The public health costs imposed by boilers are classic “externalities” — costs of production that aren’t paid by producers, but rather “externalized” onto the general public.
The economics of externalities
The economist’s ideal market is characterized by perfect information, prices that reflect full costs, and low barriers to entry and exit. Anything that causes a market to fall short of that ideal is known as a “market failure.”
Externalities are paradigmatic market failures: costs that are hidden, not reflected in prices. When some costs are obscured, consumers are not able to make rational decisions about how to balance costs against benefits. The market thus produces suboptimal results.
When externalities are priced, those hidden costs are pulled into the light. Consumers get full information and can make informed decisions. Markets work better.
The weak claim for advocates of pricing externalities is that no new costs are being imposed on the economy; costs are simply being shifted from the public to the private actors that created them. The weak claim, in other words, is that there is no net macroeconomic loss from pricing externalities.
The stronger claim is that when prices more accurately reflect costs, the market is “more perfect.” Pricing externalities, according to the strong claim, should generate a net increase in macroeconomic productivity — higher GDP, more jobs.
The political economics of externalities
Pricing externalities shifts costs from being dispersed and hidden to being concentrated and transparent. This is smart economics, but turns out to be incredibly difficult politics.
Consider: Restricting toxic pollutants the way EPA envisions will, according to air pollution administrator Gina McCarthy, “avoid between 2,600 and 6,600 premature deaths, 4,100 heart attacks and 42,000 asthma attacks, each year beginning in 2004 and every year that follows.” That will save American families between $23 billion and $56 billion in health costs. However, EPA will never be able to point to an individual family and say, “Hey, look, you didn’t get asthma because of our rule!” Those who benefit from the boiler rules almost certainly won’t be aware that they are benefiting.
By contrast, the private companies who face higher costs will be intensely aware of it and will consequently scream bloody murder. They will funnel money to politicians; they will pay for protests and petitions; they will fund bogus studies showing that the economy will collapse if they have to pay their own costs.
It’s a classic political economy dilemma: Losers cry louder than winners cheer. The brute political fact is that any business or industry that has succeeded in externalizing costs is massively incentivized to keep them externalized. There is no comparable intensity on the side of those who would benefit from the shift. In politics, intensity wins. In terms of political economy, the battle is intrinsically weighted against the public interest.
– from grist.org