Edwin S. Mills

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Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research
Volume Title: Economic Analysis of Environmental Problems
Volume Author/Editor: Edwin S. Mills, ed.
Volume Publisher: NBER
Volume ISBN: 0-87014-267-4
Volume URL: http://www.nber.org/books/mill75-1
Publication Date: 1975
Chapter Title: Introduction to "Economic Analysis of Environmental Problems"
Chapter Author: Edwin S. Mills
Chapter URL: http://www.nber.org/chapters/c2830
Chapter pages in book: (p. 1 - 5)Introduction
Edwin S. Mills, Princeton University
The papers and comments printed in this volume were delivered at a
conference held at the University of Chicago, November 10 and 11, 1972.
The conference and conference volume were jointly sponsored by the
Universities-National Bureau Committee for Economic Research and Re-
sources for the Future, and were financed partly from a grant to the Na-
tional Bureau by the National Science Foundation. Both the exploratory
committee and the planning committee consisted of Otto Davis, Allen
Kneese and the Editor. The Editor is indebted to his colleagues for their
work on these committees, and to all the participants in the conference.
Despite the outpouring of printed material on environmental prob-
lems in recent years, careful economic research on the subject is still a
scarce commodity. It is therefore hoped that the research brought to-
gether in this volume will be particularly useful to scholars, students and
public and private officials interested in the subject.
The papers and comments in this volume speak for themselves and
need not be summarized here. Instead, this introduction will present a
brief guided tour through economic issues related to the environment,
pointing out niches into which the papers fit and some niches that are
still empty or nearly empty.
The essence of economic activity is the removal of materials from the
environment, their transformation by production and consumption, and
their eventual return to the environment. With relatively unimportant
exceptions, the mass of materials removed must equal the mass of mate-
rials returned during any substantial period of time. Resource economics
is concerned with the kinds, amounts, and forms of materials removed,
places from which materials are removed, and the institutions, markets
and laws by which removal is governed. Environmental economics is con-
1I
2 EDWINS. MILLS
cerneci with similar issues related to the return of materials to the envi-
ronment.
It is natural to classify environmental studies in the ways that other
economic studies are classified: micro, macro; theoretical, empirical; do-
mestic, international; etc. The papers in this volume fall naturally into
the three parts listed in the contents.
Of the five theoretical papers in part one, the first two, by Uzawa and
Mäler, are macroeconomic. In the long run, the most important environ-
mental issue is the relationship between environmental quality and eco-
nomic growth in a finite world. Economic growth normally entails in-
creases in the amounts of materials removed from and returned to the
environment. In the absence of efforts to avoid it, environmental deteri-
oration must result when materials returns exceed the absorptive capacity s4
of the environment. This statement applies to a local or regional envi- p
ronment, such as a flowing streani, but it also applies to the global en-
vironment, especially to the earth's air mantle. Resources can be devoted
to environmental protection in two ways: materials can be transformed
by production, consumption and waste treatment in ways that make their
return innocuous; anti materials can be reused or recycled rather than
returned to the environment. Failure to realize that resources can be
devoted to environmental protection as well as to direct production o
goods is a fatal defect of mitch popular environmental literature and
technical environmental literature by noneconomists. This failure is the
source of anti-growth bias in some of that literature. Both Uzawa anti
Mäler, by incorporating resource use for environmental protection in
growth models, contribute to our understanding of their relationship. An
important direction for future work on growth theory ought to be the in-
corporation of both resource and environmental considerations in long.
run growth models.
Maler's paper also discusses short run macro stabilization policy in a
model with environmental considerations built in. He shows that effluent
or discharge taxes may have quite different stabilization effects from in-
come or othei- taxes. This must be one of the first attempts to include
environniental variables in a short run macro stabilization model. Clearly,
more such research is needed.
The last three theoretical papers are rnicroeconomic. The most im-
portant microeconornic environmental issue is to understand the
nature of the market failure that pollution entails. Economists have
studied this issue since Pigou, and the recent research by, anti inspired
by, Coase has reopened the subject. The paper by Plott anti Meyer ex-
plores fundamental aspects of the concept of mat-ket failure. The authoi-s
-INTRODUCTION 3
considerin what sense and to what extent it is useful to characterize the
reasons for market failure by the currently fashionable term 'transaction
r costs." To the extent that ituseful, they discuss what can be said about
the transaction costs of various government policies relative to the costs
of private transactions.
The next theoretical issue considered is the measurement of costs and
benefIts of environmental protection. If it is accepted that there is market
failure regarding the environment, how are the costs and benefits of meas-
ures to improve the environment to be appraised? Measuring costs of en-
vironmental protection raises few new theoretical issues, but calculating
the benefit side involves important unanswered questions. Environmental
quality differs from the usual economic goods in several ways and has
several quite different kinds of benefits. Neither this volume, nor the
profession has much to contribute on benefit measurement to date.
A third theoretical issue is the choice of public policy instruments for
environmental protection. Most research in recent years has focused on
the choice between direct regulation of materials returns or effluents, and
the use of taxes or charges on effluents. In fact, a much broader range of
policies is available to protect the environment. The papers by Oates and
Baumol and by Tolley contribute to the evaluation of alternative public
policies. It can be said that no environmental issue has been so well
studied: The great American pollution paradox is that no serious eco-
nomic swdy has concluded that discharge fees should not be a major tool
of public policy, whereas no serious environmental measure has included
them. The paradox is deep in a society in which almost everything else is
taxed, including those areas opposed by powerful interest groups.
The empirical studies reported in part two are all microeconomic. One
important kind of empirical environmental study can be termed industry
studies. These include studies of the kinds, magnitudes and speeds of
response to various public policies to protect the environment. The term
industry here must be interpreted to include public institutions, such as
municipal waste treatment plants, as well as private firms. Several earlier
studies investigated responses of industry to effluent charges on water-
borne wastes in particular river basins. The first two empirical studies
in this volume are much more comprehensive industry stitches. Tue paper
by Spoiford, Russell and Kelly reports a large-scale systems study of all
discharges in the Delaware Basin. It includes air, water, and solid wastes
and a large number of alternative ways of changing or reducing dis-
charges. The paper by Kohn is an input-output study of air pollution con-
trol in the St. Louis metropolitan area. Both are optimization studies in
that they compute least-cost combinations of ways to achieve given en-4 EDWIN S. MILLS
INI
vironmental standards. The third empirical paper is a different kind of usi
industry study. In it, Bower reports on several studies undertaken at
Resources for the Future of the process, product, and waste treatment
changes that can be employed in several industries to reduce the amounts
or harmfulness of waste discharges.
The paper by Lave and Seskin is the only paper in the volume on the
benefits of pollution abatement. In it, the authors study health effects of
episodes of severe air pollution in metropolitan areas. It is curious that
we now have better and more comprehensive studies of benefits of air
pollution abatement than of water pollution abatement. Many studies,
some of the best of them by Lave and Seskin, have estimated effects of air
pollutants on human health, and some have estimated property damage.
There are only a few studies of benefits of water pollution abatement,
mostly restricted to recreational benefits, despite the fact that basic phys-
ical, chemical and biological processes are better understood for water
pollution than for air pollution. High priority should be attached to fur-
tlier studies of water pollution abatement benefits.
The final paper in part two is a study of the political process by which
environmental issues are settled. In it, Jackson studies in detail the con-
troversy surrounding the decision whether to build a second jetport in
the Minneapolis-St. Paul metropolitan area. More such studies are needed,
especially of the passage of major national environmental legislation.
Part three consists of two international environmental studies. Several
kinds of international environmental studies might be undertaken. First
and most obvious is environmental effects that spill over national bound-
aries. Examples most often quoted are airborne discharges that pollute
the air over neighboring countries. Other possible examples pertain to
the global environment, e.g., heating of the atmosphere or pollution of
the oceans. However, no economic, e.g., benefit-cost, studies appear to have
been published on global problems, probably because underlying tech-
nical relationships are not well understood. A second kind of international
study is of the kinds of arrangements, institutions and policies that na-
tions might adopt to deal with environmental effects that spill over na-
tional boundaries. The paper by d'Arge explores basic aspects of this
problem. A third kind of international study would be effects of domestic
environmental protection policies on a country's international trade and
balance of payments. Environmental protection measures tend to make
domestic goods expensive relative to foreign goods, hence increasing im-
ports and decreasing exports. Unfortunately, we have no paper on the
subject in this volume. The fourth kind of international study is a cross-
country comparison of environmental protection policies. Wise men tellINTRODUCTION 5
uswe do not learn the lessons of history. A generalization of the proposi-
tt tion is that we fail to learn from both time series and cross-sectional data.
Hufschmidt's paper is a contribution to refuting the generalization. In it,
ts he compares recent air and water pollution control programs in the
United Kingdom and the United States.
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