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Thursday, November 10, 2005

ANWR Drilling- A Compromise

Last week in Economic Freedom we discussed drilling in Alaska. I was quite interested when I found this article today. One thing I question is why this is such a party divided issue. What motivation is there for the Democrats to oppose drilling in Alaska, and what motivation is there for many Republicans to back it? Why do only some Republicans back it and not all?

It seems to me that the motivation comes from the incentive for re-election. Many environmentalists are Democrats, or at least vote for Democrats. The incentive for all parties involved, whether Democrat or Republican, is to make the greatest number of people happy with their decision. Since this is the case, what would the majority of people in the U.S. want? There are two sides to the argument. One is that oil drilling would cause harm to the environment so it should not be allowed. The other is that we need to be less dependent on outside sources of oil and that the drilling could help reduce the price of oil. Is there a way in which both sides of the argument could be satisfied?

I think there is a way that both camps can be content; it is based on economic efficiency.

For the sake of the argument, assume that drilling creates a negative externality. I think that a negative externality could be argued for, since there would be at least some environmental damage if there was going to be drilling in an otherwise untouched area, and that would seem to me to qualify as a negative externality. The best way to correct a negative externality would be a tax. Perhaps, in order to allow drilling we should charge a tax. The tax could either be on the driller in the form of a lump sum, or it could be in then form of an excise tax, that does not matter too terribly much. What matters is that people would experience the full cost of oil drilled in Alaska. I think that, with a good explanation to accompany the idea, both camps could agree on drilling in Alaska if this plan was proposed. After all, environmentalists want to help the environment and preserve it, and tax money could go toward that. I think that the Republicans are most interested in reducing the price of oil and being less dependent on other countries for our supply of oil. As far as I can tell this solution could satisfy most people.

It seems to me that this solution could also improve the chances of passing the budget. There are some cuts proposed, and an increase in revenue would have a similar effect, logically. Again, I think this would make both parties somewhat more inclined to pass the bill since it would create more money for them to spend, while at the same time keeping the people that want budget cuts happy.

I think your analysis is pretty insightful.

I wonder if you have thought a bit about the following observations. An externality is a market failure. ANWR is a "parcel" of land which is privately owned by the government. The ANWR drilling policy debate is not about market allocation, but rather, about how government is going to use this specific parcel of land it owns.

Now the Coase Proposition suggests that ownership can "internalize" an externality. I gave an example in class about a chemical production facility that was adjacent to a dairy production facility. The chemical production facility was polluting the air, with the result that the output of dairy production was decreased. The diary producer sued for damages caused. The resolution was the chemical company bought the dairy. This internalized the external cost because one decision maker now saw the air pollution damage to dairy production. The result was efficiency chemical-dairy production.

So, if this Coase Proposition works for the realm of market choices, would it work for choices when government owns the land? After all, when government owns ANWR it is said that we all share in that ownership, and the "external cost" you point to involves some subset of all of the people who share ownership. My suggestion is that while government is the sole owner of ANWR, it generally cannot be expected to make the policy choices that internalize all costs. What is the difference between situations?
It seems to me that the incentives are what make the difference. I think that government incentives are very different than the incentives for pretty much everything else; there is no incentive for the government to change anything.
I could be way off there...but that is my initial opinion.
Yes, the Democrats should be thrilled to support anything that involves a new tax. Most Dems seem the sort who whould shoot their own mothers for a chance to raise taxes. This is to say, while they claim to champion the environment, most would jump at the chance to bring more money under their control, no matter what the cost.
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