It’s the Externalities, Stupid.

Last week, the Lancet Commission on pollution and public health (free registration required) released a study on the annual costs of pollution.  There’s bound to be argument about the specifics, but it’s difficult to argue with the conclusion that those costs are really, really, big.  The study estimates the annual global welfare loss due to pollution at $4 trillion – $6 trillion.  The Lancet says that this is more than 6% of global economic output.  It’s important to note that The Lancet treats “pollution” differently from climate change, so this study does not include losses related to climate change.

It’s also important to note the range of impacts – and some of the progress we’ve made in the developing world.  The study points out that the elimination of lead from gasoline has increased the IQ of American children born since 1980 by 2-5 points.  The economic gain just from this intelligence increase is estimated to be in the trillions of dollars since 1980.

One final point of emphasis:  while others may disagree, The Lancet very firmly takes the position that countries don’t have to get rich before they can address pollution issues.

To me, whether the study’s conclusions are right or not, its approach certainly is.  And it highlights one of the many weirdnesses of the current US administration.  An administration that should care about economics has simply ignored one of economics’ fundamental principles, that negative externalities create social welfare losses.  That’s why, for example, the Administration’s 2-for-1 Executive Order is so wrongheaded.  It pretends that externalities don’t exist and that regulations don’t have any benefits.

We can argue over the amount of benefit and make cases against regulations that cannot survive a rigorous cost-benefit analysis.  We can argue that even regulations whose benefits exceed their costs should also be subject to cost-effectiveness analysis.

But let’s not pretend that externalities don’t exist.  Social welfare losses from pollution may not be $6 trillion annually, but they’re pretty (expletive deleted) substantial.

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