Sunday, March 04, 2007

Economists go for the Green

Paul Krugman makes the case that most economists are in fact enthusiastic environmentalists contrary to the popular image.

Partly this is just because of who economists are: Being by definition well-educated and, for the most part, pretty well-off, they have the usual prejudices of their class--and most upper-middle-class Americans are sentimental about the environment, as long as protecting it does not impinge on their lifestyle. (I'm happy to reuse my grocery bags--but don't expect me to walk to the supermarket.) But my unscientific impression is that economists are on average more pro-environment than other people of similar incomes and backgrounds. Why? Because standard economic theory automatically predisposes those who believe in it to favor strong environmental protection.

True, economists generally believe that a system of free markets is a pretty efficient way to run an economy, as long as the prices are right--as long, in particular, as people pay the true social cost of their actions. Environmental issues, however, more or less by definition involve situations in which the price is wrong--in which the private costs of an activity fail to reflect its true social costs.

But I would be hard pressed to think of a single economist not actually employed by an anti-environmental lobbying operation who believes that the United States should protect the environment less, not more, than it currently does.
He then says that pollution taxes won't necessarily reduce GDP and if they do then most economists would still support them.
The Great Green Tax Shift--a shift away from taxes on employment and income toward taxes on pollution and other negative externalities--has everything going for it. It is supported by good science and good economics, as well as by good intentions.

"Gross domestic product is not a measure of the nation's economic well-being"--so declares the textbook as soon as it introduces the concept. If getting the price of the environment right means a rise in consumption of nonmarket goods like clean air and leisure time at the expense of marketed consumption, so be it.
While I agree with what he is stating, I still think that GDP is used as the proxy for economic well-being by most economists and media outlets. I have never seen an economic report or a newspaper article that stated while GDP went down this quarter it is actually a good thing as it was due to a rise in nomarket goods.

When comparing GDPs between countries, how often do you see an attempt to take these nonmarket goods into account? Most reports I see comparing the US and European economies just look at GDP and don't take into account greater leisure time or cleaner air. While I have seen some attempts, they are not what shows up in mainstream business reporting.

I think GDP and economic well-being are likely to grow farther apart as we become richer and the nonmarket goods become relatively less valuable. As such, I am on the look out for other measurements that take these nonmarket goods into account to better estimate well-being.

via Slate

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