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that socially borne costs should be internalized by making them private costs of the polluter (or generator of solid wastes). There are many ways to internalize costs, at least partially. A standard which bans a pesticide brings social costs in line with private costs by eliminating the social costs. A standard which allows some pollution, or socially borne costs, internalizes the costs to the extent that it induces expenditures for control equipment and abatement activity, but the costs of pollution allowable under the standard are not internalized. An effluent fee internalizes abatement costs, by inducing expenditures for control equipment and also the residual pollution by charging for each unit of emission. In a fee system the fee is specified and the environmental quality is somewhat uncertain. Auction of a set number of pollution permits guarantees that a specified standard of quality be achieved and the uncertainty be transferred to the amount of the unit fee (the auction clearing price). A standard system can be mixed with a fee system for first setting a target of quality and then charging a fee according to the size of the gap between the target and the polluter's emissions; this mixed system is comparable to a penalty clause in a building contract which sets a fee according to how many days the contractor is behind schedule. As long as costs are not in some way internalized, thet polluter's profits will be too high and his prices too low so that the wrong signals will be given in the market. Without full internalization of costs there will be too much pollution and too much of the pollution related product.
The efficiency criterion places no value on recycling itself. Instead it directs us to look for inefficiencies in the price system which have led to too much solid waste generation, too much extraction of primary resources, and too little recycling. The most obvious inefficiency is the failure of a product price to include its cost of disposal. Failure to pay the disposal cost is the solid waste counterpart of the failure, by many firms, to pay for air and water pollution. That is, the Polluter Pay Principle extends to the costs of solid waste as well as air- and waterborne wastes.
A second inefficiency is in the tax system. If one sector of the economy is more lightly taxed than the rest of the economy, resources will tend to flow into that sector. The tax advantage will be translated into initially higher profits, then lower prices and additional product sold. While any tax system will distort the allocation of resources somewhat from a pre-tax situation, the efficiency criterion says that the distortion should be minimal, that the tax system should be as neutral as possible. It is hard to promote neutrality, but it is easy to insure non-neutrality. The simplest way to insure non-neutrality is to lightly tax one sector of the economy and heavily tax another sector. For forty years economists have argued that the extractive sector is lightly taxed relative to other sectors, leading to too much extraction, too much material and energy throughput, too much solid waste, and not enough recycling. It is gradually becoming anparent that previous non-neutrality of the tax system has been a principal cause of the solid waste problem.
A third inefficiency is in the prices for transportation. For secondary commodities transportation is a large fraction, sometimes 50 percent, of the value added at a point where it competes with its primary material counterpart. Transportation is also a large component of
the primary material price. There is some evidence that the rates depart from cost, with secondary materials paying significantly more relative to cost than primary materials. This inefficiency means too little recycling
THE CONSERVATION CRITERION
How much should we conserve non-renewable resources for future use? It is commonly thought that markets are too shortsighted to provide adequately for the future. Several theoretical economists, on the other hand, have argued that market forces make sufficient provision for the future. Basically the idea is as follows: mineral rights and other claims to non-renewable resources are held in private hands. A resource holder, knowing that future scarcity will force his resource price up, will reserve some of his supply in order to take advantage of future higher prices. The more anticipated scarcity the more resource reservation. Thus the selfish, immediate motive of "maximizing the present value of your profit stream" conserves resources for future
However, each of the three inefficiencies mentioned in the previous section-non-inclusion of disposal costs, freight rates, and non-neutrality of the tax system—tends to speed up the rate of extraction as well as add to the volume of solid waste. And there are other market forces which also increase the rate of extraction:
1. Private discounting. Resource reservation depends upon comparing future potential profits with present profits by means of a discount rate. A forest management program which will bear fruit forty years from now may be rational from the point of view of the market discount rate but irrational from the point of view of the manager who makes the decision. The manager knows that he is likely to be judged in just a few years and wants tangible results. From the point of view of the firm the discount rate is the rate at which the firm can borrow or lend money; from the point of view of the decision maker the effective discount rate may be much higher, from 20 to 25 percent. Discounting at such high rates means little long range planning and little, if any, resource reservation.3
2. Many resources are extracted in foreign countries. It is not worthwhile to a private firm to practice resource reservation if the reserved resource is likely to be nationalized or to be taxed at a higher rate in the future. In this case, there is a strong motivation to get in and be ready to get out quickly. Insecure ownership is not conducive to longrun planning or resource reservation.
3. Acquisition of mineral claims, at least in the United States, is treated on a common property basis. By the 1872 Mining Law, a rule of capture prevails for new discoveries. Just as in the case of ocean fishing the rule of capture for mineral claims leads to overuse of the resource base.* Exploration is made on a preemptive basis in order to prevent a competitor from getting a claim first. The over-incentive to explore leads to extra discoveries relative to a more neutral ownership policy. The extra discoveries translate into new mining and less conservation from the long run point of view.
: Marris, Robin, The Economic Theory of “Managerial” Capitalism, New York Free Press of Glencoe, 1964.
* This point is discussed in the unpublished Ph. D. dissertation by Peterson, Frederick, The Theory of Exhaustible Natural Resources: A Classical Variational Approach, Princeton, 1972.
In short, resource reservation is just one among several market forces influencing the rate of extraction. Speculation on future price increases, which is the driving force behind resource reservation, does not guarantee that the future will not be impoverished by the present's preemption of non-renewable resources. In order that people do not become gradually impoverished as non-renewable resources are eventually depleted, technology must grow in an offsetting manner. In Biblical times copper was mined in a 20 percent ore. Over the centuries the best ores have been depleted until the present, when copper is commonly mined as a one-half percent ore. În spite of its depletion the price of copper has remained fairly constant because of offsetting improvements in the extraction of lower grade ores. As well as lowering the cost of extraction, technology can offset the rising costs of depleted materials by creating new substitute materials. The amount and type of technology required to offset depletion depends in part on population. With larger populations there are diminishing returns to environmental services, and an increased reliance on non-renewable resources in place of renewable ones. With greater population there tends to be a greater reliance on technological "fixes.”
There is a tendency for the invisible hand of the market to stimulate technology in those areas where future scarcity is foreseen. But there is no guarantee that market-stimulated research will completely offset rising costs due to depletion or that the technology will be created with sufficient lead time to avoid "supply crises." A case in point is the energy situation. As oil and gas companies anticipate their resources will begin to “run out” 25 to 50 years from now, they and other companies begin research on shale oil, nuclear energy, geothermal and solar energy. As energy companies anticipate future scarcity, present prices begin to rise and the growth in demand will be diminished. But even with the private technology induced by anticipated higher future prices and the slackened demand there is no guarantee that alternative sources of energy will come on line in time. In fact the federal government is betting, in effect, that the market will not produce substitute technology with sufficient lead time. Otherwise there would be no need to spend billions in government financed programs to develop energy alternatives.
The conservation problem is like other macro-economic problems such as unemployment and inflation. There is no guarantee that the equilibrium brought about by market forces will be characterized by a socially desirable level of employment or price stability. If resource depletion threatens to outstrip cost-saving technological advances, it may be appropriate to slow down the rate of extraction and at the same time increase the usefulness of material already in the economic sector. A severance tax, which works toward both goals, is a conservation counterpart to open market operations by the Federal Reserve which serves as an economic policy tool to balance inflation against interest rates.
How much conservation and technological substitution should be encouraged? There is surprisingly little discussion on this question. There is no deducible answer. It is a question of public policy, just as is the question : what is the socially desirable tradeoff between inflation and unemployment? An attractive goal is to encourage enough resource conservation and technological growth so that the
cost of basic raw materials remains constant. Under this criterion the present does not borrow from the future by depleting future resources. The present pays for its resources by not increasing the real cost of basic resource materials. It should be noted that there is an index number problem with this criterion. Some material costs go up, some down; some old materials become obsolete as new materials replace them. In other words, there is the same difficulty in defining this conservation criterion as in defining a 2 percent inflation rate-some prices go up more than 2 percent, some less, while there are new goods and changing qualities. By maintaining constant costs of material production, on average, society achieves a form of inter-temporal selfsufficiency. Primitive economies which recycle nearly everything are inter-temporally self-sufficient because one generation replicates another. À modern economy, relying much more on non-renewable resources but following the conservation criterion, is a present-day counterpart of the primitive, recycle economy. As long as it follows the conservation criterion, it too can go on indefinitely, with technological substitution replacing non-renewable resources.
The primary impact of the conservation criterion appears to be on resource extraction (H, figure 1). Yet conservationist policies will affect all the flows, particularly waste flows A, B and C. Flow H, together with A, B and C, are the throughput flows. Together they flow from the environment. Clearly one way of decreasing solid waste burdens is to "reduce at the source,” H. Correspondingly, it appears that the primary impact of the efficiency criterion is on waste disposal in all its forms. Non-inclusion in price of waste disposal costs is the most obvious inefficiency. But policies to internalize costs will affect the rate of extraction as well. While policies toward efficiency and policies toward conservation move in the same direction, they are independent in the following sense: it is possible first to choose policies toward efficiency and then to choose conservation policies which do not upset the previously chosen efficiency policies. The reason is that conditions of economic efficiency are mainly ones of present interrelationships, while conservationist policies have to do with intertemporal transfers of wealth, which, by and large, are out of reach of efficiency considerations.
The relationship between the two criteria can be illustrated comparing the economic flows in figure 1 to flows of a homogeneous liquid. Prices act as valves: as the price of a particular flow increases, volume of flow decreases. The efficiency criterion says that the flows inside the economic sector; inside the dashed line, are in proper balance when prices are set equal to costs. For any given volume of flow entering the economic system (H) there is an efficient balance of flows in the economic sector. The conservation criterion says that the flows which cross the boundary between economic and environmental sectors (H and K going into the economic sector and A, B and C going out) should be modulated in such a way that the present does not impose undue burdens on the future. However the conservation criterion is interpreted, its interpretation helps determine policies which affect resource flows across the environment-economy boundary.
Because it is so hard to peer into the future a hundred years and more, the policy implications of the conservation criterion are much
less clear than those for the efficiency criterion. Potter and Christy 5 have tried to reconstruct price series for many basic materials over the past hundred years. Using their data, Morse and Barnett 6 tentatively concluded that real resource costs have fallen in the past hundred years, except for timber, which has risen. In other words, the data suggest that the conservation criterion has been more than satisfied in past years, in spite of incentives which diminish conservation, at least with respect to extraction costs. Of course the past century can hardly be taken as a guide to the next century. The enormous tracts of land that were opened up in the last century were quite literally a last frontier; and neither the path of technology nor the search for new resource bases such as the sea is bound by previous history.
One way of handling the immense uncertainty involved in the conservation criterion is to favor technologies which decrease the risk of imposing burdens on the future. The SST, for example, entails the possibility, perhaps small but not with certainty zero, of stripping ozone from the stratosphere. If the ozone layer were depleted the results could be catastrophic. As one of the prime reasons for the SST was to improve business communications, video-telephones are a substitute technology. Other costs and benefits being equal, the conservation criterion could be interpreted to favor the less risky videotelephones.
IMPEDIMENTS TO RECYCLING
PERCENTAGE DEPLETION ALLOWANCE Introduction
Although most of the discussion of the percentage depletion allowance (or deduction) has been limited to its effects on oil and gas, the allowance is an important subsidy for the extraction of nearly all minerals. The fact that most of the subsidy goes to the oil and gas industry is balanced by the enormous size of that industry. Relatively the subsidy of percentage depletion may be just as important to other extraetive industries as it is to oil and gas. The allowance extends to seashells and clay, at a 5% rate, and the allowance encourages the extraction of such toxic materials as mercury and cadmium at a rate of 22% which is also the present rate for oil and gas.
The purpose of this section is to consider the effects of the depletion allowance on recycling, resource recovery and conservation. In order to analyze the effects of the allowance, it is necessary to translate the subsidy into an equivalent price subsidy. Of all the subsidies given to resource extraction, this translation is most direct for percentage depletion. In the next section it is shown, at least to a first approximation, how the translation to an equivalent price subsidy is made. Effects on Recycling
When the percentage depletion allowance was first under legislative consideration, in 1926, one proposal was to base it on net income. Because net income is, in part, a return to capital, this proposal would have lightened the tax burden on mineral capital and capital equipment used in mineral extraction. But instead of net income, the depletion allowance came to be based on gross income. And instead of sub
6 Potter, N. and Christy. Trends in Natural Resource Commodities, Environmental Protection Agency, August 24, 1972.
Morse, C. and Barnett, Scarcity and Growth, Johns Hopkins Press, Baltimore, Md., 1963.