This is the third part of ten extracts from the book Democratic Economic Planning (2021, Routledge) by Robin HahneI.
Market economies fail to account for the cost of pollution. How does a Participatory Economy do better? Here Robin Hahnel describes how annual Participatory Planning can generate quantitative information about pollution caused via a pollution demand revealing mechanism (PDRM) and communities of affected parties (CAPs). Other sections in the chapter address ‘Overcoming perverse incentives’, ‘Multiple victims’, and ‘Misrepresentation’.
A critical failing of market economies is they provide no quantitative information about how much damage pollution causes. As a result they provide no signals about how high to set corrective Pigovian taxes. Consequently, in market economies this gives rise to the necessity of trying to generate quantitative estimates of the damage pollution causes through stop-gap measures like contingent valuation surveys and hedonic regression studies that inspire less confidence the more one knows about them.4 However, just because markets are not likely to induce people to reveal truthfully how much they are dam- aged by environmental degradation does not mean we cannot incorporate a pollution demand revealing mechanism (PDRM) in our annual participatory planning procedure, which, at least in theory, will generate reasonably accurate quantitative estimates of the damage from pollution and thereby lead to effi- cient levels of pollution.
There is every reason to be skeptical of claims to have “solved” the problem of achieving efficient levels of pollution even at the theoretical level. The Coase theorem is commonly interpreted as implying that once property rights are specified, in theory, voluntary negotiations between polluters and pollution victims can be relied on to yield efficient levels of pollution. However, Hahnel and Sheeran 2009 demonstrate that this interpretation of the Coase theorem, peddled by free market environmentalists but found in mainstream economics textbooks as well, is not warranted, but in fact a grievous misinterpretation even at the abstract theoretical level. We draw on lessons learned about perverse incentives from a close examination of the Coase theorem to construct a PDRM that either avoids or ameliorates perverse incentives. When this PDRM is incorporated into the annual participatory planning procedure, the plan arrived at should achieve reasonably efficient levels of emissions for different pollutants.
The pollution demand revealing mechanism
First, we must add pollutants to our list of produced “goods,” and in each iteration of the planning procedure, the IFB must quote the current estimate of the damage caused by releasing a unit of each pollutant along with current estimates of all other opportunity and social costs. Just as the estimates of opportunity and social costs for resources, capital goods, labor, and produced goods can be arbitrary in round 1, the initial estimates of damages from pollutants can be arbitrary as well.
The whole point is that nobody needs to calculate what damages from different emissions are, any more than anyone needs to calculate opportunity and social costs of different resources, capital goods, labor, and produced goods in a participatory economy. Instead, once the PDRM described in this section is incorporated into the participatory planning process, arbitrary initial damage figures will be modified in successive iterations until reasonably accurate estimates of actual damages for pollutants are achieved when a feasible plan is finally reached, just as initially arbitrary estimates of opportunity and social costs are modified to achieve reasonably accurate estimates of the opportunity costs of using scarce resources, capital goods, and labor, and the social costs of producing different goods and services during the planning process.
In other words, just as there are no bureaucracies that attempt to calculate opportunity and social costs, there are no bureaucracies that attempt to calculate estimates of damages from pollution. This is an important difference between our proposal and some others, including some discussed in the appendix to this book. Many advocates for socialism assume, implicitly, if not explicitly, that if the government hired a group of trained economists to calculate opportunity costs, social costs, and damages from emissions, they could do so. In our view, this is simply naïve.
Second, when worker councils make proposals, they must also include the amount of any pollutants they wish to emit. The damages from emissions will then be calculated by multiplying the number of units of a pollutant the worker council proposes to emit times the current estimate of the damage from one unit announced by the IFB. These damages will be added to the cost of using the inputs the enterprise has requested when calculating the overall social cost of the enterprise’s proposal to be compared with the social benefits of the outputs it proposes to produce. Enterprises wishing to emit more than one pollutant will be charged according to the current estimate of damage from each pollutant they propose to emit, just as enterprises supplying multiple products are credited for each product according to its indicative price. It is not necessary for enterprises to know in advance the effects of various pollutants because that information is provided by the estimates of damages in each round of the planning procedure, which become increasingly more accurate as the planning procedure proceeds. Just as worker councils are guided by indicative prices for outputs what to produce, and by indicative prices for inputs used in production, they will be guided by estimates of damages quoted for how much of different pollutants to emit.
Third, we create Communities of Affected Parties, or CAPs, which comprise all who are damaged by the emission of a particular pollutant. For example, there would be a CAP for volatile organic compounds and nitrous oxide emissions that cause smog in the Los Angeles area. There would also be a CAP for coarse particulate matter affecting Angelinos. Whether or not, those two CAPs include the same or somewhat different populations would depend on any differences in dispersal patterns. There would also be a CAP for pollutants contributing to smog and a CAP for coarse particulate matter pollution in the Kansas City area where wind and temperature conditions are quite different than they are in Los Angeles, and demand by worker councils in Kansas City for permission to release these pollutants may be different as well.
Now we are ready to include CAPs along with worker and consumer councils and federations as “actors” who participate in each round of the planning procedure. Enterprises who wish to emit a pollutant and CAPs who are damaged by a pollutant participate in the planning procedure by responding to the “signal” from the IFB about the current estimate of the damage caused by a unit of a pollutant as follows:
Enterprises propose how much of a pollutant they want to emit, knowing they will be charged for those emissions an amount equal to the current esti- mate of the damages per unit times the number of units they propose to emit. This means damage from emissions becomes part of production costs and is included in estimates of the social costs of producing goods and services.
Communities of Affected Parties propose how many units of a pollutant they are willing to allow to be released, taking into account that the CAP will be compensated by an amount equal to the current estimate of the damages per unit times the total number of units the CAP allows to be released. In other words, the CAP has a right not to be polluted at all if it so chooses. On the other hand, if the CAP chooses to authorize a given quantity of emissions, members of the CAP will receive “credit” for damages suffered. This “sacrifice” from exposure to pollution is added to whatever “sacrifices” CAP members made as workers when calculating how much consumption it is fair for them to enjoy.
Why would this procedure yield reasonably accurate estimates of the damage caused by different pollutants and therefore lead to reasonably efficient levels of pollution? In most cases, it is reasonable to assume that as emissions increase, the cost to victims of additional pollution rises, and the benefit to producers of additional pollution falls. In which case the efficient level of pollution is the level at which the cost of the last unit emitted (the damages to all victims) is equal to the benefit from the last unit emitted – the satisfaction consumers gain from the additional goods and services that can be produced because an additional unit of emission was permitted.
What will happen if the IFB quotes an estimate of damages that is less than the amount at which the last unit of emission for some pollutant causes damages equal to benefits? In this case the CAP will not find it in its interest to permit as much pollution as sources would like to emit, – that is, there will be excess demand for permission to pollute – and consequently, the IFB will increase its estimate of the damage caused by the pollutant in the next round of planning. If the IFB quotes an estimate of damages that is higher than the amount at which the last unit of emission causes damage equal to benefits, the CAP will offer to permit more pollution than sources will ask permission to emit – that is, there will be excess supply of permission to emit, and the IFB will therefore decrease its estimate of the damage caused by the pollutant in the next round.
So when the IFB adjusts its estimate of the damages for a unit of emissions until the sum total of requests to emit a pollutant is equal to the permission granted by the CAP to emit that pollutant, it appears we will end up with a reasonably accurate estimate of the true damages caused by different pollutants and also come reasonably close to the efficient level of emission for each pollutant. We now examine possible perverse incentives that might conceivably interfere with this happy result.