Saturday, April 05, 2008

Jeff Sachs also recognizes the limits of prices

Related to the post below, here's Jeff Sachs discussing the role of prices in solving environmental problems with the Wall Street Journal:

WSJ: Many economists believe that the key to reducing carbon emissions and conserving vital resources like water is the establishment of pricing frameworks that force people to bear the cost of what they’re doing. You’re skeptical that pricing can be a cure-all. Why is that?

    Sachs: Pricing plays a roll. Certainly with carbon emissions we need a price. But it’s almost never enough when we’re talking about really big technological changes. When you think of the computer industry and its roots in defense, when you think of the Internet with its root in defense and the National Science Foundation, when you think about drug development and the crucial role of the National Institutes of Health – one major industry after another has always relied, and needed to rely, on a mix of public and private actions.

    When we’re talking about something as basic as a sustainable technology this is going to be inevitable. Think about how we’re going to climb out of the mess on nuclear power for example. We need a nuclear power industry in this country but it’s tied up in knots. Pricing by itself isn’t going to do it. There has to be public acceptability, there has to be sense of security that a regulatory framework, safe storage and nonproliferation protection is in place. These are just too complicated to be solved by a price.

    For many other things, such as watershed management, there isn’t even a price that turns them into a market. The issues of watershed management involve different rights of upstream and downstream users, and different types of users. [like agriculture, households and industry.] The right price is going to be different. Pricing plays a role, but so does basic science, eminent domain, right of passage and liability.

WSJ: You’ve also said that pricing doesn’t always favor future generations.

    Sachs: It’s a related set of issues on how we exploit resources. You can put a market price on lots of things and the market will just grind it up and give it to the highest bidder and we’ll end up depleting tremendously important resources. Right now you could pretty much plough up a tremendous amount of rain forest and plant it profitability for palm oil. We’d wreck

    Price signals, privatizing – it could accelerate complete destruction. That’s why we set some things outside the price range. For 100 years since Theodore Roosevelt established national parks in the United States we’ve pretty much understood this.

    Pricing can help to play a role but it only works in some circumstances. Where price is enough, then we put our thumb on the scale.

At the end of the post Sachs discussed the benefits of price for technology development over the traditional patent system. That point should really be explored. For example the Department of Defence offers different prizes through DARPA to develop new technologies privately. Essentially the X-Prize was the same for NASA.
And while these prizes must be publicly financed, in terms of pricing environmental pollution, why not build that in? For every law suit brought forth under CERCLA use a fraction to establish an EPA prize for hazardous waste remediation. Why not expand the use of government prizes to encourage civic participation in creating the solutions to environmental issues?
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