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« Another Credit Market Regulation, With a Twist | Main | Apparently Environmentalists Have Different Definitions of "Credible" and "Authoritative" »


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Out of curiosity, who exactly counts as an "alarmist" and a "non-alarmist" in your book?

It seems to me there are "alarmists" on both side predicting apocalapyse one way or the other - if we do something and if we don't.

The "demand revealing" concern is also odd for me to read as someone who does see this, if not as a public good, then certainly as an externality. From my perspective, "demand revelation" is what a market solution (market in the sense of no-intervention, not market in the sense of a carbon tax) has to grapple with. Indeed, that's the crux of the externalities argument - that it is you that have to deal most with the "demand revelation" problem, precisely because there is no market in which "climate comfort" or "environmental quality" or whatever you want to call it is traded. I'm not saying the intervention side of the debate doesn't have a "demand revelation" problem. It certainly does - there's always going to be a question of how high a carbon tax should actually be, etc.. That is a real problem. But it seems to me the problem of demand revelation is more of a problem for the non-interventionist approach.

I echo all your points about the human imagination and the ability to respond to this. It's one of the reasons why I think we'll address this - it's just a question of how. I don't think the disagreement is over the ingenuity of people in responding to incentives that divides people on this question (at least economically minded people). What divides them is the question of where the incentives are in the first place and does the existence of negative externalities in this case prevent ingenious, inventive market actors from responding to the problem.

In other words, you're not really "granting the strongest arguments" if you assume away the demand revelation problem that motivates the desire for a Pigovian tax in the first place!


Thank you for your thoughtful reply and also for catching some gaps in my post. Of course, the market has to deal with demand revealing processes, and the argument that in the face of externalities and in the case of public goods the textbook explanation is that the market does not do that well. But that doesn't mean that the state has the ability to "guess" the appropriate demand revealing process that _should_ exist if there was indeed no issues. This is a point, though in a different language, that Coasean analysis raised against Pigouvian analysis. And also the Buchanan, and earlier Wicksell, when it comes to public goods. These criticisms are more fundamental to the enterprise than is often understood. Rothbard also raised important issues related to the conceptual coherence of these concepts that shouldn't be dismissed.

As for alarmist, listen to the show and especially listen to the host and to the one caller who claims our future will be so miserable that we will envy the dead. Somewhere between the silly positions of the next spray of an aerosol can will light up Florida, and that a few sprinkles of nuclear waste on your cereal will do you good, the truth is to be found. And I agree that your last point is the critical question for economically minded people.

I hadn't gotten a chance to listen to the show, but from what you quoted, the host certainly sounds like one! When you said "grant the strongest case of the climate alarmist" I just hope that doesn't take the externality argument itself to be inherently alarmist.

I'm glad my point was clear - I was worried it wasn't, and I think I have a clearer exposition of it on my blog.

I'm a firm believer that a lot of what gets presented as a difference in a basic understanding of the "knowledge problem" is in many cases a disagreement over these "incentive problems". I would argue that very few economists disagree on "knowledge problem" issues. Where they disagree more is on whether the incentives are available for people to act on. This is the crux of Hans Hoppe's critique of Hayek on the socialist calculation problem, where Hoppe essentially says that Mises was more on target than Hayek.

But of course, all the Coasian points still stand. I guess I've just never seen much of a conflict between Pigou and Coase. They're both right, the question is what concerns dominate in a given circumstance.

Great post!


I recommend Steve Medema's The Hesitant Hand (Princeton, 2009), which I think you will like a lot.

On the other hand, I would push the Coasean (and Buchanan) argument a bit more. I see Coase and Buchanan (Cost and Choice) as arguing that the Pigovian remedy as suffering either a problem of redundancy (if transaction costs are zero) or non-operationability (if transaction costs are positive). This is why, to use Buchanan's language, the emphasis on constitutional level of analysis versus ordinary politics.

The knowledge problem and the incentive problem are two-halves of a coin, and the calculation problem is not separate from this. Think about it this way, the incentive is to calculate costs and benefits of alternative courses of action; in order to calculate you need knowledge of the costs and benefits that you are supposed to weigh in your decision. Property rights are necessary to get prices, and prices are necessary for monetary calculation. So I am not sure I see the point you are making with respect to those issues. But I am one of the "interested" parties in this dispute I realize, but as one of those I do think I clarified those issues in my essay on Economic Calculation, and in my introduction to the 9 volume reference set on the calculation debate. I guess that is for others to determine than me since I of course will think that since I wrote those pieces.

I have Cost and Choice and it's been on my short list - I may open that up soon.

"Think about it this way, the incentive is to calculate costs and benefits of alternative courses of action; in order to calculate you need knowledge of the costs and benefits that you are supposed to weigh in your decision. Property rights are necessary to get prices, and prices are necessary for monetary calculation."

My point is precisely that even assuming that all knowledge problems are solveable, you still need those property rights to provide the incentive to act on calculations. In many cases, this leads me to the classic economist "well just have property rights" solution. In some cases, though, that simply doesn't seem like a feasible prospect. How do you parcel out the atmosphere? How do you assign property rights to global mean temperature? These costs (or benefits) are inherently collectively experienced, so any conception of a right to "global mean temperature" that might motivate functioning market calculation would have to be a collective right, which is fundamentally my argument anyway.

Could you explain why it would be non-operable if transaction costs are positive? Because (if I'm understanding you right) this seems to be the primary issue. Transaction costs are very high because it is very hard to assign, define, or enforce property rights to this sort of thing. It seems to me that that does require a constitutional solution of sorts where the required collective action is institutionally provided for. I've read some Buchanan on constitutional vs. political phases of decision making, but I'm not sure if this is exactly the same thing that he is talking about. That's how what I see as the impact of the inherent transaction costs here - but I'm a little fuzzy on how that leads to "inoperability".

My Pigovian sympathies aren't naive Pigovian sympathies - the whole point is to understand when markets can and cannot address allocation decisions. It would defeat the purpose of the Pigovian insight to, in the same breath, ignore the question of when other institutions like the state can and cannot address allocation decisions.


First, the Mises/Hayek point is that you CANNOT have the knowledge without the property rights. The knowledge doesn't exist because it is context dependent knowledge that matters, and that context is the context of market exchange ratios which presuppose property rights. In short, there is no assuming the knowledge problem is solved and yet there is still a calculation problem. This position which has been promulgated among certain thinkers is a very bad reading of Mises, who when he assumes perfect information he is explicit that he is assuming technological information, not ECONOMIC information. But in the Lange type models they assumed that once you have the one you had the other. Mises (and Hayek) are countering that claim. That is why it is particular bad error among some "Austrians" to have missed this point. A deep reading of Human Action might have prevented that error, as would a working knowledge of actually standard neoclassical price theory circa 1940.

As for the Coasean critique, again I think you need to rethink the position as developed in Coase's "Problem of Social Cost" paper and how he uses the concept of transaction costs. Medema is an excellent interpretative source on Coase, perhaps the best, unless of course you just listen to Coase himself, especially his The Firm, the Market and The Law book. Information costs are transaction costs. And when we take transaction costs seriously we are going to be talking about comparative institutional analysis as Coase clearly states in both the FTC and the Problem of Social Cost papers. And there is a behavioral symmetry requirement for methodological consistency. The Pigovian remedy of internalizing externalities through tax and subsidy schemes requires a level of knowledge on the part of the government actors, which is denied to the economic participants. And the government actors face their own context dependent incentives that must be recognized. In other words, you cannot assume positive transaction costs in markets and zero transaction costs in government and have an appropriate comparative institutional analysis.

This may be a bit of a sideshow, but do you have a position on VA Attorney General Ken Cuccinelli's suit against U.Va. to open up emails and other files of Michael Mann when he was there to pursue further on his own an effort to try and find some sort of smoking gun on all the climategate stuff, which has so far not been found? Clearly, there are a number of issues here. I, for one, think his suit is both an egregious attack on academic freedom and a serious waste of money.

I did not see the show, but aside from ongoing uncertainties about some of the underlying scientific issues, a very big problem in all this that does get to economics and politics is that it is probably the case that the underlying probability distributions include those nasty fat tails for various reasons, a point that Martin Weitzman has repeatedly emphasized. The hard fact is that we do not have a clear way of dealing with such things. How much should we spend or do to avoid the small chance of very bad outcomes? I do not have the answer, but it is certainly a serious issue.


That is an excellent point (the nasty fat tails) and for those who want to understand Tyler Cowen's unique brand of libertarianism I believe it is this point that drives him (except when it came to business cycles). But Tyler is always asking whether the fat tails demand deviation from libertarian principles in government policy. The question then becomes what are the most effective ways to pursue the policy response to the fat tails while retaining as much as is possible for a social of free and responsible individuals.

I am not sure he succeeds, but I think this is a better way to interpret Tyler's position than the "stealth" position that was recently discussed by Bryan Caplan, etc. Tyler is a libertarian who believes that the fat tails can be very nasty and therefore we have to take them seriously.

"In other words, you cannot assume positive transaction costs in markets and zero transaction costs in government and have an appropriate comparative institutional analysis."

Certainly not. I'm not assuming that. As I said, it's not that Coase's insights are wrong - they are right. I'm simply not sure they're definitive. We have reasons to doubt a market solution and a government solution - the question is which dominates in a given case. I fully accept the cautions and have mentioned them myself.

"The Pigovian remedy of internalizing externalities through tax and subsidy schemes requires a level of knowledge on the part of the government actors, which is denied to the economic participants."

I think you're presenting a fairly one dimensional version of the Coasian argument here, Peter. I'm not sure how to address this because I'm not assuming that government actors have any more or less information than economic participants. This may be better directed to someone else's position.


Yes, I know that is Tyler's position.

Any comment on Cuccinelli's lawsuit?


Your position was never the focus, it was the argument in general. I haven't read your position as presented in a paper or book. I apologize for that, but I thought we were having a general discussion. If, on the other hand, there is a specific paper where you discuss these things, then please do send it to me and we can discuss. You and I seem to be in agreement on the Coasean and public choice agnosticism point.

Don't apologize - in an exchange, "arguments in general" and each others argument inevitably get mixed up because the fact is all three get discussed. You offered something up as a critique to what you label a "Pigovian" point, and I just wanted to make it clear that to the extent that I have a Pigovian perspective (which I think I largely do), I recognize all that.

Alas - few papers to my name at this point. But I've read more Coase than I have Pigou, and I think ultimately all the positions I've read on these public choice perspectives are well articulated and insightful - the question is which concerns come to the front in a particular instance.


I actually think all lawsuits are counter-productive, but I am sure that is not what you are looking for. I don't know enough to comment on this case. But my general rule is that this sort of politically motivated lawsuit are the most counter-productive ones anyone can imagine. Get the government out of science would be my mantra, as you might expect.


Lawsuits initiated by politicians are frequently problematic, politically inspired. However there are some real problems with Mann's work and his refusal to release his data for several years. If I recall it took a 2006 senate directed investigation chaired by Professor Wegman (GMU) to force him to release the data. For more detailed information see: The lawsuit which may in fact be politically inspired is not without some justification or merit.

Agree fully that "trade-offs abound in every aspect of human life, and suspect this issue is no different".

From my preliminary analysis, the benefits of increased CO2 are most likely to strongly dominate its costs: More blog posts on the subject:

If it is ever proven beyond doubt that CO2 is a pollutant, then fairly quick remedies exist including geo-engineering. So one should not rush into 'precautionary principle' arguments which amount to irrational panic.

"Get the government out of science would be my mantra, as you might expect." says the guy that takes home a paycheck from the state every week.


Your link does not work.


Sure, carbon is the foundation of life. So is water. But too much of a good thing can be a bad thing.

Regarding Michael Mann, the original paper was serverely flawed and was criticized, although the original criticism was overdone. There remains an open debate about what was global temperature 1000 years ago, when, indeed it was quite warm in places like Greenland. But what was it elsewhere? Unclear.

What is unequivocally clear, and is the real source of the "hockey stick," is that we have seen a very rapid increase in world temperature recently. It was all very amusing to see certain politicians making snow houses on the Capitol lawn in winter time, but in fact average global temperature was setting new record highs at the same time they were doing that, even as the mid-Atlantic region was experiencing serious winter conditions. Now, of course, the mid-Atlantic region is feeling more in synch with the global averages, which, um, are continuing to set record highs.

Regarding geo-enginneering, I am with Tom Schelling on that one. It has all kinds of dangeous possible side effects. So, what happens if somebody throwing stuff into the air above the US triggers a failure of the Indian monsoon, Sanjeev? Geo-engineering should be viewed as a deep backstop in case we run into the upper side fat tail events.


Oh, and the lawsuit is utter garbage. Even if Mann somehow engaged in some sort of questionable academic conduct, the last person who should be sticking his nose into it is the AG of VA, a politician bashing gays and enagaging in plenty of other questionable nonsense. This is totatlly unacceptable.

Even the supposed basis of the suit is phoney. Cuccinelli claims to be investigating misuse of state funds. There were no state funds used during the period he is investigating, although federal funds were. No, this is just playing to a choir of people who just want so badly for there not to be global warming, and think that Mann, who is really not all that important in the grand scheme of things, despite the focus on him due to the hockey stick study and his link to the East Anglia climategate non-scandal, somehow is hiding "The Truth" that it is not for real, gosh darnit. Sorry folks, no such smoking gun exists, and Cuccinelli is just wasting time and money, as well as seriously violating academic freedom.

"a politician bashing gays"

Example? I assume you mean something more here than opposing gay marriage?


Oh yes indeedy. He sent around an opinion to all the state institutions of higher learning telling them that because protection of equal rights for gays is not in state law, they should not have such protections in their policies on their campuses (which, just about all of them do). The governor had not included gays in his opening statements about no discrimination in state policies when he came in, contrast with two predecessors, but Cuccinelli one-upped him to the point that major businesses in the state complained to the governor that this aggressively anti-gay policy would hurt business. Governor MacDonnell noted that federal law forbids discrimination in general, but did not completely offset Cuccinelli's move, which, along with this assinine suit over Mann against U.Va. seems like a more general assault on the colleges and universities in the state.


So he said to the universities, in effect, if you receive state money (ie, taxpayer money), you should follow the state's directives. Where have I heard that before?


Of course state universities and colleges are subject to rules and regulations passed by the state. This is true everywhere. The two things that are weird with Cuccinelli is that he is insisting that they cannot protect gays from employment discrimination because there is no state law that says they should be protected. But there is no law that says that they should not be protected. He is just off the wall on that one.

And regarding his efforts to dredge up Mann's emails (who has not been at U.Va. for some years), he did not get state funds specifically. This is just an assault on academic freedom that we have not seen anybody engage in anywhere in the US for a long time.

Pete, you are right to think Bryan totally misunderstood me.

The climate is a complex system, meaning one absolutely cannot predict what will happen with it. Those who say otherwise are either ignorant of the nature of the climate or liars. Do industries create CO2? Of course. Is CO2 a greenhouse gas, meaning the more there is in the atmosphere, the higher the temperature? Of course. Does this mean that there will then necessarily be long-term global warming? Maybe, maybe not. There are numberable feedback loops which affect the climate. Higher temperatures means more evaporation from the oceans, meaning more cloud cover, meaning more reflected heat and more precipitation, including snowfall. If snowfall increases, that can reflect back more heat, too. But suppose that doesn't happen, and the arctic melts enough to disrupt the Gulf stream, meaning the warm waters from the Gulf of Mexico no longer flow up to the arctic, meaning rapid cooling of the arctic, meaning massive snowfalls, and much more heat being reflected, thus cooling the earth. This is aside from solar fluctuations and volcanic eruptions that can also affect climate. So we cannot say what effect all of this will have, and we cannot say what effectmassively reducing CO2 will have (other than destroying the world economy and starving billions of people). Like I said, anyone who says they know what will happen to the climate over the long term is either ignroant or a liar.


1. I think that the scientific arguments for action are far stronger than you give them credit. Scientists generally agree that we are already significantly changing the climate and oceans, that our activities that affect climate are still scaling up and are essentially irreversible over a period of centuries, and that there are significant risks of profoundly affecting the ecosystems that support life on this planet, including our own. If we act, we can mitigate some of the risks (while geoengineering would create further risks).

Swiss Re takes on skeptics here:

2. Elinor Ostrom is one of those people who feels that it is time for us to act, including through national governments and internationally:

3. It is evident that the very differing interests of the state actors (on top of strong domestic rent-seeking) has made effective international agreement impossible over the past twenty years. Even as Ostrom pushes for local and polycentric actions, given the global nature of the problem, it seems clear that international negotiations are needed - for which private actors simply cannot step in for governments. In such circumstances, the negotiations between states are not discrete/separate Pigouvian solutions, but are themselves a form of Coasean bargaining:

3. There are lots of libertarian approaches to climate policy; I have summarized a number of them here:


It is a good story. But look!*

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