So it is with the Environmental Protection Agency, created by Congress and President Richard Nixon in 1970. In a recent Wall Street Journal op-ed, EPA Administrator Lisa Jackson painted the same gloomy picture that is given for creation of any federal agency: American life had become too intolerable without it. She writes:

Last month’s elections were not a vote for dirtier air or more pollution in our water. No one was sent to Congress with a mandate to increase health threats to our children or return us to the era before the EPA’s existence when, for example, nearly every meal in America contained elements of pesticides linked to nerve damage, cancer and sometimes death. In Los Angeles, smog-thick air was a daily fact of life, while in New York 21,000 tons of toxic waste awaited discovery beneath the small community of Love Canal. Six months before the EPA’s creation, flames erupted from pollution coating the surface of Cleveland’s Cuyahoga River, nearly reaching high enough to destroy two rail bridges.

Coverage of the Cuyahoga River fire featured a Time Magazine photo from a 1952 fire on the river with claims it was taken during the June 1969 fire. However, as Stacie Thomas pointed out in this article, the real fire was brief, no photos were taken, and damage to the bridges was minimal.

Furthermore, notes law professor Jonathan H. Adler, the “pollution-was-progressively-becoming-worse” scenario Jackson paints is not true:

Contrary to common perceptions, many measures of environmental quality were already improving prior to the advent of federal environmental laws. The Environmental Protection Agency’s first national water quality inventory, conducted in 1973, found that there had been substantial improvement in water quality in major waterways during the decade before adoption of the federal Clean Water Act, at least for the pollutants of greatest concern at the time, organic waste and bacteria.

Unfortunately, Jackson is not satisfied with rewriting environmental history. She also commits the venerable broken-window fallacy, failing to account for what did not happen because of government intervention. She writes:

We have seen GDP grow by 207% since 1970, and America remains the proud home of storied companies that continue to create opportunities. Instead of cutting productivity, we’ve cut pollution while the number of American cars, buildings and power plants has increased. Alleged “job-killing” regulations have, according to the Commerce Department, sparked a homegrown environmental protection industry that employs more than 1.5 million Americans.

She’s also guilty of the post hoc ergo propter hoc fallacy. Moreover, Jackson confuses jobs with the creation of real wealth. For example, many of the new “green jobs” are created via government subsidies, which means that the government is cannibalizing profitable entities to prop up those firms that are unprofitable. Far from creating wealth, this activity is economically destructive.

One wonders how much economic growth would have taken place had the EPA not existed. Obviously, that is a calculation no one is able to perform, but I suspect that some readers of this site who have had to deal with EPA bureaucrats can tell a few horror tales.

My only contact with the EPA came more than 30 years ago when I was a news reporter covering a story about a fertilizer plant’s discharges into Chickamauga Lake. Although Tennessee state water-quality authorities were willing to work with the firm, given there was no immediate health or aquatic hazards, the EPA was utterly rigid and the plant was shuttered. It was the bureaucratic mind at work.

Jackson wants us to believe that without the EPA we’d all be dead. I doubt that seriously, but I don’t doubt that EPA is a destructive enterprise killer. While Jackson calls for “common-sense solutions,” I submit that common sense tells us to do away with the agency.

The problem with this view is that “government” is an abstraction. In practice everything done in the name of government is done by government employees, ordinary human beings who can be, well, as fallible as anyone. To support this point we need only look at one of the cases Fahrenthold and Mui cited in buttressing their idea that government needs to protect us: the careless spraying of insecticides like DDT.

In the 1950s airplanes flew over swamps and suburbs, fields and forests, drenching everyone and everything with a rain of DDT and other insecticides. It was a triple fiasco: 1) it failed to control the target insect pests (such as the spruce budworm, the imported fire ant, and the gypsy moth, among others); 2) it cost a lot of money; and 3) the spraying slaughtered living things on a vast scale. It killed some farm and domestic animals; it killed hundreds of species of beneficial insects and nematodes; and it killed wildlife, including foxes, raccoons, rabbits, fish, and birds, turning affected areas into—in the eyes of a sensitive environmentalist—an eerie wasteland.

Who carried out this irresponsible madness? Rachel Carson fingered the culprits in her celebrated 1962 book, Silent Spring. The point is often overlooked today, but Silent Spring was not so much a critique of pesticides but a condemnation of their irresponsible use. In case after case, the organizations that drenched land and wildlife with poisonous insecticides were . . . wait for it . . . government agencies! For example, in 1958 the U.S. Department of Agriculture launched a campaign to spray 20 million acres in nine southern states in an attempt to eradicate fire ants. The department won congressional approval for the program by making the unsupported assertion that fire ants were dangerous to livestock and crops, when in actuality, as Carson documented, they were no significant threat to either. The spraying did not control the fire ant, but it did cause massive kills of wildlife, especially fish and birds. The program was, said Carson, “an outstanding example of an ill-conceived, badly executed, and thoroughly detrimental experiment in the mass control of insects.”

In New York State the U.S. Department of Agriculture joined forces with the New York Department of Agriculture and Markets in a futile attempt to eradicate the gypsy moth. In 1957, Carson continued, they “showered down the prescribed DDT-in-fuel-oil with impartiality. They sprayed truck gardens and dairy farms, fish ponds and salt marshes. They sprayed the quarter-acre lots of suburbia, drenching a housewife making a desperate effort to cover her garden before the roaring plane reached her. . . . Birds, fish, crabs, and useful insects were killed.”

In Michigan, in an attempt to control the Japanese beetle, government agencies joined forces to dust the suburbs of Detroit with aldrin, a pesticide 100 times more toxic to birds than DDT. The first offender in this debacle was the Michigan state legislature, which gave state agencies the power to spray indiscriminately, without notifying landowners or gaining their permission. The spraying was carried out by the Michigan Department of Agriculture, backed by the pesticide-tropic U.S. Department of Agriculture. When worried citizens reported dead birds and sickened humans and animals, Carson reports, government agencies stonewalled. The Federal Aviation Agency, the Detroit Department of Parks, and the Detroit police all vouched for the safety of the operation even though they had no evidence on the point.

Silent Spring—the gospel of the environmental movement—abundantly demonstrates that government can be an irresponsible, insensitive polluter. This raises an interesting question: Why has this point been forgotten?

My explanation of this blindness is that these reporters—and environmental activists in general—are victims of the “watchful eye illusion.” Human beings have a disposition to believe in authority and to ascribe godlike wisdom and maturity to it. This orientation probably begins in childhood when parents are viewed as wise and capable. As children grow up, many transfer this faith in authority to government, producing the watchful eye illusion: the belief that government is wise and responsible. This illusion will lead people to forget about—or repress—all the evidence demonstrating that government officials are often unwise and irresponsible.

The 1950s spraying scandal hasn’t been government’s only environmental miscue. For another, look at the Hanford Nuclear Reservation in the state of Washington, where the federal government’s radioactive spills are now expected to cost taxpayers $50 billion to clean up. In just one type of pollution at that site, the feds deliberately vented 725,000 curies of radioactive iodine-131. This was over 36,000 times as much radioactivity as was released in the 1979 Three Mile Island accident in which naughty private interests were supposedly “taking risks in search of a payoff.”

Just as government can be an irresponsible polluter, it can also be an ineffective regulator. Many people don’t grasp this reality because, again, they are blinded by their faith in authority. With naive confidence, they propose, for example, that “government should regulate oil drilling,” thinking that this will prevent oil spills. If they could overcome the watchful eye illusion they would realize that they need to put their proposal more carefully: “Assuming that the government employees doing the regulating are alert, thoughtful, energetic, and responsible, and never lazy, complacent, uninformed, irrational, careless, corrupt, or paralyzed by red tape, government should regulate oil drilling.” Thus stripped of illusion, the idea that government can protect the environment loses much of its luster.

In the final analysis, overcoming environmental abuse is not likely to be achieved by governmental dictation. Instead, it is a process of social learning that includes everyone: friends and neighbors, reporters, pamphleteers, teachers, researchers—and companies too, as they discover how pollution hurts their image and their bottom line.

But dramatic changes in the quality of life have occurred in recent history. Global life expectancy in the last century climbed from 30 to around 60. In the United States, life expectancy has reached 76. So many of the things we take for granted—hot and cold running water, health care, and a stable food supply—were unknown to mankind throughout most of history.

Why is it that in the last couple of centuries things have changed so rapidly, when for thousands of years life remained a struggle for survival? For one thing, free-market economies emerged, based on the principles on which the United States was founded. John Locke spoke of these principles as the unalienable rights to “life, liberty, and estate.” Later Thomas Jefferson echoed these sentiments and helped make them central to the American way of life. Such basic liberties mean that we in America have the right to self-determination and the right to profit from our own ingenuity. From the onset of government based on fundamental rights, free-market economies emerged, wealth increased profoundly, and our quality of life improved by leaps and bounds.

Among the many achievements was the development of manmade chemicals, which have revolutionized how we live. They make possible such things as pharmaceuticals, safe drinking water, and pest control. Yet popular perception is that manmade chemicals are the source of every possible ill from cancer, ozone depletion, and infertility to brain damage. Ignoring that nature produces far more chemicals in far higher doses and that most chemicals are innocuous at low doses, activists capitalize on these fears. They scare the public by hyping the risks to ensure that the government passes volumes of laws and regulations all focused on the elimination of chemicals, thus jeopardizing our freedom without much regard for the tradeoffs.

Advocates of such limits say that we need to make sure every chemical is safe before exposing the public. In his recent book, Pandora’s Poison, Greenpeace’s Joe Thornton calls on society to follow the “precautionary principle,” which says we should avoid practices that have the potential to cause severe damage, even in the absence of scientific proof of harm. Thornton advocates a “zero discharge” policy, which calls for the elimination of all “bioaccumulative” chemicals. In particular, he has long called for the elimination of chlorine, about which he noted in Science magazine (July 9, 1993): “There are no known uses for chlorine which we regard as safe.” More recently, perhaps in recognition that this standard is politically untenable, he suggested that we continue using chlorine for “some pharmaceuticals” and some “water disinfection,” but only until other options become available.

Promoting such “precautionary policies” could mean halting all industrial activity, because nothing can be proven 100 percent safe. Hence, such policies carry dangerous tradeoffs. While chemicals may create new risks, they have been used to eliminate others—many of which wreaked havoc on civilization for centuries. As the Competitive Enterprise Institute’s Fred Smith notes: “Experience demonstrates that the risks of innovation, while real, are vastly less than risks of stagnation.” Indeed, he asks, what would the world be like if we had never introduced penicillin because we could not prove it was 100 percent safe?

Essential Chemicals

While we don’t think much about it, manmade chemicals are essential to almost everything we do. They make our cars run; they clean everything from our teeth to our dishes; they reduce illnesses by disinfecting everything from our bathrooms at home to the operating rooms in our hospitals; they are used on food products such as poultry to eliminate E. coli and other deadly pathogens; and they keep our computers, televisions, and other electronic products running. Consider just a few of the critical functions they perform in making our lives better:

• Chlorination of water supplies has saved millions of lives. For example, since local engineers and industry introduced chlorination in 1880s, waterborne-related deaths in the United States have dropped from 75 to 100 per 100,000 people to fewer than 0.1 deaths per 100,000 annually in 1950.¹ Rather than curtailing the use of chlorination as Thornton suggests, we should be expanding access. According to the World Health Organization (WHO), in the developing world diarrheal diseases (such as cholera and dysentery) kill about two million children under five every year because of such things as poor sanitation and unsafe drinking water. Nearly 85 percent of pharmaceuticals that we now use require chlorine in their production.
• Thanks to chemicals used for pharmaceuticals, combination drug therapy has reduced AIDS deaths by more than 70 percent from 1994 to 1997.²
• Fifty percent of the reductions in heart-disease-related deaths between 1980 and 1990 (total death-rate decline of 30 percent) are attributable to medicines and the chemicals that compose them.³
• Chemicals called phthalates (there are several kinds) are used in PVC—vinyl used for medical tubing, blood bags, and numerous other products. While environmentalists have tried to ban these,⁴ vinyl medical devices provide many life-saving benefits. PVC is a safe, durable, sterile product that can withstand heat and pressure, and produces tubing that doesn’t kink. It’s particularly beneficial for vinyl blood bags because it stores blood twice as long as the next best alternative and doesn’t break like glass alternatives. In times of blood shortages, PVC blood bags are an essential tool in maintaining and transporting supply.
• Thanks to modern farming with chemicals, food production has outpaced population growth—providing people in both developed and developing countries with more food per person. Per capita grain supplies have grown by 27 percent since 1950, and food prices have declined in real terms by 57 percent since 1980. The use of herbicides to control weeds decreases the need for tilling soil, which in turn reduces soil erosion 50–98 percent.⁵

Disregarding such benefits, most of the key U.S. environmental regulatory statutes follow the lead of groups like Greenpeace, focusing on the elimination of chemicals without much regard to the dangers of not having these technologies. The Clean Water Act (1972), for example, made this unattainable pledge: “it is the national goal that the discharge of pollutants into the navigable waters be eliminated by 1985.” While we can meet reasonable clean-water goals, we can’t meet a zero discharge without forcibly halting industrial processes that bring us lifesaving medicines, a safe food supply packaged to resist spoilage, and even clothing.

Likewise, regulations that the EPA issued under the Safe Drinking Water Act (1974) actually set zero as the goal for certain chemical contaminants in drinking water—something that is virtually impossible and totally unnecessary for public-health purposes. With such goals, drinking-water standards for chemicals are extremely stringent. For example, one standard for a contaminant demands that drinking water not contain any more than 0.03 parts per trillion. The high costs of such onerous standards mean that financial resources are diverted from other more essential needs.

The Manmade Cancer Myth

Writing in the Journal of Clinical Oncology last year, researchers from the University of Alabama Schools of Medicine and Public Health noted that “A typical commentary blamed ‘increasing cancer rates’ on ‘exposure to industrial chemicals and run-away modern technologies whose explosive growth had clearly outpaced the ability of society to control them.’”⁶ But their research finds: “There is no denying the existence of environmental problems, but the present data show that they produced no striking increase in cancer mortality.” They conclude: “When the mortality from all smoking-related cancers is excluded, the decline in other cancer from 1950 to 1998 was 31 percent (from 109 to 75 deaths per 100,00 person years).” Hence the increase in cancer at that time was not related to the use of synthetic chemicals or pollution, but to personal lifestyle choices.

The most recent report from the National Cancer Institute confirms that: “Cancer incidence for all sites combined decreased from 1992 through 1998 among all persons in the United States, primarily because of a decline of 2.9 percent per year in white males and 3.1 percent per year in black males. Among females, cancer incidence rates increased 0.3 percent per year. Overall, cancer death rates declined 1.1 percent per year.”⁷ Cancer among women increased slightly only because of better detection, which is good news because it means doctors are finding and curing more cancers among women.

In their landmark 1981 study of the issue, Sir Richard Doll and Richard Peto set out to determine the causes of preventable cancer in the United States.⁸ According to Doll and Peto, pollution only accounts for 2 percent of all cancer cases. They do note that 80 to 90 percent of cancers are caused by “environmental factors.” But while activists often trumpet this figure as evidence that industrial society is causing cancer, Doll and Peto explain that “environmental factors” simply means factors other than genetics. It does not mean pollution alone. Environmental factors include smoking, diet, occupational exposure to chemicals, “geophysical factors” such as naturally occurring radiation, manmade radiation, medical drugs and radiation, and pollution. Tobacco use accounts for about 30 percent of all annual cancer deaths, and dietary choices account for 35 percent of annual cancer deaths.

With so few cancers caused by pollution, how many could environmental regulation eliminate? With each regulation the EPA claims to save thousands from dying from cancer. Together, these would likely add up into the millions. But scientist Michael Gough demonstrates why we should consider such EPA claims suspect.

Gough analyzed the findings of the Doll-Peto study along with estimates of cancer risks in the EPA’s report Unfinished Business. He came to conclusions similar to that of Doll and Peto. Gough noted that between 2 and 3 percent of all cancers could be associated with environmental pollution. Determining such numbers helps us understand what exactly the EPA can expect to accomplish when regulating pollutants. Gough says that EPA action could only address a small percentage of cancers: “If the EPA risk assessment techniques are accurate, and all identified carcinogens amenable to EPA regulations were completely controlled, about 6,400 cancer deaths annually (about 1.3% of the current annual total of 435,000 cancer deaths) would be prevented. When cancer risks are estimated using the more realistic method employed by the Food and Drug Administration (FDA), the number of regulatable cancers is smaller, about 1,400 (about 0.25%).”⁹

Faulty Rodent Tests

Given these realities, how does the EPA justify its claims? Many of the findings on
chemicals and cancer relate to faulty tests that entail administering massive amounts of chemicals to rodents bred to be highly susceptible to cancer. Then researchers extrapolate the possible effects of such chemicals on humans, who may be exposed to small amounts of the same chemical during their lives.

We should ask: Why are the impacts on rodents relevant to humans? Doll and Peto note that some chemicals found to be carcinogenic in humans have not produced cancerous tumors in rodents. In fact, for many years, cigarette smoke failed to produce malignant tumors in laboratory animals although tobacco is a leading cause of cancer in the United States. These discordant effects of chemicals in animals and humans underline the difficulty of relying on animal results to estimate human risks.

Moreover, Bruce Ames and Lois Swirsky Gold demonstrate why we need not be concerned about low-level exposure to “rodent carcinogens.”¹⁰ They found that such chemicals pose no more of a risk than that posed by many natural, unregulated substances that are common and accepted parts of a healthy diet. While 212 of 350 of the synthetic chemicals examined by various agencies were found to be carcinogenic at the massive doses given to rodents, 37 out of 77 of the natural substances tested were also found carcinogenic in rodent studies employing the same methodology. The average intake of natural rodent carcinogens in plant foods is about 1,500 mg per person each day, while the average intake of manmade pesticides is .09 mg per day.¹¹ Natural rodent carcinogens exist in apples, bananas, carrots, celery, coffee, lettuce, orange juice, peas, potatoes, and tomatoes at levels thousands of times greater than exposures found in drinking water.¹²

The free use and development of chemicals have proven a key to human progress, and ill effects on health from low-level exposures are small, if detectable at all. Continued progress demands the continuation of an unfettered marketplace in which firms can develop new products without having to meet an impossible or nearly impossible zero-risk standard. Such allegedly more “precautionary” approaches of the environmental activists actually risk a return to the world of Thomas Hobbes.

1. Michael J. LaNier, “Historical Development of Municipal Water Systems in the United States, 1776 to 1976,” Journal of the American Water Works Association, April 1976, p. 177.
2. Frank J. Palella et al., “Declining Morbidity and Mortality among Patients with Advanced HIV Infection,” The New England Journal of Medicine, March 26, 1998.
3. M.G. Hunink et al., “The Recent Decline in Mortality From Coronary Heart Disease, 1980–1990,” Journal of the American Medical Association, February 19, 1997, pp. 535–42.
4. Bill Durodie, “Poisonous Propaganda: Global Echoes of an Anti-Vinyl Agenda” (Washington, D.C.: Competitive Enterprise Institute, July 2000).
5. Dennis Avery, “Saving the Planet with Pesticides,” in Ronald Bailey, ed., The True State of the Planet (New York: Free Press, 1995), pp. 52–54.
6. Brad Rodu and Philip Cole, “The Fifty-Year Decline of Cancer in America,” Journal of Clinical Oncology, January 1, 2001, pp. 239–41.
7. Holly L. Howe et al., “Annual Report to the Nation on the Status of Cancer (1973 through 1998), Featuring Cancers with Recent Increasing Trends,” Journal of the National Cancer Institute, June 6, 2001, pp. 824–42.
8. Richard Doll and Richard Peto, “The Causes of Cancer: Quantitative Estimates of Avoidable Risks of Cancer in the United States Today,” Journal of the National Cancer Institute, June 1981.
9. Michael Gough, “How Much Cancer Can EPA Regulate Away?” Risk Analysis 10, no. 1 (1990), pp. 1–6; and Michael Gough, “Estimating Cancer Mortality,” Environmental Science and Technology 23, no. 8 (1989), pp. 925–30.
10. Bruce Ames and Lois Swirsky Gold, “Too Many Rodent Carcinogens: Mitogenesis Increases Mutagenesis,” Science,
August 31, 1990, p. 970.
11. Ibid.
12. National Research Council, Committee on Comparative Toxicology of Naturally Occurring Carcinogens, Carcinogens and Anticarcinogens in the Human Diet: A Comparison of Naturally Occurring and Synthetic Substances (Washington, D.C.: National Academy Press, 1996), Appendix A.

But that doesn’t mean federal loan guarantees are in order.

Government should not be trying to pick winners and losers in the energy industry. If one company has its loans backed by the government, other companies without guarantees will have trouble borrowing capital. Bureaucrats don’t know and can’t know whether (or in what combination) nuclear energy, biodiesel, ethanol, solar energy, hydroelectricity, fuel cells, or any other alternatives are “best” for meeting our energy needs. This information can only emerge through market competition.

This is not just about energy. We don’t know—once and for all—the best way to build a computer chip. We don’t know the ingredients for the next tasty trend in food. We’re ignorant about a lot of things we would like to know. Markets—and competition—produce the information that allows us to make decisions. But governments distort it by intervening in the capital markets, by doing things like guaranteeing loans to particular firms.

In other words, we do not find the best way to build a computer chip by having the government offer loan guarantees to firms that use particular production processes. We let firms compete for customers, and in a free market without government interference, firms earn profits when they use resources wisely and produce things people want at prices they are willing to pay.

Solving these problems—what to produce and how—requires information embodied in prices. Few of us buy golden faucets, because they’re too expensive. Prices help producers decide whether to use gold or steel, or try to come up with something better. F. A. Hayek called competition a “discovery procedure.” As they compete with one another for profits, firms discover the best way to produce things. The firms that can maximize the difference between the price of what they produce and the cost of producing it will survive and thrive; those that cannot must change or perish.

Energy prices might not reflect the full costs of production and consumption. There are additional costs—the harm caused by air pollution or climate change (if that’s what’s going on)—that producers do not pay but are imposed on the public generally. Therefore they produce too much energy from dirty sources like coal and too little energy from clean sources like nuclear power. It is intuitively appealing, therefore, to have the government simply pick a cleaner energy source and subsidize it. But this is a mistake that leaves too many questions unanswered. It is a mistake for the same reason that it would be a mistake to order all chip manufacturers to use a 32-nanometer process, or subsidize cake makers that use margarine: The government is in no position to know if these are the best processes to produce the desired results. A 32-nanometer process would be expensive overkill for a pocket calculator, and many people prefer cakes made with butter. The market reaches these conclusions by punishing firms that ignore them.

Similarly, we do not know how much more nuclear power to use, how many more plants to build, and at what point we should start using other energy sources instead.

Firms competing in truly free markets will find the best ways to get desired results. Competition forces the answers on them.

What About Externalities?

But what about those costs that aren’t reflected in prices, the ones from so-called externalities like pollution?

In principle there are better alternatives to government interventions that choose winners and losers. While far from ideal, pollution could be taxed or tradable permits to emit certain pollutants could be established. Power companies with dirtier plants would suddenly find themselves at a disadvantage versus other companies with cleaner plants and would have an incentive to shift toward cleaner energy. Pollution-reduction mechanisms we haven’t even imagined could emerge as firms search for ways to reduce their pollution costs. Maybe nuclear power would make huge gains in the resulting competition; maybe it would not. We cannot know, but we can say that the resulting victors in that competition will be the energy providers that found ways to reduce pollution at the lowest cost.

These are superior, more market-oriented alternatives, but their effective implementation rests on similarly implausible assumptions about the policymakers’ knowledge and incentives. They assume we know (or can know) all the relevant external costs of pollution. They further assume we know (or can know) the socially optimal level of emissions that would prevail in the absence of externalities. They also assume that people acting through the political process are immune to the perverse incentives the programs create. At various times and places environmental initiatives have been co-opted by special interests. Thus we should keep in mind that even more market-oriented regulations will be difficult to get right. There’s no real substitute for the free market.

We can take other actions in addition to those designed to internalize the externalities. For example, government-granted advantages for other forms of energy production should be repealed—the special tax treatment for oil exploration, wind, and ethanol should be eliminated. Instead of targeted favors, taxes should be cut across the board. We should remove regulatory barriers that make it hard to start new power plants but easy to keep innovative competitors out. And, importantly, special limited tort liability must not be permitted for nuclear power or anyone else; thus the Price-Anderson Act, which was passed in 1957 to encourage civilian nuclear power, should be repealed.

The government should stop trying to pick winners and let the competitive process sort things out.

Moore argues that the nuclear plants will create jobs, but this is a canard. When the government assumes a company’s risks, it does not create net new economic activity. It merely reallocates it from one line of production to another. Having government-guaranteed loans for a nuclear power company means other businesses go without loans. Without undistorted prices, profits, and losses, there is no way to know whether value has been created or destroyed.

Edison’s words may have been true in the 1800s. Today, however, we have plenty of rules, thanks to the U.S. Congress. Some are so bizarre that you have to question the judgment of those who come up with them. One rule in particular is probably causing Edison to spin in his grave. His most famous invention, the incandescent light bulb, a mainstay in every American household for over a hundred years, has been banned by an act of Congress and will be replaced with the government-approved compact fluorescent light (CFL) bulb.

U.S. Rep. Jane Harman announced in a 2007 news release that her provision “bans Thomas Edison’s favorite oldie, the 100-Watt incandescent, by 2012, and will phase out inefficient light bulbs by 2014. By 2020, it requires that all light bulbs be 300 percent more efficient than today’s incandescents.”

Unfortunately, the federal government’s ban on products that happen to work just fine is nothing new. In writing about government-mandated products, I have noticed remarkable similarities in each case. They proceed through four phases and the light-bulb mandate is no exception.

Phase 1: Bureaucrats, “consumer advocates,” and environmentalists trumpet how wonderful the new product is. The extensive hoopla surrounding it can be boiled down to just two claims: big savings for the consumer and benefits to the environment.

The Department of Energy (DOE) and the Environmental Protection Agency (EPA) began to promote CFLs in 1999 with their “Change a Light, Change the World” program. The DOE’s and EPA’s promotional (lobbying?) efforts were directed at members of Congress and governors, plus state and local officials, to encourage their constituents to participate. In 2006 then-Secretary of Energy Samuel Bodman said: “Here’s a simple step we can take to preserve energy resources, save money and help the environment.” This is the typical approach that the government uses to influence the marketplace. The government never states that its chosen prod-uct is better.

The “big savings” never refers to the retail price. This is because the government-endorsed products are always more expensive than the consumer-endorsed alternatives. A 75-watt incandescent bulb at my local Kroger store costs 22 cents. The 20-watt CFL (advertized as equivalent to the 75-watt bulb) costs $5.49–25 times more expensive. A three-way incandescent bulb (50-100-150 watts) costs $1.25. A three-way CFL (12-23-32 watts) costs $13.12. That’s ten-and-a-half times more expensive. So when the government, environmentalists, and consumer advocates talk about big savings, they are obviously not talking about the upfront cost. They mean the operating cost over the life of the product. CFLs are advertised to last up to ten times longer than the incandescent bulb and use 75 percent less energy.

In the not-too-distant past, patriotism was exploited by the government to elicit a desired response from its citizens. Today, it is environmentalism. This has become our de facto state religion. When the government says that we need to do something because it is good for the environment, we are expected to take it on faith. We are not to question the government’s motives or logic for taking away our freedom of choice, but are expected to feel good about forgoing our selfish consumer desires because there is no higher calling in this country than saving the environment.

Rejected by Consumers

Phase 2: Consumers weigh the advantages and disadvantages of this wonderful product and decide that it is not really that wonderful after all.

CFLs have been on the market for some time, but so far consumers have not been impressed. Besides being expensive and strange looking, the light quality doesn’t seem to please people. They are not as good for reading as incandescent bulbs are, for example. Many also complain that the bulbs flicker and buzz. Dimming the intensity of CFLs also poses a problem. It would appear that consumers have a very clear choice: They can pay more for the new inferior government bulb or pay far less for a superior existing product. This might help to explain why CFLs made up only 5 percent of the light-bulb market last year, according to H. Sterling Burnett of the National Center for Policy Analysis.

I have been trying one of these bulbs above the sink in our kitchen. When I get up in the morning to make coffee, I flip the switch—but the light doesn’t really turn on. It starts off with a faint glow that gradually brightens for two to three minutes until fully illuminated. To get the lighting I want I must also turn on the light over the stove (one of those bad incandescent bulbs) because it brightens immediately. So now I am using two lights instead of one. Because turning the CFL on and off is so annoying, it is the one light in the house that we tend to leave on all the time. Why not? It’s so cheap! This situation is analogous to what happened when the government imposed CAFE fuel-efficiency standards: People drove more.

Mandated by Government

Phase 3: Hating to have their recommendations ignored by the ignoramus class, the miffed elitist class takes steps to mandate their beloved product.

Here is a question that never gets a direct or honest answer: If these economical and environment-friendly products are so wonderful, why is it necessary to outlaw competing products? The unsaid answer appears to be: The government, consumer advocates, and environmentalists know what’s best for the consumer.

As Ed Feulner, president of the Heritage Foundation, put it, “It’s only inferior or unnecessary products that require congressional intervention to survive. Useful or innovative products thrive on their own.”

When Rep. Harman introduced the bipartisan ban on the Edison light bulb, she said, “Only 10 percent of the power used by today’s incandescent bulbs is emitted as light, while the other 90 percent is released as heat.” Let me see if I have this right. Here in Michigan, where we have long, cold winters, the incandescent light bulbs in our family room actually help keep my wife, daughter, and me warm while we watch TV and read. Since the lights in the rest of the house (except for the light over the sink) are all off, why is this considered a problem? In the summer, when it gets dark later, we hardly use the lights. So I fail to see why this issue demands heavy-handed congressional intervention.

The Energy Independence and Security Act, signed by President Bush in 2007, contained the incandescent ban, but it also included a Consumer Awareness Program, authorizing $40 million to help consumers make energy-efficient lighting “choices.” Thus as the government takes away our freedom of choice, it also spends our money to convince us that we really have a choice.

Bad Product

Phase 4: It becomes clear that the consumer’s reluctance was justified. The product is in fact bad. But it doesn’t matter because the old product that worked has been outlawed.

The DOE guidelines for CFLs suggest that they be left on for at least 15 minutes after they are turned on, prompting Andrew Ferguson of the Weekly Standard to comment, “Odd, isn’t it—an energy-saving device that you’re not supposed to turn off?” It turns out that the lifespan of a CFL depends on how many times you turn it on and off. Failure to keep the light on causes the bulbs to burn out just as fast as the Edison bulbs. There go those big savings. So try to get in the habit of not turning off the lights after using the bathroom, a closet, or the laundry room. However, plan to come back 15 minutes later to turn off the light.

And while CFLs that are left on may last ten times longer than incandescent lights, no one is saying that they will fully perform for that long. A Department of Energy study found that after 40 percent of the advertised service life, a quarter of the CFLs started to become dim bulbs. If you don’t mind having dim bulbs for 60 percent of the service life, then CFLs should make you happy.

While these mandated lights may be great for the environment, they are not so great for humans. In some people they trigger headaches or even migraines because of the nearly imperceptible flickering. The BBC reported that the bulbs can also increase the risk of seizures in people with epilepsy. According to the Winnipeg Free Press, the United Kingdom’s Health Protection Agency recommends that people be no closer than about a foot from these lights for more than an hour a day. The ultraviolet radiation emitted by CFLs is like direct sunlight on bare skin. Thus the government is mandating that we all have miniature sun lamps throughout our homes.

But maybe the government light bulb is not really good for the environment after all. It turns out that the each CFL contains five to ten milligrams of mercury. Mercury is one of the most toxic substances on earth; it can cause serious health problems, including nerve and kidney damage. The mandate will result in millions or billions of CFLs ending up in landfills where the mercury will leach out to contaminate the soil and groundwater.

So how do CFLs fit with the EPA’s recommendation that we purchase mercury-free products? It explains that the amount of mercury in the bulbs is much smaller than the amount in old-fashioned thermometers (which are disappearing from households) and watch batteries. Both statements may be true; however, I have never had a thermometer or watch battery explode, shatter, or break the way a light bulb does. It was also my choice to have, or not to have, a mercury-filled thermometer or watch battery. The EPA’s final defense is that the health and environmental risks of CFLs are insignificant compared to the risk presented by the mercury put out by coal-burning power plants.

So what happens if a CFL next to my daughter’s bed breaks? According to the EPA guidelines, I am to: 1) open the windows and evacuate the room for 15 minutes; 2) shut off the heating or air-conditioning system; 3) carefully scoop up the glass using stiff paper and place it in a glass jar or sealable plastic bag; 4) after vacuuming, wipe the canister and put the bag or debris in a sealed plastic bag; and 5) throw away clothing or bedding that comes in contact with the broken glass or the mercury-containing powder. I must not wash contaminated clothing or bedding because mercury fragments may also contaminate the washing machine or pollute the sewage.

Has this convinced you that the health and environmental risks of CFLs are minor?

As a result of the Energy Independence and Security Act, we will be forced to buy new light bulbs for every room in the house that are more expensive, of lower quality, dangerous to our health, and bad for the environment. Given this government mandate, the consumer has three options. The first is to go out and buy up all the old-fashioned Edison bulbs before they become illegal. The second option is to try to get a family discount on hazmat suits. The final option is to just say no to dim bulbs. U.S. Rep. Michele Bachmann has proposed the Light Bulb Freedom of Choice Act. She is facing extensive opposition from the green lobby, big government, and consumer groups. Sadly, fighting for freedom in this country has become an uphill battle.

The small industrial town of Kalundborg, located 75 miles from Copenhagen, shouldn’t be on the radar screen of most visitors to Denmark. It has nonetheless become something of a Mecca for “sustainable development” theorists the world over.

Kalundborg’s main attraction, apart from its twelfth-century cathedral, is a network of recycling linkages that have developed over the last three decades between four large industrial plants, the municipality, and a few smaller businesses. This “Industrial Symbiosis,” as it is now known, originally comprised five core partners: an Asnæs power station (Denmark’s largest), a Statoil refinery (Denmark’s largest), a Gyproc plasterboard factory, Novo Nordisk’s largest pharmaceutical and industrial-enzymes plant (which produces, among other things, 40 percent of the world’s supply of insulin), and the City of Kalundborg.

Beginning in the 1970s a series of deals between these otherwise independent entities gave rise to various recycling linkages. For example, a few years ago, the Asnæs station supplied residual steam from its coal-fired power plant to the Statoil refinery in exchange for refinery gas that was formerly flared as waste. The power plant burned the refinery gas to generate electricity and steam, and sent its excess steam to a fish farm, a district heating system serving 3,500 homes, and the Novo Nordisk plant. Sludge from the fish farm and pharmaceutical processes became fertilizer for nearby farms. Surplus yeast from the biotechnology plant’s production of insulin was shipped to farmers for pig food. The fly ash from the power plant was sent to a cement company, while gypsum produced by the power plant’s desulfurization process went to the Gyproc gypsum-wallboard plant. The amounts of avoided wastes were significant, including 200,000 tons of fly ash and 130,000 tons of carbon dioxide, while Asnæs saved up to 30,000 tons of coal a year. While most of these linkages are still functional, a few were abandoned and new ones have since been created.¹ (See diagram.)

A Spontaneous Phenomenon

By all accounts the Kalundborg industrial symbiosis was not designed by consultants or financed by Danish government officials, but rather was the result of several distinct bilateral deals between company employees seeking, on the one hand, to reduce waste-treatment and disposal costs, and, on the other, to gain access to cheaper materials and energy while generating income from production residue. Indeed, it was only in the late 1980s that the various participants in the symbiosis first recognized the environmental implications of the partnerships and exchanges that had evolved since the early 1970s. There remains to date no higher level of organization managing this interaction.

Jorgen Christensen, a spokesperson for Novo Nordisk, was explicit on this point when asked to describe how people in Kalundborg had “designed” their recycling linkages: “We didn’t design the whole thing. It wasn’t designed at all. It happened over time.”

Henning Grann, a Statoil employee, reinforced this view a few years later: “The symbiosis project is originally not the result of a careful environmental planning process. It is rather the result of a gradual development of co-operation between four neighboring industries and the Kalundborg municipality.” Erling Pedersen, CEO of the Industrial Development Council in the Kalundborg region, concurred with this evaluation when he wrote in 1999 that the industrial symbiosis “was not a planned network, but a series of projects initially quite independent from one another. There was no original joint management, but rather bilateral agreements between independent partners.” Most interesting is his statement that “the network did not evolve with any academic knowledge of scientific environmental network theories, but as good and economical management practice. All projects required investments and resulted in revenues or savings for the parties involved.”²

The story of the Kalundborg industrial symbiosis is interesting on at least two counts. First, it illustrates how localized inter-industry recycling linkages have spontaneously developed, most of all because they made good business sense.³ Second, it shows how modern environmental regulations, hailed by many as the main reason why the environment has improved recently, have actually turned out to be quite unproductive.

Why Kalundborg Would Have Never Emerged in America

Traditionally, dangerous pollution problems in English-speaking countries were handled through the common-law doctrines of negligence, trespass, nuisance, and strict liability. Liability was thus imposed whenever harm resulting from a pollutant could be demonstrated with scientific evidence. Such a system mandated no specific conduct, but allowed private parties both to recover monetary damages for harm caused and an injunction against offenders who did not or could not reduce emissions to a nonharmful level.⁴

In the last three decades, however, this legal approach to industrial pollution has given way to a regulatory system that sets and enforces specific standards of conduct (typically dubbed “command and control”). Despite somewhat catchy names, such as the Resource Conservation and Recovery Act, modern American environmental regulations that deal with industrial waste have been built on the view that byproducts are a nuisance to be destroyed rather than potentially useful resources. The result is that many environmental statutes typically define pollution prevention in a way that excludes recycling and reclamation, while instituting pervasive biases against technological innovation. The result, not surprisingly, is that creating wealth out of industrial waste is now much more difficult than it was in the past.

Kalundborg provides an interesting lesson in this respect. As many commentators have pointed out, the flexibility of the Danish regulatory framework made possible events that would have been prohibited in America. For example, the flue gas that Statoil pipes to Gyproc and the liquid sulfur that Statoil sells to Kemira probably would not have been approved in the United States because both substances would be classified as “hazardous waste.” Furthermore, the new resources created from these byproducts would also have been treated as hazardous under the so-called “mixture and derive from” rule, which classifies as “waste” new products that incorporate industrial waste. Also, the movement of sulfur from Statoil to Kemira and of scrubber-ash gypsum from Asnæs to Gyproc would have violated a 90-day-storage rule, which, as its name implies, prevents the accumulation of such material for more than 90 days. In the Danish case, the possibility of a longer storage period made the project economically viable.

The flexibility of Denmark’s approach to environmental matters, coupled with the Danish Environment Ministry’s encouragement regarding the use of all waste streams on a case-by-case basis, allows firms to focus on finding creative ways to become more environmentally benign instead of fighting the regulator. As a result, they can use byproducts as inputs rather than “virgin” materials that are often virtually identical in chemical composition.

There have probably always been two views of industrial byproducts. One considers residuals to be health and environmental hazards, urging people to take every step to protect both humans and the natural environment against them. The obvious solution to pollution problems then lies in reducing production and in destroying waste. The second approach considers residuals as potential resources from which marketable products can eventually be derived.

Past experience and current regulatory problems suggest that the second approach is both more sensible and economical. Perhaps, then, the development of an institutional framework that requires firms to prevent pollution, but leaves them free to develop new and profitable uses for byproducts, is the real road to sustainable development.

Notes

1. For a concise and updated introduction to the Kalundborg Industrial Symbiosis, see www.symbiosis.dk/.
2. For the sources of these various quotes, see Pierre Desrochers, “Cities and Industrial Symbiosis: Some Historical Perspectives and Policy Implications,” Journal of Industrial Ecology, Fall 2001, pp. 29–44.
3. Since Kalundborg first began to draw interest on these issues, similar industrial symbiosis has been “discovered” in, among other places, Austria, Germany, Finland, and various American and European petrochemical complexes. My research suggests that similar cases were probably very common throughout history. See my “Cities and Industrial Symbiosis” and “Regional Development and Inter-Industry Recycling Linkages: Some Historical Perspective,” Entrepreneurship and Regional Development, January 2002, pp. 49–65, for a more detailed discussion of these other cases.
4. For a brief introduction to the topic and further references, see Pierre Desrochers, “Industrial Ecology and the Rediscovery of Inter-Firm Recycling Linkages: Some Historical Perspective and Policy Implications,” Industrial and Corporate Change, November 2002, pp. 1031–57.

The EPA requires the new reformulated gasoline to have an oxygen content of just over 2 percent to help the gasoline burn cleaner. The two primary oxygenate additives are ethanol (corn alcohol) and methyl tertiary butyl ether (MTBE). Because these additives are not pure oxygen, the amount needed to meet the required oxygen content is significant. For example, since MTBE is only 19 percent oxygen, RFG made with this oxygenate additive must contain at least 11 percent MTBE.²

For environmentalists ethanol presents a dilemma. On the plus side it is a renewable energy source. On the minus side it is highly “volatile.” (It evaporates far more rapidly than gasoline.) In the summer the evaporative emissions of ethanol before combustion are a major contributor to smog. This serves to negate the advertised benefit of reduced tailpipe emissions.³ It is therefore not surprising that advocates of ethanol only want us to look at what happens during and after combustion. To offset this problem, ethanol needs to be blended with a more expensive, lower-volatility gasoline that is not readily available in the market.⁴ To make the situation worse, the ethanol separates from the gasoline if it is transported by pipeline over any significant distance. Because of this distribution problem, ethanol needs to be mixed with non-oxygenated gasoline as close to the final market as possible.⁵

Given all these inherent problems (environmental, cost, and logistical), ethanol is extremely fortunate to have very strong support from the “Big Corn” lobby. This is a coalition of Midwest politicians, big agriculture, and such agri-business firms as Archer Daniels Midland. Ethanol is exempt from federal excise taxes.

MTBE is derived from natural gas. It has been used since the late 1970s in low concentrations as an octane booster. This coincided with the phase-out of lead in gasoline. Compared to ethanol, MTBE is far less expensive and it can be more easily added during the refining process. For these reasons, MTBE is used in over 87 percent of the reformulated gasolines. The oxygenated-gasoline mandate increased MTBE production from 83,000 barrels per day in 1990 to 269,000 barrels per day by 1997.⁶

While the RFG program is advertised as being “great for the environment,” the benefits for the consumer are hard to find. Since the oxygenate additives can cost up to twice as much as gasoline, reformulated gasoline can cost up to 10 cents more per gallon than the non-oxygenated gasoline.⁷ Unfortunately, it gets worse. Both major oxygenated additives have a lower energy content than regular gasoline, MTBE roughly 20 percent less, ethanol 30 percent less.⁸ This results in a 2–3 percent loss in fuel efficiency. Translation: Consumers pay more to get fewer miles per gallon than before.

Vanilla Gasoline

Before the reformulated-gas mandates started to kick in, the logistics of fuel distribution were relatively simple. The product was homogeneous; all gas was “vanilla.” When one area of the country was experiencing a higher demand, it was easy to redirect more gas from another area to meet it. With RFG, in addition to “vanilla” we now have “rocky road” gas, “butter pecan” gas, and “pistachio almond” gas. While some parts of the country will require RFG all year long, others will only need a special gas in the summer to combat high ozone levels. Still other areas will only need a special gas in the winter to address high carbon-monoxide levels. As a result of the requirement for multiple types of gasoline that vary both by location and season, the logistics of fuel distribution have become a nightmare for the petroleum industry.

Unfortunately for the consumer, multiple flavors of gas are not interchangeable. If one part of the country is running low on “rocky road” gas, you cannot divert surplus “butter pecan.” Thus it should not be surprising that since the implementation of the RGP there have been many shortages (with accompanying price spikes) in certain parts of the country.

As if on cue, the media responded with a barrage of headlines charging Big Oil with “price gouging” and “obscene profits.” Grandstanding politicians got airtime to “call for investigations.” However, nothing ever came of these investigations, and the news media dropped the subject because the villain was not Big Oil but Big Government and its “environmental gas” mandate. As Jerry Taylor of the Cato Institute put it during testimony before Congress, “This congressionally mandated balkanization of the gasoline market has seriously hampered the flexibility that refiners would otherwise have to react to spot shortages.”⁹

“Environmentally-friendly” MTBE has another problem. Since MTBE is extremely soluble in water, it moves farther and more rapidly through both groundwater and surface water than gasoline. A study by the Vermont Agency of Natural Resources (ANR) found that MTBE migrated nearly ten times the distance of the non-MTBE gasoline contaminants.¹⁰

In tests conducted by the U.S. Geological Survey, MTBE has been detected in approximately 20 percent of the ground water where RFG is sold. This compares to a 2 percent detection rate in non-RFG areas.¹¹ It is increasingly being found in municipal drinking-water wells and reservoirs. Even in extremely small amounts MTBE makes drinking water unusable. MTBE causes the water to smell and taste like turpentine. For some reason, humans are hypersensitive to even small traces of MTBE. We are able detect MTBE-tainted water at ten times lower concentrations than water containing just gasoline.¹² As a result of this low threshold, it only takes a spoonful of MTBE to completely contaminate enough water to fill an Olympic-sized swimming pool.¹³

To make matters worse, the cleanup of MTBE-contaminated water is more difficult and costly than water contaminated with just conventional gasoline. Much of the MTBE contamination remains “beyond the reach of even the most sophisticated cleanup technologies.”¹⁴ Instead of degrading over time, MTBE has a tendency to accumulate. So as long as we have a mandate for reformulated gasoline with MTBE, water pollution will only get worse.

Most MTBE-contaminated ground water has been traced to leaking underground storage tanks. This comes as quite a surprise since the federal government ordered gas stations to replace their old underground tanks with double-walled tanks and pipes in an effort to prevent environmental damage. The conversion was to have been completed by 1998. But in California a “state study found that two-thirds of the upgraded tanks and pipes tested in Yolo and Sacramento counties [were] leaking MTBE.”¹⁵

These new upgraded storage tanks cost consumers $2 billion. Even more tragic is the fact that thousands of gasoline stations across the country, mostly the “mom and pop” operations, were forced out of business.¹⁶ They simply could not come up with the $100,000 for “the upgrade.”¹⁷

MTBE Makes People Sick

In November 1992 about 200 residents of Fairbanks, Alaska, reported having headaches, dizziness, eye irritation, a burning sensation in their noses and throats, disorientation, and nausea. These health problems were linked to the newly introduced reformulated gas containing MTBE. So many people complained that the governor banned its use after only three months.¹⁸

As the use of reformulated gas increased across the country, so did the incidence of illness. Thousands of people became ill after being exposed to MTBE/gasoline fumes (before combustion), MTBE/gasoline exhaust (after combustion), and MTBE-tainted water. North Carolina banned MTBE after it was classified as a probable human carcinogen.¹⁹ At its annual meeting in 1994 the American Medical Association passed a resolution calling for a moratorium on the use of oxygenated fuel based on the risks posed by MTBE.²⁰

In addition to Alaska and North Carolina, at least 12 other states (Arizona, California, Colorado, Connecticut, Iowa, Maine, Michigan, Minnesota, Nebraska, New York, South Dakota, and Washington) have taken steps independent of the federal government to limit, phase-out, or ban MTBE.

As the biggest champion of reformulated gas, the EPA continually dismissed the growing criticism of MTBE. The agency’s official position was that while MTBE posed some risk, it was no greater than the risk of other gasoline components. The EPA responded to the ground water contamination problem by simply “providing information, intensifying research, and focusing on the need to minimize leaks from underground fuel tanks.”²¹

For six years the EPA opposed all measures to limit the use of MTBE. It was not until 1998 that the agency made MTBE a “potential candidate” for regulation under the Safe Drinking Water Act. Later that year the EPA finally established an independent panel to investigate the problems associated with the reformulated gas program. According to observers, the panel’s 1999 final report recommended, among other things, “that Congress act to remove the current Clean Air Act requirement that 2 percent of RFG, by weight, consist of oxygen,” that the “use of MTBE should be reduced substantially (with some members supporting its complete phase-out), and that Congress should act to provide clear federal and state authority to regulate and/or eliminate the use of MTBE and other gasoline additives that threaten drinking water supplies.”²²

Given these damning findings, the EPA was forced to admit that its advocacy of the MTBE fuel additive had been a mistake.²³

As a result of the government’s overzealousness in “helping the environment,” people pay more per gallon of gas, get fewer miles per gallon, and get sick. The biggest irony, however, is that the environment is worse off thanks to this “environmental program.” So far, the misguided policy has cost consumers untold billions of dollars. Unfortunately, the environmental and economic nightmare caused by government gas is not over. Be prepared to cough up another $30 billion or more to deal with the clean-up and phase-out costs of MTBE.²⁴

What Next?

From the current devastation wrought by the EPA, stand by for still more government command and control of the nation’s fuel supply. With MTBE rapidly falling into disfavor, that just leaves ethanol. The prospect of having ethanol as the only game in town has Big Corn salivating. In June the Senate approved an amendment to the energy bill that would mandate the use of ethanol in every state except Alaska and Hawaii by 2012. This new rule would also ban the use of MTBE. While the House version also supported ethanol, it left the resolution of the MTBE problem with the states.²⁵

An alternative solution, based on common sense, calls for a policy that objectively weighs both environmental and economic trade-offs. With this criterion, a strong case can be made that the EPA should just get out of fuel micromanagement altogether. As Michael Centrone observes: “the need for oxygenated fuels may be unfounded inasmuch as 75–85% of [the] smog in major cities is from non-automobile sources and tailpipe emissions of new cars are 95% lower that they were in the 1960s.”²⁶ Eric Stork, a former EPA employee, stated that “reformulated gasoline was a good idea 30 years ago, but in cars built in 1983 or later, the fuel is obsolete and pointless.”²⁷

It is time for us to rein in the EPA so that it can no longer do damage to the environment, to our health, to the consumer, or to the business community.

Notes

1. James E. McCarthy and Mary Tiemann, “MTBE in Gasoline: Clean Air and Drinking Water Issues,” National Council for Science and the Environment (98-290), www.ncseonline. org/NLE/CRSreports/Air/air-26.cfm?&CFID=6942884&CFTOKEN=41159272.
2. 2. Ibid.
3. A. Blakeman Early of the American Lung Association, Testimony on Issues Concerning the Use of MTBE in Reformulated Gasoline: An Update, November 1, 2001, House Committee on Energy and Commerce, Subcommittee on Oversight and Investigations, http://energycommerce.house.gov/107/hearings/11012001hearing407/Early694.htm.
4. “Commonly Available Ethanol and MTBE Gasoline Blends Do Little to Reduce Smog,” News, National Academies, May 11, 1999, www4.nas.edu/news.nsf/isbn/0309064457? OpenDocument.
5. McCarthy and Tiemann.
6. “MTBE, Oxygenates, and Motor Gasoline,” Energy Information Administration, www.eia.doe.gov/emeu/steo/pub/special/mtbe.html.
7. Ben Lieberman, “The Ethanol Mistake: One Bad Mandate Replaced by Another,” Competitive Enterprise Institute March 12, 2002, www.cei.org/utils/printer.cfm?AID=2895.
8. Larry Weitzman, “The Formula,” Mountain Democrat Online, December 15, 1999, www.mtdemocrat.com/display/inn_1999_columnists/Larry%20Weitzman/N1215_W.txt.
9. See Jerry Taylor, “The Effect of Federal Regulations on Gasoline Prices in the Milwaukee/Chicago Area,” Testimony before House Committee on Government Reform Subcommittee on National Economic Growth, Natural Resources, and Regulatory Affairs, July 7, 2000, www.cato.org/testimony/ct-jt070600.html.
10. Vermont Agency of Natural Resources (ANR) Study, www.anr.state.vt.us/env02/graphics/Waste%20Toxics.doc, p. 2.
11. “MTBE/Oxygenates in Gasoline Fact Sheet,” Environmental Health and Safety Online, www.ehso.com/news+MTBE.htm.
12. “The Efficacy of MTBE Use in Connecticut,” Connecticut Academy of Science and Engineering, September 30, 1999, www.ctcase.org/reports/MTBEsum.html.
13. “MTBE Still Leaking at Gas Stations Despite New Tanks,” North County Times (AP), March 10, 2002, www.nctimes.net/news/2002/20020310/54956.html.
14. Vermont ANR Study.
15. “MTBE Still Leaking.”
16. “Testimony of John C. Felmy of the American Petroleum Institute before the Federal Trade Commission,” August 2, 2001, www.ftc.gov/bc/gasconf/comments/felmyjohn.htm.
17. “Thousands of gas stations to miss deadline for fixing leaks,” CNN, December 22, 1998, www.cnn.com/US/9812/22/gas.tanks.02/.
18. Suzanne Zolfo Patton, “What Price, MtBE?” www. emagazine.com/july-august_1998/0798curr_mtbe.html.
19. Ibid.
20. “MTBE: Ozone Solution or A New Kind of Pollution?” Everyone’s Backyard, Spring1995, www.chej.org/SF/MTBE.html.
21. McCarthy and Tiemann.
22. Ibid.
23. “Clinton and EPA Chief Browner Act to Eliminate MTBE from Gasoline, and Boost Ethanol Instead,” November 17, 2002, www.ehso.com/news+MTBE.htm.
24. “MTBE Still Leaking.”
25. “Senate Adds Rule to Energy Bill to Double Ethanol in Gasoline,” New York Times (AP), June 6, 2003.
26. Michael Centrone, “How the Environmental Protection Agency Became a Public Health Risk,” National Center for Public Policy Research, National Policy Analysis # 304, August 2000, www.nationalcenter.org/NPA304.html.
27. Taylor.

In the mind of the 21st-century environmentalist, Victorian cities and towns evoke images of black coal smoke and unsanitary conditions. For most people of the time though, they were one of humanity’s supreme achievements. Not as clean as the countryside, no doubt, but thriving places where millions of rural poor had been lifted out of their miserable condition.

Pollution might have seemed an acceptable price to pay for such progress, but a surprisingly large number of Victorians thought it reasonable to expect both a higher standard of living and improved environmental amenities, if some trends that they witnessed in their day continued in years and decades ahead. First among these were the tremendous successes of entrepreneurs and technologists in creating valuable byproducts from industrial waste.

While many writers collected bits and pieces of information on these achievements, the journalist Peter Lund Simmonds (1814-1897) published a massive synthesis on the topic, first in 1862 and in a significantly revised form in 1873, which he titled Waste Products and Undeveloped Substances; or, Hints for Enterprise in Neglected Fields.¹ Simmonds’s books discussed the profitable re-use of virtually all types of industrial and other waste. A point he never tired of making was that not only had considerable wealth been extracted from formerly wasted residuals, but also that the environment was typically better off as a result. A few such cases will give a glimpse of the achievements of Victorian manufacturers.

As Simmonds reminded his readers, what should be done with the fifth quarter of the animal, or the “offal,” was a question that “formerly used to be perpetually assailing Boards of Health, and other sanitary bodies who have the supervision of slaughter-houses, meat-markets, &c.” By the time he wrote his books, however, the offal of cattle suited for food, the waste from dressing skins and preparing leather, and other animal refuse had all found “distinctive and remunerative uses.” A contemporary of Simmonds, the polymath Charles Babbage, thus described in 1832 the profitable uses of horn byproducts: “The tanner who has purchased the raw hides, separates the horns, and sells them to the maker of combs and lanterns. The horn consists of two parts, an outward horny case, and an inward conical substance, somewhat intermediate between indurated hair and bone. The first process consists in separating these two parts, by means of a blow against a block of wood. The horny exterior is then cut into three portions with a frame-saw.”

Babbage proceeded to enumerate the various processes used to turn parts of the horn into combs, a glass substitute for lanterns, knife handles, soap, glue to stiffen cloth, and fertilizer. “Besides these various purposes to which the different parts of the horn are applied,” Babbage wrote, “the clippings, which arise in comb-making, are sold to the farmer for manure [fertilizer]. . . . The shavings, which form the refuse of the lantern-maker, are of a much thinner texture: some of them are cut into various figures and painted, and used as toys. . . . But the greater part of these shavings also are sold for manure.”²

As Simmonds pointed out, if “such skill and ingenuity” had not also been exhibited in the case of bones, and if bones had been left to rot, “producing fever and disease,” there would indeed have been “cause for anxiety amongst sanitary authorities.” Yet, this was not the case, and it was there for all to see “how the danger is dispelled, and a source of evil becomes the agent of much good, and the subject of a thriving and prosperous industry.”³

Recycled Water and Other Byproducts

What was true for animal byproducts was true for most other industries. Simmonds thus describes a process developed at the Kinghole woolen mills, near Dumfries, by which the refuse water of the washing houses had been converted into valuable commercial material. “By means of mechanical appliances and chemical action,” he wrote, “the refuse formerly turned into the river Nith to the injury of the salmon, is made to produce stearine, which forms the basis of composite candles, as well as a cake manure that sells at 40s per ton.”

A friend of Simmonds, the chemist Lyon Playfair, similarly described progress at another textile mill where the recovery of used madder (the residual of a plant that formed the basis for a dye) provided both economic and environmental benefits. “The large quantities of spent madder constantly accumulating,” he wrote, “were found exceedingly inconvenient.” Used madder was not valuable enough to be turned into fertilizer and, as a result, this waste material was at first thrown into rivers. But, Playfair observed, it came to the attention of chemists that one-third of the coloring matter was thus thrown away. A simple treatment with a hot acid was soon devised and again rendered it available as a dye. The result, he observed, was that the “waste heaps are now sources of wealth, and the dyer no longer poisons the rivers with spent madder, but carefully collects it in order that the chemist may make it again fit for his use.”⁴

The slag from iron furnaces provides another interesting illustration. This waste matter was on the mind of several Victorians and led to numerous proposals and experiments. For instance, on the evening of March 25, 1855, a Dr. William Smith of Philadelphia read a paper at a London meeting of the Society of Arts on “The Utilization of the Molten Mineral Products of Smelting Furnaces,” in which he discussed a new technology that he had developed to turn slag into bricks or blocks for the construction industry. In the discussion that followed, one Mr. Nesbit said that even though the paper was of great importance, he thought that the subject was not new. Actually, he had himself labored much on the topic almost a decade earlier and, as he pointed out, his experiments took him to numerous works in southern France, south Wales, and parts of England and Scotland.

Other interesting remarks were made during this meeting on the cost to manufacturers of getting rid of this byproduct and on the fact that it could therefore be obtained cheaply from them. A Mr. Austin noted that he had known some iron masters who paid a lot to convey the slag away, which increased the price of iron, and that this would not be the case if it were convertible to useful purposes. This, he was convinced, “only required the spirit and energy which Englishmen possessed, to carry it out to a very profitable result.”⁵

Smith’s proposal, like many others before and after him, did not prove commercially successful. An innovative solution to the problem of slag was nonetheless found a few decades later when it became largely used as a substitute for stone in concrete and for sand in cement mortar. The British engineer John Kershaw described the major improvement that this brought to the British landscape: “Not only has this new manufacture solved the problem of slag disposal in Staffordshire, and in the other iron-producing districts of this country, but . . . the immense accumulations of slag, due to the past activities of the blast-furnaces, are being gradually removed, and the outward aspect of what in the past has been known as the ‘Black Country’ is undergoing a gradual change for the better, as a result of the success of this new manufacture.”⁶

Perhaps the most spectacular case of profitable byproducts recovery in the Victorian era resulted from the purification of coal gas. As Playfair wrote, coal gas was only reluctantly accepted at the beginning of the nineteenth century because of its noxious side effects: “It was no mean innovation to replace tallow candles and oil lamps by an air streaming through pipes, but the difficulties attending its purification from noxious ingredients appeared even more insuperable than to reconcile the public to the innovation: the gas had an insupportably foetid odour, and certainly injured health when burned; it discoloured the curtains, tarnished the metals, ate off the backs of books, and covered everything with its fuming smoke.”⁷ According to Playfair, “it required a man of courage, as indomitable as [Frederic] Winsor, its great advocate, to persuade the public to continue its use until means were found for the removal of these noxious qualities.”

The negative side effects of coal gas resulted from the presence of substances such as sulfureted hydrogen, which tarnished the metals and, with sulfuret of carbon, produced sulfurous fumes; ammoniac compounds, which changed the colors of dyes and acted on leather; and tarry vapors, which deposited soot. In time, however, chemists were able to turn the sources of these problems into profitable byproducts.

As Playfair put it, “the waste and badly-smelling products of gas-making appeared almost too bad and foetid for utilization, and yet every one of them, Chemistry, in its thriftiness, has made almost indispensable to human progress.”

Among other examples, the bad-smelling tar yielded benzole, an “ethereal body” that proved valuable as a solvent and for preparing varnishes, making oil of bitter almonds, removing grease spots, and cleansing soiled white kid gloves. The same tar gave naphtha, a solvent of Indian rubber and gutta percha. Coal tar also furnished the chief ingredient of printer’s ink in the form of lampblack. It also substituted for asphalt in pavements. When the tar was mixed with coal dust (previously wasted in mining operations), it formed by pressure an excellent and compact artificial fuel. The water, condensed with the tar, contained much ammonia and was readily convertible into sulfate of ammonia, which was used as a fertilizer and in many other lines of work. Cyanides were also present among the products of distillation and were converted into the dye known as Prussian blue. The naphthaline, which used to choke the pipes, was also made into a beautiful red dye, closely resembling the color previously obtained from madder. Coal, when distilled at a lower temperature than that required to form gas, turned into an oil containing paraffin, which was largely used as an antifrictional oil for light machinery.

Learning from the Victorians

Most “sustainable development” theorists show little faith in the incentive structure of market economies to do well financially and environmentally at the same time. Yet many Victorian commentators who were more familiar with commerce and industry saw a direct connection between increased competitive pressures and improved environmental amenities. In their judgment, technological innovation and entrepreneurial behavior insured both a better standard of living and solutions to serious pollution problems.

This is not to say, of course, that Victorian firms were more efficient or cleaner than current manufacturing operations whose foundations are built on more than a century of subsequent innovations. The criteria by which the environmental consciousness or environmental performance of Victorian entrepreneurs should be judged are therefore not 21st-century standards of cleanliness, but rather the improvements that they brought over previous practices. As the economist Thomas DeGregori writes, innovation and progress are never defined in terms of ultimate or final solutions, but rather in terms of “creating smaller or less important [problems] than those we solve.”⁸

Even though the evidence presented here only deals with the United Kingdom during the Victorian era, similar processes can be found in all past advanced economies. Simmonds said: “Great Britain was the first to carry out this utilisation on an extensive scale, and her example is now being followed largely on the Continent, in Australia, the United States, and even in the River Plate States [Argentina and Uruguay], where numerous substances, formerly wasted, have now become profitable articles of commerce.”⁹ If Simmonds’s assessment was correct—and it is corroborated by the fact that a few decades later treatises similar to his were written by French, German, and American authors¹⁰—a case can be made that economic development and improved environmental amenities have not only never been incompatible, but that economic progress has always mandated the development of more efficient practices and the discovery of profitable new uses for industrial waste.

1. Peter Lund Simmonds, Waste Products and Undeveloped Substances; or, Hints for Enterprise in Neglected Fields (London: Robert Hardwicke, 1862), and Peter Lund Simmonds, Waste Products and Undeveloped Substances: A Synopsis of Progress Made in Their Economic Utilisation During the Last Quarter of a Century at Home and Abroad, 3rd ed. (London: Hardwicke and Bogue, 1876 [1873]).
2. Charles Babbage, On the Economy of Machinery and Manufactures (1832). Available at http://socserv.socsci.mcmaster.ca/~econ/ugcm/3ll3/babbage/babb2.
3. Bethnal Green Branch of the South Kensington Museum, Descriptive Catalogue of the Collection Illustrating the Utilization of Waste Products (London: George E. Eyre and William Spottiswoode for Her Majesty’s Stationery Office, 1875), p. 36.
4. Lyon Playfair, On the Chemical Principles Involved in the Manufactures of the Exhibition as Indicating the Necessity of Industrial Instruction (London: Royal Society for the Encouragement of Arts, Manufactures and Commerce, 1852), pp. 173-74.
5. “The Utilization of the Molten Mineral Products of Smelting Furnaces,” Journal of the Society of Arts, March 30, 1855, pp. 335-41.
6. John B.C. Kershaw, The Recovery and Use of Industrial and Other Waste (London: Ernest Benn Limited, 1928), pp. 3-4.
7. Playfair, pp. 186-88.
8. Thomas R. DeGregori, A Theory of Technology: Continuity and Changes in Human Development (Ames, Iowa: Iowa State University Press, 1985), p. 5.
9. Peter Lund Simmonds, Animal Products, Their Preparation, Commercial Uses and Value (New York: Scribner, Welford and Armstrong, 1875), p. iii.
10. For more detail on this issue, see Pierre Desrochers, “Industrial Ecology and the Rediscovery of Inter-Firm Recycling Linkages: Some Historical Perspective and Policy Implications,” Industrial and Corporate Change, November 2002, pp. 1031-57.

“The ‘polluter pays principle’ states that whoever is responsible for damage to the environment should bear the costs associated with it.”
—United Nations Environmental Programme¹

The “polluter pays principle” appeals to our sense of justice. People should be held responsible for their actions, and polluters who cause damage to others should “pay” for that damage. Furthermore, forcing polluters to bear the costs of their activities would enhance economic efficiency. In other words, appropriately applied, policies based on the principle face no tradeoff between the efficient working of a capitalist system and environmental protection.

But as with most general principles, the devil is in the details. In this case the details relate to basic questions that any application must answer: How do we define pollution? Who is a polluter? How much should the payment be, and to whom should payment be made? The answers to these questions are at the heart of whether an application will be either just or economically efficient.

Most advocates of the principle never talk about harms to people. The statement above is typical. Polluters are those who “damage” or impose “costs” on the environment. This language is common. The U.N.’s “Rio Declaration on Environment and Development” states that “National authorities should endeavor to promote the internalization of environmental costs and the use of economic instruments. . . .”² (More on this below.) The “Draft International Covenant of Environment and Development” states: “Parties shall apply the principle that the costs of preventing, controlling, and reducing potential or actual harm to the environment are to be borne by the originator.”³

Ultimately terms like “environmental costs” and “damage to the environment” can mean anything a policymaker wants them to mean. Since all human activity involves altering (damaging?) the natural environment, the “polluter pays principle” as defined by its most vocal advocates can be invoked to justify taxing or regulating any consumption or production activity, and often is. Indeed this may be the point of using such nebulous language.

Closely tied to that principle are policies typically referred to as “market based.”⁴ These policies are broken down into two categories, taxes and tradable permits. Both are seen as attempts to “make the polluter pay” by attaching a fee to the polluting activities.

The taxation approach is most direct. The tax would be paid either in the form of an emissions fee or an excise tax on the product associated with pollution. The tradable-permits approach (also called cap and trade) would first have the government establish an overall acceptable level of pollution for an industry and would then distribute emission permits to firms in that industry. The total amount of emissions represented by these permits would add up to the overall level that was initially established. Companies could then buy and sell these permits based on their needs to emit the pollutant and their abilities to find pollution-abatement techniques. The point is that in either case, the polluters are made to “pay” for their polluting activities, either through a tax or through the purchase of permits from others in the industry.

While the moral case for market-based instruments is generally centered on the concept of making the polluter pay, the economic justification is based on the idea that using market-based incentives to accomplish environmental goals is more efficient than traditional command-and-control policies. Theoretically, polluters who must pay will have to consider all of the costs associated with their production activities and use resources more efficiently. Furthermore, they will have an incentive to find the lowest-cost methods for reducing emissions.

Manipulated Definition

The problem is that, in advocacy and practice, the supporters of market-based instruments, like the supporters of the “polluter pays principle” more generally, manipulate the definition of cost to make it consistent with the vague concept of harm or damage discussed above. Economics attaches the concept of costs to human beings and individual decision-making. “Cost” refers to what must be given up when a person chooses one course of action rather than another, or when someone else’s activities prevent a person from choosing a course of action. For example, in the case of a company’s polluting a river, the cost might be to downstream recreational users who have to give up or cut back on certain activities that the pollution is preventing them from pursuing. From this perspective then, pollution problems arise because the polluter is imposing costs on other human beings. It is human users of the river who bear the costs, not the river itself.

As with the “polluter pays principle” more generally, many advocates of market-based instruments misuse the economic theory by redefining the concept of costs and damage to apply to things rather than to people. But the environment does not incur costs. Only people do.

An article by David Pearce and Kerry Turner is typical. In the name of “making the polluter pay,” the authors call for excise taxes on the use of beverage containers. Their claim is that “environmental damages from packaging waste is not reflected in the prices of packaged products” and that “the size of the levy needs to be related directly to the environmental damage done by the production and consumption of the packaging, or to the costs of restoration to the environment” (emphasis added).⁵ Nowhere is there a reference to costs or damage to actual people from the use or disposal of beverage containers. Unfortunately, such abuse of the concept of costs is not discouraged among economists. This article appeared in a respected and refereed academic journal.

The notion that polluters should be made to pay for the damage they cause is nothing more than an extension of the idea that people should be held accountable for their actions. This fundamental principle is made coherent by property rights. When person A does harm to person B, it is understood that A has done damage to B’s person or property. The appeal of a “polluter pays principle” is that A makes B whole again; that is, to the extent possible, he provides restitution, most likely in the form of monetary compensation, for B’s suffering.

It is right that environmental policy should make the polluter pay so long as it is grounded in these basic principles. Within this context ambiguity is greatly reduced about what kinds of emissions or by-products of production processes should be characterized as pollution, who should be identified as a polluter, and what the polluter should pay and to whom. If a producer emits a substance, whether into the air, a body of water, or the ground, and those emissions cause health problems or cause damage to people’s property, then those emissions would be correctly characterized as pollution and the company as a polluter. The payments that the company would be forced to make should go, not to the government in the form of a tax or to other companies to buy permission to pollute, but to those in the community who have suffered from pollution.

From this perspective pollution problems are the result of conflicts over the use of a resource. Persons A and B would both like to use the same resource for conflicting purposes. Usually the presence of private property allows for such conflicts to be resolved both peacefully and in a mutually beneficial way, even when the issue involves the environment. For example, on wildlife preserves owned by the Audubon Society it is not uncommon to see oil companies drilling for crude. While the Audubon Society and oil companies may want to use this land for what might first appear to be conflicting purposes, private ownership provides a strong incentive for the parties to compromise and resolve the differences. By leasing part of its land for oil exploration, the Audubon Society can gain revenues to purchase other lands while insuring that the drilling takes place in an environmentally friendly way. This is not the case on “publicly” owned lands, such as the Alaskan National Wildlife Reserve (ANWR), where any drilling is viewed as being at the expense of environmental concerns.

Use Without Permission

In cases where someone decides to make use of another’s property without permission, the problem is resolved by applying the simple rule that the person who owns (has title to) the property is the one whose purposes prevail. This approach takes the focus off the physical environment, per se, and places it on human beings and their right to live their lives unmolested. An activity is polluting only if it harms others.

This approach to the “polluter pays principle” has two distinct and mutually re-inforcing advantages. First it is consistent with the principles of liberty. Under a property-rights–grounded principle, people are free to pursue whatever production or consumption goals they desire so long as there is personal accountability for any and all damage to others or their property. Second, if generally invoked as a guiding principle of environmental policy, it will enhance economic efficiency and social welfare. Moreover, those involved in production activities will attempt to ameliorate problems before they occur. There would be a strong incentive to develop new technologies that eliminate or minimize pollution from the outset.

Environmental problems tend to arise when people are allowed to impose costs on others by degrading other people’s property or by using property that is unowned. A property-rights-based “polluter pays principle” would go a long way toward solving many of these problems, first by seeing to it that existing property rights are enforced and by providing principled guidance for the privatization of currently unowned resources by courts and legislatures. It will be much easier for lawmakers and adjudicators of disputes to move in the right direction once the target is clearly identified.

Roy Cordato is vice president for research and resident scholar at the John Locke Foundation. His more extensive discussion of the “polluter pays principle” can be found at www.iret.org.

Notes

1. United Nations Environmental Programme, Taking Action, Chapter 2, p. 3.
2. “Rio Declaration on Environment and Development,” Principle 16, The U.N. Environment Programme, found at www.unep.org/documents/default.asp?DocumentID=78&ArticleID=1163.
3. “Draft International Covenant on Environment and Development,” Article 11.6, World Conservation Union, found at www.iucn.org/themes/law/the_draft_covenant.html.
4. For the distinction between market-based environmentalism and free-market environmentalism, see Roy Cordato, “Market Based Environmentalism and the Free Market: They’re Not the Same” The Independent Review, Winter 1997.
5. David Pearce and R. Kerry Turner, “Packaging Waste and the Polluter Pays Principle: A Taxation Solution,” Journal of Environmental Management and Planning, Vol. 35, No. 1, 1992, p.

But no matter how well markets work, and how extensively they are operating, we remain in a world of scarcity, with people wanting more than they have and often seeing ways to acquire more by behaving in noncooperative ways–ways that create more losses for others than gains for themselves. There is almost always a tension between cooperative and noncooperative behavior, and this column examines that tension in the context of a simple model widely known as the prisoners’ dilemma. By looking at this dilemma we can understand the interaction between politics and economics and the tendency for government action to encroach on market action even though the result is destructive of wealth and, more important, liberty.

To Confess or Not to Confess

The problem I am about to illustrate is very general, but it takes its name from an example involving two prisoners known to have committed a serious crime but who can be convicted only of a relatively minor crime without a confession from at least one of them. The prisoners are separated and each told the same thing: “If you confess to the serious crime, you will receive a sentence of ten years if your accomplice also confesses, but only two years if he doesn’t. But if you refuse to confess to the serious crime you will receive a sentence of 15 years if your accomplice does confess and three years (for the minor crime) if he also refuses.”

The possibilities the prisoners face are shown in the nearby payoff matrix, where the first number in each cell is the sentence Prisoner A receives and the second number the sentence Prisoner B receives. As easily seen, the collective interest of both prisoners is best served when neither confesses, in which case they will serve a total of only 6 years. The worst thing for their collective interest is for both to confess, since this results in their serving a total of 20 years. Yet no matter what each thinks his accomplice will do, the best thing for him to do is confess. For example, if A thinks B is not going to confess, then if he doesn’t confess he gets 3 years, but only 2 years if he does confess. Or if A thinks B is going to confess, then if he doesn’t confess he gets 15 years, but only 10 years if he does confess. And the same situation faces B. So from the perspective of each, the best thing to do is confess even though this leads to the worst outcome from the perspective of both. The action that is individually rational is collectively irrational.

The prisoners’ dilemma is an example of the tension between cooperation and noncooperation that is unavoidable. For example, pollution problems are prisoners’ dilemmas. We would all be better off if everyone cooperated by polluting less. But for each of us it makes more sense not to do so. Regardless of what others do, it doesn’t pay me to reduce my pollution, since the benefit will go primarily to countless others, while I incur all the cost and inconvenience. The reader is encouraged to construct a payoff matrix like the one above showing the payoffs to two individuals from the four different pollution-reduction possibilities (with a higher number representing a higher payoff rather than a longer sentence).* The point of pollution policy is to change the payoffs to eliminate the prisoners’ dilemma by making it pay for each individual to reduce pollution no matter what others do. Creating markets in pollution permits does exactly this, which is not surprising since markets excel at promoting cooperation by eliminating prisoners’ dilemmas.

Consider how eliminating markets destroys cooperation by putting everyone in a huge prisoners’ dilemma. Marxist ideology claimed to substitute the rule “From each according to his ability, to each according to his need” for the “exploitation” of the market. Forgetting that without markets we cannot determine what people’s abilities and needs are, such a rule can be implemented only with brutal force, because without force the rule creates a prisoners’ dilemma: having lots of needs and no ability is the only sensible choice for each person. Whether each person thinks that others will produce to the best of their ability or live off the efforts of others, the rational action is the latter. But obviously this leads to a situation that is collectively irrational, with few abilities being used and few needs being satisfied.

But surely not everyone will shirk since many, probably most, of us want to do our part by being a productive member of society. True, at least initially. But even if only a few people exploit the prisoners’ dilemma initially, soon others will see that they are being treated as suckers by the shirkers. As the number of shirkers increases, it becomes increasingly obvious that cooperation is for suckers, and the productive process unravels. Without markets to eliminate this prisoners’ dilemma by rewarding cooperation, only government force can prevent a breakdown in productivity. But while government can force people to work, it cannot provide either the information or motivation people need to work in their most productive activities and to do so with the creative zeal and cooperative attitude that is characteristic of market activity.

A destructive prisoners’ dilemma is eliminated by the information and motivation provided by markets. But the prisoners’ dilemma comes in many forms and, as a practical matter, markets do not eliminate them all. Because of this, the prisoners’ dilemma is commonly used to justify government and the coercive power it exercises. I will discuss this justification next month.