Is a consumer choice necessarily the best choice?
Jim Manzi, climate change voice of non-denialist conservatives, writes:
But consider this at a common-sense level: you are forcing people, through rationing, to use something like 80% less of a substance that they choose to use because they believe that it creates net economic utility (prior to externalities) as compared to any available alternative. There is a respectable (though as I’ve argued in many articles, incorrect) argument that the negative externalities outweigh all those private benefits, but it’s crazy to assert that the private benefits are zero, which is what Klein and Roberts are saying. Call it economic denialism.
You are left arguing this idea of “raised consciousness”: if only these fat, lazy, Whopper-eating, SUV-driving proles could be forced to ride bikes to work, eat different foods and take trains on vacation, then they would realize that they are better off. They’re just too stupid to know it.
When you go out and buy a steak, you’re weighing the private benefits of that purchase (deliciousness, some level of nourishment) with the private costs (bad health effects, plus the opportunity costs associated with the money and fullness involved). Rightly or wrongly, millions of people (including myself) conclude every day that the purchase of a piece of red meat involves net benefits.
But there are also social costs, like the pollution and carbon emissions associated with the production of a steak and its delivery to your dinner plate. At present, we don’t pay for those costs. A cap-and-trade plan would create a market, and therefore a price, for carbon. As such, the cost of a steak would come to include its carbon footprint. Steaks would become more expensive and steak consumption would decline. Jim Manzi is saying that the reduction in social costs from this shift would not outweigh the reduction in private benefits, and he’s further saying that Ezra and Dave are wrong to suggest that the shift in net private benefits would be close to zero.
But is this correct? Carbon pricing doesn’t just reduce social costs and private benefits-it also reduces private costs. Now there are a couple of ways to think about the trade-offs involved with pricing carbon. One is that in lots of ways, people aren’t actually all that good at properly weighing costs and benefits for lots of consumption decisions-that they underestimate the private costs of heavy beef consumption or overestimate the extent to which they enjoy driving. I think there’s a pretty good case to be made that this is frequently true. So when models assume that people are behaving rationally when in fact they aren’t (or aren’t given the information available to them), they overestimate the costs of carbon pricing. This isn’t saying that people are stupid or that they would be happier living the way we want them to, it’s simply a recognition of the indisputable fact that there are ways that people systematically make bad decisions, and that a failure to account for that makes pricing look worse than it should.
Or, it could be the case that people are behaving rationally given everyone else’s decisions. For instance, someone out there buying a car might be personally indifferent between an SUV and a smaller, more efficient car, but they might then opt for the SUV because so many others have done so, under the perception that driving a small car among giants might compromise safety. In this case, a small car equilibrium might be as good to drivers as a big car equilibrium, but unattainable given the barriers to collective action. A universal shift in relative prices, however, would have the effect of coordinating a shift to the smaller equilibrium. In such a case, the change in net private benefits could easily be zero while social costs were simultaneously reduced. And once again, this involves no consumer stupidity or liberal snobbery.
The other thing about these trade-offs is that we don’t have much of a sense of whether the net benefits of something like meat consumption, relative to alternatives, are enormous or small. But just because someone prefers something, doesn’t mean they vastly prefer it. A diner at a restaurant might be nearly indifferent between the filet and the tuna, all private costs (as judged by the consumer) considered. If you then shift relative prices to take into account carbon emissions, that diner might shift his decision. But that doesn’t mean that all the private benefits of his meal are erased. It’s quite possible that the loss of net benefits resulting from the shift is essentially zero (how many times have you sat in front of a menu, for all intents and purposes indifferent between two choices?).
We don’t have a good idea whether carbon-intense activities are vastly preferred to alternatives or slightly preferred. The behavioral changes we’ve seen as a result of high petroleum prices (and the surprising economic resilience in the face of these changes) suggests that it’s maybe not as hard or as costly as we thought it might be to shift to substitutes. And we shouldn’t forget that given a certain and permanent change in relative prices, substitutes will rapidly become better and cheaper, as the market works to optimize given its new constraints.
So what Ezra and Dave are saying is not at all crazy, and Jim Manzi’s position relies on a ludicrously narrow view of economic decision making. Perhaps this is why so many economists — of all intellectual proclivities — agree that carbon pricing is the most promising policy option available where climate change is concerned.