The Economics of Regional Public Bads Such as PM2.5 Imports from Canada
Adapting to Air Pollution Spikes in the Short Run and Medium Term
Back in 2002, I published a paper on the economics of regional public bads. You can download a free copy here. While the paper has very few cites, I do think that it offers some insights.
A regional public bad is a case of pollution such as air pollution or water pollution drifting across political boundaries such as state or international boundaries. In Asia, agricultural fires in Indonesia pollute Singapore’s air. China’s coal burning pollutes Korea’s air. In Europe, upriver pollution along the Danube pollutes the water for downstream neighbors.
Note that a regional public bad is a case where polluting activity imposes social costs on neighbors in the region but the not the globe as a whole. Canada’s fires are not really injuring people in Paris today.
What is to be done?
#1 As I re-read my 2002 Book Chapter, I see that I emphasize the importance of measurement. Back then it was more costly to continuously monitor air and water pollution levels. Today using cheaper and cheaper sensors and our cell phones, we can both record in real time the level of ambient pollution across areas and people who live in these areas can much easier have real time readings regarding their outdoor exposure to the pollution. This information revolution facilitates adaptation.
#2 The media isn’t really reporting what Canada’s officials are doing to put out the wildfires. In the short run, is the Biden Administration offering equipment and people power to put out the blaze? How effective are these inputs? What is the marginal cost for us to send more of such inputs?
#3 My book chapter presents an accounting framework for quantifying the total economic damage caused by a cross-boundary externality. If this $ is large, and if there is no international law to coerce the polluter to stop polluting, then the Coase Theorem teaches us the that the victims shouldn’t be passive victims here. We should be willing to pay Canada to take steps such as thinning out its forests and engaging in prescribed burns to reduce mega-fire risks.
#4 If more PM2.5 smoke will drift to the U.S cities in future years, then how do we adapt? We need real time alerts of these PM2.5 spikes similar to what cities do on very hot days. Shelters should be opened up for the poor. Public health workers can educate the public about the quality of life and and health impacts of PM2.5 exposure.
Such information will nudge people to buy air filters and use masks and take steps to be in cleaner places during the days when the air is as bad as India’s.
I claim that entrepreneurs will work harder on designing better air filters because of the short run damage that we are now suffering. This is the dynamic adaptation hypothesis. Over time, capitalists innovate to design products we want and need to cope with the challenges we face. This messy process leads to higher quality and cheaper self protecting strategies. As we adopt these, outdoor PM2.5 has less of an effect on our health and happiness. This is the adaptation hypothesis.
So many young economists simply assume that we already have our full menu of adaptation products. This is nuts and defies 40 years of research on on induced innovation. The pace of this innovation is not linear. It depends on the aggregate demand for such solutions. In this sense, expected misery caused by the future PM2.5 spikes creates an optimism about our future menu of adaptation strategies.
#5 Is Canada doing enough right now to mitigate its fires? Given that their people do not bear the full costs of their pollution, the answer is likely to be no. What can President Biden do to muscle his friend Justin to work harder for all of North America? When do nations overcome free-rider problems? This classic question becomes more important due to climate change.