External Cost

The dangers of calling everything pollution

Pollution is a growth business. All over America, intellectuals and policy makers are busy discovering, or inventing, new toxic spillovers in desperate need of stringent regulation. Consider a few recent examples:

? In Portland, Oregon, the problem is aesthetic pollution–specifically, ugly houses. As City Commissioner Charlie Hales wrote in response to a letter from the Portland Metropolitan Association of Realtors, "Nearly every day, I or someone in my office hears a complaint from a citizen about the poor quality of design of new construction….I want to encourage you and your members and your colleagues in the development industry to propose something–anything–that will put a stop to the ugly and stupid houses that we see going up."

To control Portland's architectural pollution, the city council recently voted to regulate the facades of new houses. Windows and doors must take up at least 15 percent of any new house's front. The garage cannot occupy more than half the facade and cannot stick out unless it is less than 40 percent; smaller garages can protrude only six feet. These rules represent a compromise from a proposal that would have also regulated trims, siding types, and roof pitches.

? In his much-touted book, Luxury Fever, economist Robert Frank revives the anti-consumption arguments of Thorstein Veblen and John Kenneth Galbraith, with a new twist: He declares the purchase of increasingly nice goods a form of pollution–a "negative externality," as economists put it. If you see that your neighbor has a fancy barbecue grill, argues Frank, you'll want one too, and you'll make yourself miserable working to get the money to keep up with the Joneses. That you might just think the grill is really cool, that owning one might give you genuine pleasure, is beyond Frank's ken; all he can see is destructive one-upsmanship. "The same arguments that have persuaded economists that effluent taxes are the best way to curb excessive pollution suggest that consumption taxes are the best way to curb conspicuous consumption," he writes.

Frank acknowledges Milton Friedman's argument that consumers know better than bureaucrats how best to spend their money. But, he says, "even Friedman concedes that at least some decisions are not best left in the hands of individuals–again, the most commonly cited examples being those with respect to activities that generate pollution. Yet ordinary consumption spending is often precisely analogous to activities that generate pollution. When some job seekers buy custom-tailored interview suits, they harm other job seekers in the same way that motorists harm others when they disconnect the catalytic converters on their cars."

? In an August Weekly Standard cover story called "The Case for Censorship," political scientist David Lowenthal invokes the pollution analogy to justify government controls on the mass media: "As a nation we are concerned about pollution, about pure air and water, about the prevention and cure of disease in all its forms. Is there no such thing as moral pollution?"

The Lowenthal article attracted attention because it advocated full-blown, prior-restraint censorship. But the "cultural pollution" metaphor has been buzzing around Washington for some time. At May Senate hearings on media violence, Sen. Sam Brownback (R-Kans.) and Bill Bennett both used the term, and Rowell Huesmann, a University of Michigan psychology and communications professor, drew a Frank-style analogy. He declared that media "producers can ignore what economists might call negative externalities" and called for a tax to offset the profitability of violent programming "much as you might do the same to encourage pollution controls, or other kinds of environmental controls."

Everyone, it seems, has learned one lesson from Economics 101: Some activities have negative spillovers whose full costs aren't borne by the beneficiaries. As Paul Samuelson put it in my old econ textbook (1976 edition, emphasis in the original), "Wherever there are externalities, a strong case can be made for supplanting complete individualism by some kind of group action….The reader can think of countless other externalities where sound economics would suggest some limitations on individual freedom in the interest of all." Samuelson had no idea how big "countless" could become. His book is silent on garage doors, fancy barbecue grills, and action movies.

The current rage for externality arguments may seem like a victory for economic reasoning–at least people are taking the idea of markets into account–but it actually has little to do with the economic world of trade and tradeoffs. The appeal of the externality claim to anti-market ideologues is that it has absolutely no stopping point. It sees anything that affects anything else as fair game for regulation; any side effect can be called "pollution." Since every action affects people other than the actor, anything someone doesn't like can qualify. The old adage that "your freedom to swing your fist ends where my nose begins" suddenly applies to a world of noses that put Pinocchio to shame.

All this economistic blabber about externalities conveniently ignores one of the central scholarly insights about spillovers and their regulation. Even Frank, with his showy 21 pages of tightly spaced bibliographical references, manages to omit the most cited paper in all of economic literature, an article directly relevant to his topic. That is a telling oversight.

The paper in question, Nobel laureate Ronald Coase's 1960 article, "The Problem of Social Cost," begins with a shocking observation: "Externalities" are reciprocal. They aren't a matter of physical invasion, with good guys and bad guys, but of unpriced impacts of any sort. We may recognize that an action inflicts a spillover harm, but stopping that action inflicts a different spillover harm.

If I build an ugly house, your aesthetic sensibilities may be offended. But if, to keep the neighborhood to your taste, you stop me from building my house, I lose the benefit of living in it. If I buy a cool barbecue grill, you may feel pressure to do likewise. But if you keep me from buying the grill, or take my money in a consumption tax, I'm hurt by your efforts. The same is true for classic externalities: If a steel mill pollutes the air, it harms those who breathe the pollution. But to shut down the mill (or require controls that increase its costs) harms those who buy and sell steel. In all these cases, an externality exists either way, regardless of who has to bear the costs of adjustment. (There are other aspects to Coase's paper, including, famously, the important issue of transaction costs.)

To deal with externalities, therefore, Coase argues for putting the burden where the cost is least. In a Coasian world, people who don't like other people's garages avert their eyes. People who do not approve of violent movies do not buy tickets for them and, perhaps, do not socialize with others who do. People who covet other people's nice possessions get therapy or religion. In a Coasian world, you cannot simply yell "externality" and get the government to stamp out anything that offends you. You cannot declare that conjectural, unquantified costs, such as aesthetic considerations, are infinite, but real, private market costs, such as more expensive houses, don't count. The burden of proof for regulation is not infinite, but it is high.

By contrast, one reason for regulating stationary sources of gross air pollution, such as steel mills circa 1969, is that such regulation offers large benefits at relatively low costs. It would be extremely difficult for individuals to avoid inhaling the dirty air, compared to the relative ease with which the factory could install smokestack scrubbers or use cleaner coal.

Coase's reasoning is obviously not an absolutist argument for freedom of action. As Frank notes, even strong libertarians usually make exceptions for some sorts of externalities. By clarifying the issues, Coase's utilitarian insight helps separate serious spillovers from mere excuses for bossing people around.

There are certainly other arguments against the infinitely elastic notion of externalities, which, as a theoretical matter, is a prescription for totalitarian control. But Coase's insight explains in a nutshell why peaceful social life, in which all actions are necessarily interconnected, must include a large measure of tolerance–and why spouting economic jargon is no substitute for thinking clearly.