COVID Externalities: the Costs and Benefits of Intervention

13 Sunday Dec 2020

Posted by pnoetx in Coronavirus, Public Health, Social Costs

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Cost-Benefit Analysis, Covid-19, Externalities, Friedrich Hayek, Intervention, Knowledge Problem, Mutual Risks, Non-Pharmaceutical interventions, Public Health, Stringency Index, University of Oxford

This post offers a simple representation of the argument against public non-pharmaceutical interventions (NPIs) to subdue the COVID-19 pandemic. The chart below features two lines, one representing the presumed life-saving benefits of lockdown measures or NPI stringency, and another representing the costs inflicted by those measures. The values on the axes here are not critical, though measures of stringency exist (e.g., the University of Oxford Stringency Index) and take values from zero to 100.

The benefits of lives saved due to NPI stringency are assigned a value on the vertical axis, as are the costs of lives lost due to deferred health care, isolation, and other stressors caused by stringency. In addition, there are the more straightforward losses caused by suspending economic activity, which should be included in costs.

One can think of the benefits curve as representing gains from forcing individuals, via lockdown measures, to internalize the external costs of risk inflicted on others. However, this curve captures only benefits incremental to those achieved through voluntary action. Thus, NPI benefits include only extra gains from coercing individuals to internalize risks, while losses from NPI stringency are captured by the cost curve.

My contention is that the benefits of stringency diminish and may in fact turn down at some point, and that costs always increase in the level of stringency. In the chart, for what it’s worth, the “optimal” level of stringency would be at a value of 2, where the difference between total benefits and total costs is maximized (and where the benefits of incremental stringency are equal to the marginal costs or losses). However, I am not convinced that the benefits of lockdown measures ever exceed costs, as they do in the chart above. That is, voluntary action may be sufficient. But if the benefits of NPIs do exceed costs, it’s likely to be only at low levels of stringency.

To the extent that people are aware of the pandemic and recognize risk, the external costs of possible infectiousness are already internalized to some degree. Moreover, there is mutual risk in most interactions, and all individuals face risks that are proportional to those to which they expose others: if your contacts are more varied and your interactions are more frequent and intimate, you face correspondingly higher risks yourself. After all, in a pandemic, an individual’s failure to exercise caution may lead to a very hard internalization of costs if an infection strikes them. This mutuality is an element absent from most situations involving externalities. And to the extent that you take voluntary precautions, you and your contacts both benefit. Nevertheless, I concede that there are individuals who face less risk themselves (the young or healthy) but who might behave recklessly, and they might not internalize all risk for which they are responsible. Yes, stringency may have benefits, but that does not mean it has net benefits.

Even if there is some meaningful point at which NPIs are “optimized”, government does not possess the knowledge required to find that point. It lacks detailed knowledge of both costs and benefits of NPIs. This is a manifestation of the “knowledge problem” articulated by Friedrich Hayek, which hampers all efforts at central planning. In contrast, individual actors know their own tolerance for risk, and they surely have some sense of the risks they create in their normal course of affairs. And again, there is a strong degree of proportionality and voluntary internalization of mutual risks.

While relying on voluntary action is economically inefficient relative to an ideal, full-information and perfectly altruistic solution, it is at least based on information that individuals possess: their own risk profile and risk preferences. In contrast, government does not possess information necessary to impose rules in an optimal way, and those rules are rife with unintended consequences and costs inflicted on individuals.

My next post will present empirical evidence of the weakness of lockdown measures in curbing the coronavirus as well as the high costs of those measures. The coronavirus is a serious infection, but it is not terribly deadly or damaging to the longer-term health of the vast majority of people. This, in and of itself, should be sufficient to demonstrate that the array of non-pharmaceutical interventions imposed in the U.S. and abroad were and are not worthwhile. People are capable of assessing risks for themselves. The externality argument, that NPIs are necessary because people do not adequately assess the risk they pose to others, relies on an authority’s ability to assess that risk, and they invariably go overboard on interventions for which they underestimate costs. COVID is not serious enough to justify a surrender of our constitutional rights, and like every concession to government authority, those rights will be difficult to recover.

“Recycling Is Largely Fake”

30 Friday Aug 2019

Posted by pnoetx in Recyclng, Social Costs

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Aluminum, Chinese Plastics Ban, Exporting Trash, External Costs, Glass Bottles, Landfills, Mandates, Michael Munger, NIMBY, Plastics, Recycling, Scrap Metal, Social Costs

The quotation headlined above is from Duke University economist Michael Munger, and it’s essentially what I’ve contended for years (see “When Is Recycling Not Wasteful?“). Munger’s latest essay on this subject is entitled, “For Most Things, Recycling Harms the Environment“. The reasons are very basic: resource costs. As Munger says, the degree of economic and environmental justification for recycling varies, depending on the item, but few supporters of recycling ever bother to look into the details.

First, a very basic economic point: resource conservation is beneficial for the environment. Sometimes there are technological trade-offs between conservation of different resources, but costs are always a matter of resource use: less use, lower total costs. Resource conservation is synonymous with lower costs. Indeed, that is why we are told to recycle, and that is what most people think they’re doing when they recycle.

But while recycling always conserves some resource more or less directly, the mere process of recycling uses other resources. This includes the costs of rolling trucks to collect the items, including fuel, labor, machinery and labor for sorting, water, chemicals, more distant shipping, and separate processes to convert the items into usable goods. In its entirety, then, recycling often does not conserve resources.

Voluntary consumer-recyclers seldom face the marginal costs of recycling directly. This highlights the general nature of environmental problems that arise in any society: external costs are often borne by parties external to the activity in question. And here is where the story of recycling’s poor economics gets interesting. Recycling advocates would have us believe that our private use of products, for which we generally pay full cost, imposes external or social costs on others unless we recycle all recyclable components of the product and it’s packaging. In fact, the opposite is often true!

Therefore, governments, fully on-board with popular recycling myths, often mandate recycling, which is another way of saying that you are not free to make your own decision based on costs and benefits. So the costs of recycling are on you, but you are unimpacted at any margin along which you can make decisions. You are forced to internalize some part of the costs that are presumptively avoided via recycling according to the myth. You pay taxes to fund the collection of materials at the curb, but governments often require citizens to clean and sort those materials. That carries significant costs that governments prefer to remain implicit.

This is to say nothing of the actual net value of the recycled materials, which is often negative. Certain items require so much processing and produce materials of such low quality that no one wants them. Virgin materials are often cheaper than fully processed recycled material, and usually yield better quality, or both. Far better, then, to pay the cost of transporting these kinds of discards to landfills and paying for the low-cost landfill space, which is plentiful, contrary to greenist propaganda.

Munger provides examples of such wasteful-to-recycle materials. For instance, attempts to recycle glass bottles are often completely non-productive relative to landfilling. That’s due to cost factors, lousy quality after processing, and weak market prices for recycled glass. Plastics are of questionable value as recyclables as well: huge quantities had been shipped to the Far East, but the volume was too much for the Chinese (and too dirty, they claimed), so it often ended-up in landfills anyway. Last year, the Chinese banned imports of recyclable plastics from several countries, which means that our plastic materials are probably headed for our own landfills. Yet we still go to the trouble of preparing and collecting them for recycling.

According to Munger, aluminum cans are worthwhile to recycle relative to landfilling. So are certain types of cardboard (though the Chinese don’t want some of those either). Also, scrap metals are privately recycled via active markets for the materials.

Private parties who can internalize costs in their voluntary decisions are wise to abide by the following:

“I have sometimes suggested a test for whether something is garbage or a valuable commodity. Hold it in your hand, or hold a cup of it, or tank, or however you can handle it. Consider: Will someone pay me for this? If the answer is yes, it’s a commodity, a valuable resource. If the answer is no, meaning you have to pay them to take it, then it’s garbage.”

Of course, society as a whole must internalize costs. There’s no way around it. Therefore, governments should behave as if they internalize costs as well, though they hardly ever do. They would sooner mandate recycling when they know full well that the simple economics outlined above don’t support it. That means an unnecessary consumption of resources is attributable to the recycling charade, which is environmentally unsound by the strictest of Green standards.

I am not quite so hard on government recycling mandates when there exist significant external costs associated with sending uneconomic trash to landfills, or when there are real efficiencies associated with recycling. Landfills must price their space efficiently, collecting sufficient fees from users to pay for environmental mitigation as well as the payoffs necessary to mollify those nearby who might happen to harbor NIMBY-ism. But recycling mandates offer strong evidence that the economics of recycling are not worthwhile. So please, whenever you are told that recycling is virtuous, be suspicious. As Munger says, it’s largely a fraud.

Relieving the U.S. Public Toilet Shortage: User Fees

12 Wednesday Dec 2018

Posted by pnoetx in Price Mechanism, Social Costs

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Alex Tabarrok, Broadway, Charmin Van-GO, CityLab, Cross Subsidies, EBT Cards, Externalities, Free Ridership, Internalized Costs, Pay Toilet Bans, Pay Toilets, Price mechanism, Public Restrooms, Public Urination, Sophie House, Toilet Sharing, Urinetown, User Fees

The musical comedy Urinetown opened in 2001 and ran for 965 performances, not a bad run by Broadway standards. The show, which is still performed in theaters around the country, is a melodramatic farce: a town tries to deal with a water shortage by mandating that all townspeople use pay toilets controlled by a malevolent private utility. Despite the play’s premise, pay toilets are a solution to the very real problem of finding decent facilities, or any facility, in which to relieve oneself in public places. Anyone who has ever strolled the streets of a city has encountered this problem from time-to-time. But in the U.S., where local budgets are typically strapped, the choice is often between scarce and decrepit free toilets or no toilets at all. Otherwise, those seeking relief must rely on the kindness business owners or pass laws allowing non-patrons to commandeer businesses’ bathrooms at will. Toilets with user fees, however, are an alternative that should get more emphasis.

In part, the theme of Urinetown reflects a longstanding notion among anti-capitalists that pay toilets are a disgustingly unfair solution to these urgent needs. One can imagine the logic: everyone has a need and a right to make waste, so we should all have access to sparkling public toilets for free! There is also the presumed misogyny of charging at stalls but not urinals (which are cheaper to maintain, after all), but overcoming that problem should not present a great technical hurdle. And surely pay toilets could be made to accept EBT cards, or locally-issued pee-for-free cards for the homeless.

Yes, we all make waste. However, most of us are so modest and fastidious that we quite literally “internalize the externality” we’d otherwise impose on others were we to seek relief in the street or behind trees in the park. We hold it and sometimes incur high costs in search of a restroom. Those are costs many of us would willingly pay to avoid.

As Alex Tabarrok says in “Legalize Pay Toilets“, outrage over pay toilets, very much like the kind expressed in Urinetown, is what led to outright bans on pay toilets in America during the 1970s (also see Sophie House’s discussion of the need for pay toilets at Citylab). According to Tabarrok, “In 1970 there were some 50,000 pay toilets in America and by 1980 there were almost none.” Many travelers know, however, that pay toilets are fairly commonplace in Europe.

In the wake of pay-toilet bans in America, and without the flow of revenue, those one-time pay toilets were not well-maintained nor replaced. In that sense, hostility to the concept of pay toilets is responsible for the paucity and abysmal condition of most public restrooms today. Public restrooms are often plagued by a tragedy of the commons. And when you do see a “free” public restroom in relatively good condition (in an airport, on a turnpike, or elsewhere), it is usually because its costs are cross-subsidized by payments for other goods and services offered in those facilities. It’s not as if you don’t pay for the bathrooms.

There is no question of a willingness to pay, but legal obstacles to pay toilets remain. Pay toilets are still very uncommon. New York City actually decriminalized public urination a few years ago, an odd way to deal with the shortage of restrooms. Some cities, such as Philadelphia, have initiated efforts to bring back pay toilets, but they have made little headway. Just last year, the toilet paper producer Charmin ran a successful publicity campaign in New York City by testing a mobile toilet-sharing service (à la Uber ride-sharing) called Charmin Van-GO. The company described the test as a big success in terms of publicity, but apparently the service has not been offered on a continuing basis.

The economic problem posed by full bladders and bowels on the public square can be solved with relative efficiency using the price mechanism: pay toilets. The flow of revenue can defray the costs of restrooms and their maintenance, easing the strain on public budgets and covering the cost of keeping them clean. Pay toilets can be provided publicly or built and operated by private providers. Pricing the use of toilets, whether offered publicly or privately, helps focus resources at the point of need. Free public toilets, in contrast, are scarce and typically unsanitary. Funding public restrooms through taxation, rather than user fees, involves a loss of efficiency because taxpayers are often distinct from actual users. Forcing purveyors of food and drink (or anything of value) to offer bathroom access to “free riders” creates another obvious source of inefficiency. Allowing the use of EBT cards at pay toilets, while overcoming certain objections, would also involve inefficiencies, but at least they’d be limited to subsidies for a small proportion of the bathroom-going public. Given the alternatives under the status quo, our cities would be far more pleasant if they were flush with pay toilets.