Economics and Government

http://www.jhnewsandguide.com/article.php?art_id=7302

A conservation group listed the Hoback River as one of most endangered rivers in the United States, saying it faces the threat of pollution from a proposed gas field in the Noble Basin area of the Wyoming Range.  The proposed gas field sparked my interest to investigate any possible market failure; sources of market failure are everywhere.  The article was more intriguing to me because this river was recently listed on the endangered list and is near my hometown.

“Listing the Hoback this year was a no-brainer,” said American Rivers northern Rockies director Scott Bosse. “It’s one of the most pristine rivers in the country, and it faces an immense threat from oil and gas drilling.”  The marginal social benefit of drilling next to an endangered river leads me to question pareto optimality and individual ethic in order to see if we have efficiency or room for a pareto improvement. 

“I can’t think of another case in the United States where industrial-scale gas drilling has been proposed at the headwaters of a Wild and Scenic River,” Bosse said.  It looks like in this case the individual ethic controlled the marginal social benefit in order to outweigh our social cost; therefore there is inefficiency in this proposal that clearly developed into an externality.  In particular, officials at American Rivers worry about the impacts of a proposal by Plains Exploration and Production Company to drill 136 gas wells immediately south of the river. Runoff, a spill or contamination of the aquifer could channel pollution from the gas field directly into the Hoback River’s headwaters, Bosse said.  To identify our externality here we must understand the three elements of an externality.  First the action must be unintentional, non-market and be done interdependently.  There is no spill over, no market.  Just a transaction between you two and the third person can’t be related through the market.  We also remember that an externality is a positive or negative, no dollar value assigned to it.  The people such as the PXP (Drilling company) making the transactions cannot always see the external cost.

“We think there is clear and present danger to groundwater resources and surface water resources,” he said. “We think that the Forest Service hasn’t fully considered what a worst-case scenario would look like at the Hoback headwaters.”  Negative externalities happen when law/rule is poorly defined.  Keep in mind that property rights are assigned to people, so no one individually can claim the river to fight the drillers. 

Smitherman said the issue is bigger than the lower Hoback’s Wild and Scenic designation. 

“It’s more fundamental than that,” he said. “It’s an important fishery, and any type of pollution at all could be devastating to that ecosystem.”  Again, when the rules/laws are loosely defined we run into negative externalities.  Externalities are a source of market failure so; the negative externality of the drillers spilling oil right next to the pristine river cause there to be inefficiencies in the quantity supplied and demanded of water, fish and the ecosystem.  This is because the marginal social cost doesn’t equal the marginal social benefit.  Very important to remember that the market of oil cannot fully capture the whole marginal social cost.  That being said, just because there is always a cost to drilling next to rivers doesn’t mean it is necessarily a negative externality.  We must ask if there is an external cost, and there clearly is with the pollution of the water, and the impact on the ecosystem that would have a ripple effect through the small community of Hoback leading to the presence of a negative externality.  Let’s recall that externalities don’t correlate with government, it relates to the drillers and their voluntary choices that lead to inefficiencies and ultimately market failure for many markets in the community.

Even though I don’t want to group externalities and government together, there is the possible role for government (force) in this situation of the negative externality.  The government is known well for using its force; therefore they could place a corrective tax on the drilling company for pollution per unit.  Actually, it wouldn’t matter whether the government places the corrective tax on the buyer or the seller of the oil; the corrective tax can help to regulate drilling and manipulate the market to reach optimal pollution.  You may think I'm crazy for saying optimal pollution, but there is always an efficient amount of something and that is no different for river pollution.  That being said, we will never have zero pollution or complete pollution abatement.  If no drilling ever happened then we would still have some pollution; Furthermore the marginal cost to control oil pollution abatement from the water is the opportunity cost of using resource to controlling the pollution.  Therefore, we are polluting through trying to control pollution, kind of a never-ending circle; this leads me to support my thought that there has to be an efficient amount of pollution for the Hoback River.  What they need to ask is what everyone’s marginal social benefit, or willingness to pay in order to reduce the pollution for their river and ecosystem.  When the benefit of the oil equals the cost of the pollution then you could say you have an efficient amount of pollution.  In this case though, they do not equal and the opportunity cost is greater to the community of Hoback than the benefit from oil.  The key is how we value our goods and services won’t allow for the zero pollution like they are asking for.  Even though they are willing to give up oil, they aren’t willing to give up all the oil.

So what can they do to help alleviate the tension, the government can tax it.  I previously brought up the idea of a corrective tax, but the government won’t ever do that so they could propose a different type of tax.  First, they would need to calculate the marginal external cost, which is not easy.  In general economist do this because they don’t like standards.  They want to find what it is at the margin and no the average so they can be more cost efficient.  So what they should do is operate through least cost by implementing either an emissions tax or a pollution tax.  They could tax per unit of pollution until they have the tax greater than the marginal cost to control.  This would ideally lead to less pollution.  When you can get the tax to be equal to the marginal cost of control then both sides could be happy and efficient.  Another option for regulating pollution would be to sale permits.  Unfortunately, pollution permits are marketable and we must stay strict on our exchange rates to regulate hot sports.  Scott Winters, vice president of corporate planning and communications for Plains Exploration and Production Company, said in an email. “PXP has not been contacted by American Rivers to discuss our proposed project or to offer a buy out of the leases.  As the Coase theorem suggest, an individual (drillers) must be held accountable or liable for their pollution to help prove the cause and effect.  “PXP is sensitive to community concerns about protection of ground and surface water quality in the area surrounding the project,” Winters continued. “PXP has taken extra steps as part of the Wyoming Range Conservation Agreement to design as many protections as possible for water resources in the area. Among other things, PXP has agreed to relocate two pad locations to create an additional buffer between the Hoback River and some of the drilling operations.”  With the accountability of the drillers and the internalized cost through market exchange, we can see that markets can fix externalities.  If the government warrants its force to override decisions for drilling companies/ implementing taxes then the market itself can/does fix the negative externalities it causes.