ECONOMIC

produced with higher-cost energy sources, and those which primarily burdenresidential consumers who are unable to obtain gas supplies at any price.REGULATIONS THAT DIRECTLY AFFECT COSTA free-market economy cannot allocate resources efficiently unless pricesreflect all of the costs of producing and consuming each good and service,and unless buyers and sellers have adequate information on which to basetheir market decisions. If the external costs that spill over to outsiders areignored, the price of a good or service will be too low and consumers willbuy too much. The output that is purchased will entail a greater social costof production than the benefits that its consumers will derive. The effectwould be similar to a direct subsidy of certain economic activities: economicdecisions would be distorted toward the production and consumption of thesubsidized product. In addition, if producers or consumers have inadequateinformation, market decisions will not necessarily reflect relative costs. Themore prominent cases of Government efforts to correct for spillover costsand inadequate market information in recent years concern health, safety,and the environment.Unfortunately, in many instances it is extraordinarily difficult to estimatethe external cost of private decisions or the public benefits which would stemfrom policies to alter those decisions. Errors in estimating either the benefitsor the costs can result in programs which are socially more costly than theexternalities they are attempting to correct. The inadequacy of informationfrequently means that these decisions must be made in the presence ofconsiderable uncertainty.Several problems hinder the development of efficient regulations that willcorrect for external costs and inadequate information. The appropriate degreeof pollution removal or reduction of risks to health and safety must bedetermined. Eliminating absolutely all pollution or risk to health and safetywould be so expensive that it would preclude other national goals. By analogy,in their private lives individuals rarely try to lessen the risk of incurringinjury or contracting disease to the technologically feasible minimum. Peoplerecognize that the incremental benefits of health and safety are limited andmust be balanced against having more resources available to satisfy otherneeds. In those instances where the private sector is unable to generate asocially efficient amount of information, there is scope for Government researchand dissemination of data. Finally, whatever is chosen as the targetof environmental cleanup or health and safety improvement should beachieved at the minimum sacrifice of other goods and services.Electric PowerRegulations have been imposed on the generation of electric power in aneffort to internalize the spillover costs associated with air and water pollution.Although it is difficult to measure the benefits, these goals have clearlybeen expensive to achieve. Investments to meet air and water standards areestimated to add about 10 percent to the total capital expenditures in electric-153