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Thursday, March 01, 2012

Mercury Regulations

I read an article in The Economist concerning Obama’s recent enforcement of the reduction of mercury emissions by power plants. The majority of the article focuses on Obama’s justifications for the regulations, which have little sound economic theory backing them. Although the article attempts to explain the holes in Obama’s reasoning, it lacks economic terminology and analysis, which are some of the components I intend to contribute. I will also point out uses of government force that I feel are inappropriate and unjustified.

To begin with, the article points out that the health benefits associated with the reduction in mercury are instead almost entirely attributed to the reduction in fine particles. This makes perfect sense considering that only trace amounts of mercury are emitted from the burning of coal. It seems entirely possible that Obama (and the EPA) used the “mercury reduction” method as a scare tactic, because of the well-known effects the element has on human health. This seems a pretty poor use of government force.

The primary focus of the article is the seemingly overstated benefits associated with the regulations and where the inflated amount comes from. Essentially, positive externalities are included in the benefit analysis, which would not be a problem if it weren’t for the fact that a full two-thirds of the benefits associated with the regulatory decrease in mercury emissions are attributed to the positive externalities of reducing the emission of fine particles. If such a high amount of the benefits are from reducing fine particles emissions, why not design the regulation directly around that aspect? Again, it seems to be a tactic centered on the fears associated with mercury.

The best example of violating economic principles and exerting unjustifiable government force is Obama’s argument for the mercury regulation, because of the private benefits associated with it. Given that government regulation is only justifiable in the event of a market failure, which only occurs with externalities, the use of public goods, and monopoly market power, using private sector benefits as an excuse for regulation is another example of a poor use of government force. Private costs and benefits would be captured in a market, and therefore, do not require government intervention.

Obama argues that the regulations will bring private benefits in the form of reduced spending on fuel and electricity. Several things are wrong with this argument, the first of which is the fact that consumers bring about equilibrium within the market by demonstrating their own marginal private benefits and marginal private costs through the consumer choices they make. By forcing additional benefits into a market, equilibrium would be distorted.

Another hole in Obama’s argument claiming that consumers will spend less money on fuel and electricity, is that it is more likely that the average consumer will spend the same amount as they previous did, yet because of the rise in prices, will be forced to consume less OR will spend more money than they previously had to in able to consume the same amount.

Obama also tries to defend his position of using government force to essentially create the equilibrium point of marginal private benefit and marginal private cost by using some aspects of behavioral economics, namely the concept of irrationality in consumer choices. Still, irrationality is not a source of market failure, as all consumption choices, whether rational or irrational, still represent consumer preferences. Trying to make choices for consumers by basically telling them that they are too stupid to choose for themselves is yet another example of the improper use of government force.

 *I have researched several documents looking for information regarding how the regulations will be implemented and have for some reason not been able to find what I’m looking for. With that in mind, even though there are many aspects of the mercury regulations that do not add up to sound economic practices, the best way to correct the existence of the targeted externality(s) would be by using a corrective tax.

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