Re: Please help with internalized costs argument

Frank Ackerman (
Fri, 22 Jan 1999 16:52:49 -0500

The argument about environmental costs that should be internalized is a
complicated one. Of course, environmental costs should be taken into
account; these costs appear to me to be much larger in production of
virgin materials than in disposal. If environmental costs were
internalized, then virgin materials would be more expensive relative to
recycled materials.

BUT...mainstream economics has obfuscated and diminished this issue, like
so many others. The problem is that in order to internalize environmental
costs, you have to put a monetary value on them -- and the process of
doing so is difficult to justify, or to perform in a sensible manner.
Economists are doing it; they're just not doing a sensible job of it.

Increasingly, there are economists who try to put specific prices on
environmental values, typically using "contingent valuation" studies.
This is essentially a public opinion poll, asking a random sample of
people how much they think some aspect of the environment is worth, or
what they would be willing to pay to get or keep it. E.g., how much would
you pay to avoid a reduction in visibility in the Grand Canyon that might
be caused by air pollution from a nearby power plant? (A real example!)
Naturally no one knows, and different studies value visibility at the
Grand Canyon at wildly different rates. This type of study is largely
what mainstream environmental economics consists of these days. (Contact
me if you're interested in this issue; I can supply lots more information
about these techniques and their limitations, based on recent research and

Even if the myriad problems with these economists' studies could be
overcome, what would you do with the results -- the monetary "values" of
various forms of environmental harm? You would probably try to design
market incentives, incorporating those values via taxes, fees, etc. I
believe that this agenda is destined to fail; the problems we're
interested in just are not responsive enough to feasible (i.e., small)
market incentives. (See chapter 2 of "Why Do We Recycle?" for elaboration
and documentation.)

What does this mean for the argument about environmental costs and
recycling? On the one hand, the longterm environmental impacts of
profligate use of virgin materials are THE reason for recycling. On the
other hand, there is no obvious way to incorporate this conclusion into
market incentives. My conclusion is that there are some things much too
important to leave to the market; deciding how much recycling, or
environmental protection in general, we should have is a social and
political choice, and should not be determined by markets alone. (See
chapter 3 of "Why Do We Recycle?" for elaboration and documentation.)
Once we decide how much to have, of course it's desirable to make it as
cost-effective as possible -- but cost-effectiveness should be the
servant, not the master, of society's decision-making process.

Having heard most of the panel you referred to, Amy, I would have said
that John Stutz, Robin Ingenthron, and you all made remarks quite
consistent with this perspective -- and that you collectively did quite
well in defending the legitimacy of a broader view of recycling, in the
face of the "markets, markets, markets" mantra. The mistake may lie in
thinking that there is a deeper economic analysis lurking out there
somewhere, that would solve all our problems. Actually, economics is
shallower than you think, and can't be trusted to make public policy
decisions on its own, without some grownups in the room to supervise the

Frank Ackerman
(a professional economist)
Global Development and Environment Institute
Tufts University