[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

in such developments. The end of logging would have presented
them with bleak prospects. There seemed to be a clear
trade-off: which was more important, the livelihood of the loggers
or the survival of the spotted owl? There was one way
out of this box: if the value of preserving the spotted owl
exceeded the economic damage to the loggers, those benefiting
from preservation could pay off the loggers. Alternatively,
the federal government might have used general tax revenues
to compensate the loggers. But at the time, the government’s
budget was severely constrained. A compromise was sought,
whereby enough area was kept closed to protect the spotted
owl’s habitat while enough was kept open for logging to protect
many of the jobs.
Critics of the Endangered Species Act pointed out the perverse
incentives created by the law. For example, if you had a
tree of the type that a spotted owl might nest in, you would
have an incentive to cut it down before the owl nested in it.
That way, your later desire to develop your land would not be
encumbered by a court injunction issued because the land
contained a habitat for an endangered species. Some worried
that these unintended consequences were so large that they
reversed the act’s intended effects.
Which is more important, the livelihood of loggers or the
survival of the spotted owl?
damage, since it often would not allow those technologies to be used, even if they
did a better job. 1
Moreover, politics inevitably intrudes into the setting of regulations, resulting
in higher than necessary costs. High-sulfur coal producers worried that the cost
of scrubbers would put them at a competitive disadvantage relative to low-sulfur
coal producers. (This is the correct market outcome from the viewpoint of economic
efficiency, because the social cost of high-sulfur coal—including its negative
environmental impacts—was greater than that of the low-sulfur coal.) So they succeeded
in getting Congress to mandate that users of low-sulfur coal also had to
have scrubbers, though for them such devices were unnecessary. In another example,
ethanol producers (dominated by a single firm, Archer Daniels Midland) persuaded
regulators to require a corn-based gasoline additive to reduce pollution
rather than an oil-based one—even though the latter is cheaper and may be better
environmentally.
Another reason economists are wary of regulations is that the costs they impose
are often hidden. As the costs of environmental regulation rise, it becomes clear
that better analysis when designing regulations is needed. Such analysis should look
1 On the other side, advocates argue that in some cases the tight regulations have “forced” the development of
new technologies to meet environmental standards that could not be met with existing technologies.
POLICY RESPONSES TO PROBLEMS IN THE ENVIRONMENT ∂ 411