there have been significant challenges to this paradigm that are, in my mind, not fully appreciated. Though Henderson doesn't make this point in his final response to Gordon, I think it gets to the heart of the matter. Perhaps a tax on carbon is a sensible policy, but to simply assume that governments can get that price right ignores the reality that information and incentive problems present in markets are not absent from governments.