Friday, April 8, 2011

second best

One of the curious things we do is to subsidize environmental harm in the name of environmental good. We also forbid people doing things that they might wish to do, again often allegedly for their own good; I'm not thinking just here of situations in which "we" disagree with their assessments, or believe they aren't well informed about the choices they're making. While non-economists frequently run into trouble by not thinking to second-round effects, I'm referring here to situations in which the second-round effect is the real target of policy.

Taking the subway requires the production of electricity, among other environmental harms. The bus is probably even worse.* We subsidize it, however, at least in part for environmental reasons. Someone might take the bus instead of walking or instead of not making a trip, but there's an expectation that the subsidy will incent many people to use public transit instead of something more destructive — namely, driving a car. The standard Pigovian prescription would be to tax driving, and place a smaller tax on public transportation; it's easier, both for reasons of transaction costs and those of politics, to subsidize public transportation instead.

We also make it illegal to work for less than minimum wage. There are situations in which these laws have been used in clearly inappropriate ways against volunteers, but the intention of those who support these laws is not that somebody who could be making $5 per hour be unemployed instead; the hope is that forbidding someone to work for less than $7 per hour will induce more employers to pay $7 per hour, either because they previously gained more than $7 per hour in marginal benefit from the worker anyway, or, if the economic analysis is better, because making competitors unable to hire workers for less than $7 per hour will allow them to raise prices to where the workers are more valuable.

There are important differences between these cases, but both are situations in which the policy goal is pursued in a slightly round-about way, in a way that, in terms only of the immediate, proximate effect, is entirely perverse. With further analysis, each illustrates that, in the absence of an ability to pursue goals directly, that sort of perverse approach may be the next best option available; if you can't tax driving, taxing public transportation for its direct environmental impact is no longer a good idea, and if you can't transfer wealth from consumers at large to people with low-wages in more direct ways, outlawing their work altogether might ultimately benefit them in a similar way.

* In some stochastic, long-run sense. Obviously the fact that the subways run requires electricity; if they're already running on a given schedule, an additional rider contributes essentially nothing to that. If there's a 5% increase in ridership, though, after a period of time, it's likely that more trains will be run than if there's a 5% decrease in ridership. This is perhaps even more true of buses. When you decide to take a bus, let's suppose, given knowledge of which you could reasonably avail yourself, that increases the odds of them running another bus by some amount, and attribute to your bus ride the extra pollution from that extra bus, multiplied by the probability you contribute.

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