Environment and Monopoly

By Jeffrey Braddock
Published 04/24/09 


In the wake of the environmental crisis, government intervention is the buzzword on most citizens lips. I shall show the concerned citizen that intervention leads not only toward inefficiency, but reduced benefit, and inevitably, a monopoly. 

I will begin with a definition of externalities. Recall that an externality is any cost or benefit of a transaction that affects parties not involved in a transaction. Thus, a restaurant sells food and the consumer eats, but the carbon dioxide emitted by the kitchen’s stove is not directly involved in the transaction, and thus an externality. Welfare economists use different methods to measure the benefits or costs in terms of “society’s welfare.” That these words are meaningless shall not be addressed here.[1] Example of intervention in an externality: The EPA decides the pollution emitted by factories must be reduced. The EPA may set a level for emissions, collect Pigovian taxes, or issue tradable pollution permits in order to meet these goals. There are other methods, but these three are extremely popular. 

Let us now alter the three EPA methods to read properly: “exclusive right to pollute to level X” (emissions standard), a “pollution trading oligopoly” (tradable pollution permits), or a “pollution tax” (Pigovian taxes). These impositions on firms lead toward the same end — monopoly. Why is this so? Practically any measure forced on employers results in higher costs of production and therefore a change in the conditions of competition.[2] Thus foreign producers can compete with US firms under more favorable conditions, both at home and abroad. Consider: if a firm cannot pollute above level X (without punitive taxes), or a pollution tax is leveled on the firm, it will either end production, lobby extensively to achieve a higher pollution standard, or relocate to a place where it can pollute without regard. The consequence is such that firms which can successfully lobby for exemptions will remain in country, while those that cannot will either move abroad or close down. The pollution problem appears settled — but that only hides the true state of affairs. Pollution has merely shifted abroad[3], while higher domestic prices and increased unemployment result from the monopoly. The accrued “social benefit” is eroded by the depressed standard of living, resulting in no change save a perceptible shift in public opinion toward protectionism.[4] 

Now, if the government is given exclusive right to create/distribute permits (or levy politically-expedient taxes with impunity), what would prevent the government from distributing (or rescinding) those permits (taxes) to (from) “essential industries”, “exclusive enterprises”, or “very important financial donors?” What are the implications of a transfer of wealth from the consumer and private industry (who bear the total cost of the excise) to the government? I leave these issues for you to consider. Finally, I offer a solution to the pollution issue. Allow private entrepreneurs to seek private financing, experiment, and then market “green”[5] technologies as cost-reducing measures. Many will fail — some will succeed. But there will be no monopolies. “Monopoly,” as Ludwig von Mises wrote, “is not inherent to the capitalist system or the result of unhampered capitalism, as most socialists would have us believe, but rather the result of government policies aiming at the reform of the market economy.”[6] 

[1] An extremely good account of the changes in language can be found in Hayek, F.A.’s The Road to Serfdom (1944), pg 106-119.
[2] Ludwig Von Mises, Omnipotent Government: The rise of the total state and total war. 1944 [3] Christopher L.Weber* and H. Scott Matthews. “Embodied Environmental Emissions in U.S. International Trade, 1997-2004.” Environmental Science Technology, 41 (2007), pg 4875-4881. 
[4]Literally, more government intervention to protect US jobs from foreign competition.
[5] I use this word for expediency, disregarding the didactical issues associated with its use.
[6] Ludwig Von Mises, Omnipotent Government: The rise of the total state and total war. 1944




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