Environmental Policy: Why It Doesn't Work

Economics is involved with a lot more than just decisions involving money. In fact, it can be used to examine any decision in which one is considering utility and trade-offs, which, realistically, is nearly everything.

Here I'm going to discuss a bit about why environmental policy as instituted by a democratic or semi-democratic government will never yield optimal results from the viewpoint of society as a whole. A more in-depth discussion of this can be found in a paper by Kennedy called "Rethinking Sustainability."

I have been unable to find a link to an online copy, for which I apologize.

Regardless. The paper itself deals with the idea of present value of future benefits. This refers to the idea that, in the decision-making process of anyone, we always prefer to be given the same thing now than at some point in the future, with the preference being more and more weighted to the present the further in the future we look.

As an example, imaging I were to offer you $1,000 now, or $1,000 in ten years. You would take the present, guaranteed $1,000, possibly after thinking for a short while, and there are many reasons this is done, uncertainty and impatience being the main ones.

For any individual, the degree to which we prefer things now to things in the future can be thought of as the rate that we discount future values in the present, or the discount rate.

Now, consider the difference between the way an individual discounts the future, and the way an insurance company discounts the future. For the individual, his own death is a catastrophe, both to himself and to his family. This is why he buys life insurance. To the insurance company, the death of the individual

It is then the case that we say the insurance company discounts the future of the individual at a lower rate than the individual does. More generally, the individual always discounts the future more than any larger entity, with society as a whole being the largest possible entity with which economics concerns itself.

That is, the individual prefers things now to a degree that is not the most beneficial to society as a whole.

Now, let's apply this same logic to the environment. Obviously, the environment provides us with benefits. Benefits in the future are worth less to us than benefits now. We also know that the individual discounts the future more than society does. This means that any individual or collection of individuals will always take more from the environment than is optimal for society as a whole.

This is a fairly common idea, and the common solution is that the government should step in and prevent individuals and corporations from taking too much from the environment, be it in the form of adding pollution or removing natural resources.

However, in a democratic or semi-democratic government, the government is beholden, at least somewhat, to the preferences of the ordinary individual citizen. This means that, in any case where the government attempts to discount the future at the much lower rate that is optimal for society, the average individual will see such an action as contrary to their own needs and oppose it, therefore rendering the democratic government incapable of doing so over any appreciable length of time.

Kennedy suggests one solution in the form of education about the environment and why it is worth protecting. I present another in the form of changing expectations about government - that is, making people understand that the government is there to make appropriate decisions to benefit them, not to represent them.

I'm sure some of you have your own ideas about what, exactly, can be done about the situation.

Regardless of how you feel about the issue, the bit about discounting the future is very important and I am fairly sure will come up in a number of future issues I'm thinking about discussing.

Anyways. Hopefully this was interesting. If you have any ideas about things I should talk about, please let me know.