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WANTED: A POLLUTION DAMAGE REVEALING MECHANISM
A critical failing of market economies is they provide no quantitative information
about how much damage pollution causes. As a result they provide no signals
about how high to set corrective Pigovian taxes.1 Consequently, in market
economies this gives rise to the necessity of trying to generate quantitative
estimates of the damage pollution causes through stop-gap measures like
contingent valuation surveys and hedonic regression studies which inspire less
confidence the more one knows about them.2 However, just because markets are
not likely to induce people to reveal truthfully how much they are damaged by
environmental degradation does not mean we cannot design a different economic
mechanism in a different economic system which could, at least in theory, generate
reasonably accurate quantitative estimates of the damage from pollution.
This article proposes a pollution damage revealing mechanism (PDRM) designed
to overcome, or at least ameliorate a number of perverse incentives, and argues that
when incorporated into the participatory planning procedure of a theoretical
economic model known as a “participatory economy” the PDRM would, in theory,
lead to efficient emission levels for different pollutants.
There is every reason to be skeptical of claims to have “solved” the problem of
achieving efficient levels of pollution even at the theoretical level. The Coase
theorem is commonly interpreted as implying that once property rights are
specified, in theory voluntary negotiations between polluters and pollution victims
can be relied on to yield efficient levels of pollution. However, Hahnel and Sheeran
2009 demonstrate that this interpretation of the Coase theorem, emphasized by free
market environmentalists but also found in mainstream economics textbooks, is
not warranted, but in fact a grievous misinterpretation even at the abstract
theoretical level. This article draws on lessons learned about perverse incentives
from a close examination of the Coase theorem to construct a PDRM that avoids or
ameliorates perverse incentives. When this PDRM is incorporated into the
participatory planning procedure of a participatory economy it is argued that at
1 A Pigovian tax is a tax equal to the magnitude of the sum total damage inflicted on all “external
parties” from the production and consumption of a unit of a good. If a Pigovian tax of the correct
magnitude were applied to every good, in theory a general equilibrium of a perfectly competitive
market economy would allocate resources and distribute goods efficiently.
2 There is a large literature about different kinds of “biases” that plague contingent valuation
surveys and hedonic regression studies. For a succinct evaluation of these problems see Hahnel
2011 pages 24-30.
1
least in theory the plan arrived at would achieve reasonably efficient levels of
emissions for different pollutants.3
Section 1 briefly reviews the defining features of a participatory economy, with an
emphasis on explaining how the participatory planning procedure works. Section 2
describes the PDRM and explains how estimates of damages and pollution levels
are determined by this mechanism during the participatory planning process.
Section 3 reviews why perverse incentives prevent voluntary negotiations,
including Coasian negotiations, from achieving efficient levels of pollution in
market economies, and explains how specific features of the PDRM overcome, or
at least ameliorate, important perverse incentives regarding emissions. Finally,
after summarizing the major findings, section 4 highlights an important implication
of the analysis: For efficient levels of pollution to be determined through
participatory procedures an egalitarian distribution of income seems to be
necessary.
1. A Participatory Economy 4
The model of a participatory economy was originally designed over twenty-five
years ago to promote economic justice, defined as economic reward commensurate
with effort and sacrifice, and economic democracy, defined as decision making
power in proportion to the degree one is affected by a decision, while achieving
economic efficiency, as traditionally defined by economists. The major institutions
used to achieve these goals are: (1) public ownership of all productive resources,
(2) democratic councils and federations of workers and consumers, (3)
remuneration according to effort as judged by one’s coworkers, (4) balancing
3 While a great deal can be said about how “efficient” should be defined, a traditional definition
of the efficient level of pollution as the level at which the marginal social cost of emission is
equal to the marginal social benefit from emission is sufficient for our purposes here.
4 This section is not intended as a comprehensive description, much less defense of the
theoretical alternative to capitalism known as a “participatory economy.” However, since the
PDRM functions in the context of the participatory planning procedure that is part of this
theoretical economic model, it is necessary to provide a brief overview for readers unfamiliar
with the model. For early expositions of the model see Albert and Hahnel 1991, 1992a, and
1992b. For defenses of the model against various criticisms see Albert and Hahnel 2002, Hahnel
2012a, 2014, and Hahnel and Wright 2015. For a fuller discussion of the planning procedure and
how it compares with other planning procedures see Hahnel 2006 and 2012. For discussion of a
possible transition from capitalism to participatory economics see part four of Hahnel 2005. For
the most up-to-date presentation of the model see Hahnel 2012, and for current discussion about
the vision see www.participatoryeconomics.info.
2
various tasks that comprise jobs for empowerment and desirability, and (5) a
participatory planning procedure in which councils and federations of workers and
consumers propose and revise their own activities until a feasible plan is reached.
Production is carried out by worker councils where each member has one vote,
where a committee attempts to balance jobs for empowerment and desirability, and
where workers’ efforts are rated by a committee of their peers which serve as the
basis for consumption rights. Every family belongs to a neighborhood consumer
council, each neighborhood council belongs to a federation of neighborhood
councils the size of a ward or rural county, each ward belongs to a city
consumption council, each city and county council belongs to a state council, and
each state council belongs to the national federation of consumer councils.
Different levels of consumer federations are responsible for requesting different
levels of public goods during the planning procedure.
The participants in the planning procedure are worker councils, consumer councils
and federations, and the Iteration Facilitation Board (IFB). Conceptually
participatory planning is quite simple: The IFB announces current estimates of the
opportunity costs of using all natural resources, produced capital goods, and all
categories of labor, and current estimates of the social costs of producing all goods
and services. Consumer councils and federations respond with their own
consumption requests. Workers councils respond with production proposals —
listing the outputs they would provide and the inputs they would use to make them.
The IFB then calculates the excess demand or supply for each resource, capital
good, category of labor, produced good and service, and adjusts the estimate of the
opportunity or social cost up or down in proportion to the percentage excess
demand or supply. Using these new estimates of opportunity and social costs,
worker councils, consumer councils, and federations revise and resubmit their
proposals until (a) the proposal from each council and federation has been
approved by the other councils and federations, and (b) there is no longer excess
demand for any resource, capital good, category of labor, or produced good or
service.
Essentially this procedure whittles overly optimistic, infeasible proposals down to
a feasible plan in two ways: Consumers requesting goods and services whose
social cost is greater than their effort ratings warrant are forced to reduce their
requests, or shift their requests to less socially costly items in order to win approval
from other consumer councils -- who otherwise will disapprove their requests as
too greedy and therefore unfair to other consumers. Just as the social burden
implied by a consumption proposal can be calculated by multiplying items
3
requested by the social costs of producing them, the social benefits of the outputs a
worker council proposes can be compared to the social costs of the inputs it
requests using the estimates of opportunity and social costs from the planning
procedure. Worker councils whose proposals have social benefit to social cost
ratios less than one are forced to increase either their efforts or efficiency to win
the approval of other worker councils – who otherwise will disapprove their
proposals as inefficient uses of productive resources that can be put to better use by
other worker councils. Moreover, since the average effort rating workers in a
council can award one another is higher when the social benefit to cost ratio for
their enterprise is higher, there is an incentive for worker councils to submit
requests with high social benefit to cost ratios even as they also strive to make their
working conditions as pleasant as possible. Under traditional assumptions it has
been proved (Albert and Hahnel 1991, chapter 5) that as iterations proceed,
requests to consume and proposals to produce different goods and services, and
requests to use and supplies of different natural resources, capital goods, and
categories of labor, will all move closer to mutual feasibility, that estimates will
more closely approximate true opportunity and social costs, and that the plan
reached will be a Pareto optimum.5
Participatory planning is different from most conceptions of comprehensive,
democratic, national economic planning. It is designed so as not to overburden the
main planning process with meetings, and particularly meetings without a clear
agenda and clear criteria for settling disagreements. There are no meetings of
representatives from all worker and consumer councils and federations where
attendees propose, debate, and eventually vote on what everyone will do. In other
words, participatory planning is not a “one-big-meeting of delegates” approach to
comprehensive, national, democratic planning. Nor is participatory planning a
referendum approach to democratic planning, where citizens vote for a plan from a
list of alternative national plans drawn up by experts based on whatever
information they can gather and whatever priorities they thought were important.
There are no government agencies which perform elaborate calculations required
by decision makers, and no bureaucracies which manage the planning process.
5 A team of researchers in the Systems Science Department at Portland State University has
simulated the planning procedure using mathematica and netlogo, and the Institute for Solidarity
Economics in Oxford England has recently funded a grant to expand the prototype to: (a)
increase the number of worker and consumer councils as well as the number of final,
intermediate, and capital goods and the number of different kinds of labor and inputs from
“nature” to approximate the size of real economies, (b) test different price adjustment algorithms
to reduce the number of iterations required to reach a feasible plan, and (c) relax various
“traditional” assumptions about convexities of production and utility functions to see at what
point convergence may be compromised.
4
Instead, the participatory planning procedure provides for meaningful deliberation
through a carefully structured, social, iterative process in which (1) estimates of
opportunity and social costs emerge organically from the planning process, (2)
workers and consumers discover how their choices affect one another, and (3)
workers and consumers have a great deal of control over their own economic
activities at the same time that they can protect themselves from socially
irresponsible behavior by others.
2. A Pollution Demand Revealing Mechanism (PDRM)
First, we must add pollutants to our list of produced “goods,” and in each iteration
of the planning procedure the IFB must quote the current estimate of the damage
caused by releasing a unit of each pollutant along with current estimates of all
opportunity and social costs. Just as the estimates of opportunity and social costs
for resources, capital goods, labor, and produced goods are arbitrary in round one,
the initial estimates of damages from pollutants can be arbitrary as well. The whole
point is that nobody needs to calculate what damages from different emissions are,
any more than anyone needs to calculate opportunity and social costs of different
resources, capital goods, labor, and produced goods in a participatory economy.
Instead, once the PDRM described in this section is incorporated into the
participatory planning process, arbitrary initial damage figures will be modified in
successive iterations until reasonably accurate estimates of actual damages for
pollutants are achieved when a feasible plan is finally reached, just as initially
arbitrary estimates of opportunity and social costs are modified to achieve
reasonably accurate estimates of the opportunity costs of using scarce resources,
capital goods, and labor, and the social costs of producing different goods and
services during the planning process.6
Second, when enterprises make proposals they must also include the amount of any
pollutants they wish to emit. The damages from emissions will then be calculated
by multiplying the number of units of a pollutant times the current estimate of the
damage from one unit announced by the IFB. These damages will be added to the
cost of using the inputs the enterprise has requested when calculating the overall
social cost of the enterprise’s proposal, to be compared with the social benefits of
the outputs it proposes to produce. Enterprises wishing to emit more than one
6 In other words, just as there are no bureaucracies which attempt to calculate opportunity and
social costs, there are no bureaucracies which attempt to calculate estimates of damages from
pollution.
5
pollutant will be charged according to the current estimate of damage from each
pollutant they propose to emit, just as enterprises supplying multiple products are
credited for each product according to its indicative price. It is not necessary for
enterprises to know in advance the effects of various pollutants because that
information is provided by the estimates of damages in each round of the planning
procedure, which become increasingly more accurate as the planning procedure
proceeds. Just as worker councils are guided by indicative prices for outputs what
to produce, and by indicative prices for inputs how to produce it, they will be
guided by estimates of damages quoted for how much of different pollutants to
emit.7
Third, we create “communities of affected parties,” or CAPs, which comprise all
who are damaged by emission of a particular pollutant. For example, there would
be a CAP for volatile organic compounds and nitrous oxide emissions that cause
smog in the Los Angeles area. There would also be a CAP for coarse particulate
matter affecting Angelinos. Whether or not those two CAPs include the same or
somewhat different populations would depend on any differences in dispersal
patterns. There would also be a CAP for pollutants contributing to smog, and a
CAP for coarse particulate matter pollution in the Kansas City area where wind and
temperature conditions are quite different than they are in Los Angeles, and
demand by worker councils in Kansas City for permission to release these
pollutants may be different as well.8
Now we are ready to include CAPs along with worker and consumer councils and
federations as “actors” who participate in each round of the planning procedure.
Enterprises who wish to emit a pollutant, and CAPs who are damaged by a
pollutant, participate in the planning procedure by responding to the “signal” from
7 The fact that an enterprise may emit more than one pollutant, and therefore affect more than one
CAP is not a problem since the estimate of damages for every pollutant is determined by how
much its CAP is willing to permit in grand sum total compared to the sum total demand from
sources for permission to emit the pollutant, as explained below.
8 How to create CAPs, and difficulties associated with this process are discussed in section 3
below. For now we simply assume that all affected by an emission are included in the CAP for
that pollutant, and none who are unaffected are members of the CAP.
6
the IFB about the current estimate of the damage caused by a unit of a pollutant 9
as follows:
Enterprises propose how much of a pollutant they want to emit, knowing they will
be charged for those emissions an amount equal to the current estimate of the
damages per unit times the number of units they propose to emit. This means
damage from emissions becomes part of production costs and is included in
estimates of the social costs of producing goods and services.
Communities of affected parties propose how many units of a pollutant they are
willing to allow to be released, taking into account that the CAP will be
compensated by an amount equal to the current estimate of the damages per unit
times the total number of units the CAP allows to be released. In other words, the
CAP has a right not to be polluted at all if it so chooses. On the other hand, if the
CAP chooses to authorize a given quantity of emissions members of the CAP will
receive “credit” for damages suffered. This “sacrifice” from exposure to pollution
is added to whatever “sacrifices” CAP members made as workers when calculating
how much consumption it is fair for them to enjoy.
Why would this procedure yield reasonably accurate estimates of the damage
caused by different pollutants, and therefore lead to reasonably efficient levels of
pollution? In most cases it is reasonable to assume that as emissions increase the
cost to victims of additional pollution rises and the benefit to producers of
additional pollution falls. In which case the efficient level of pollution is the level
at which the cost of the last unit emitted – the damages to all victims -- is equal to
the benefit from the last unit emitted – the satisfaction consumers gain from the
additional goods and services that can be produced because an additional unit of
emission was permitted.
What will happen if the IFB quotes an estimate of damages that is less than the
amount at which the last unit of emission for some pollutant causes damages equal
to benefits? In this case the CAP will not find it in its interest to permit as much
pollution as sources would like to emit, i.e. there will be excess demand for
9 Following our examples, there would be estimates of (1) the damage caused by releasing a unit
of nitrous oxide in LA, (2) the damage caused by releasing a unit of coarse particulate matter in
LA, (3) the damage caused by release of a unit of nitrous oxide in KC, and (4) the damage
caused by release of a unit of coarse particular matter in KC. Note that the two damage estimates
for KC might well be different than the two damage estimates in LA for reasons already
mentioned, or because KC residents have different preferences regarding environmental
amenities vs. income than LA residents.
7
permission to pollute —and consequently the IFB will increase its estimate of the
damage caused by the pollutant in the next round of planning. If the IFB quotes an
estimate of damages that is higher than the amount at which the last unit of
emission causes damage equal to benefits, the CAP will offer to permit more
pollution than sources will ask permission to emit, i.e. there will be an excess
supply of permission to emit, and the IFB will therefore decrease its estimate of the
damage caused by the pollutant in the next round. So when the IFB adjusts its
estimate of the damages for a unit of emissions until the sum total of requests to
emit a pollutant is equal to the permission granted by the CAP to emit that
pollutant, it appears we will end up with a reasonably accurate estimate of the true
damages caused by different pollutants and also come reasonably close to the
efficient level of emission for each pollutant. In section 3 we examine possible
perverse incentives that might conceivably interfere with this happy result.
3. Overcoming Perverse Incentives
It is instructive to begin an examination of hurdles that must be overcome if we are
to achieve efficient levels of pollution by reviewing perverse incentives that
prevent voluntary negotiations in market economies, including “Coasian
negotiations,” from doing so. There are two crucial perverse incentives which
prevent voluntary negotiations between polluters and pollution victims from
achieving efficient levels of pollution -- neither of which has to do with the
transaction costs of carrying out negotiations.10
Multiple Victims: The first problem was recognized by Ronald Coase himself, and
by many who have cautioned that Coasian negotiations are not the panacea that
free market environmentalists would have us believe. Coase explicitly warned that
his argument applied only in the case where there was one pollution victim, and
not to situations where there were multiple victims since this introduced additional
complexities. (Coase 1960) While free market enthusiasts simply ignore their
hero’s cautionary caveat, many who argue that efficient levels of pollution are
unlikely to emerge from voluntary negotiations even if property rights are clarified
emphasize the frequency of multiple victims as the primary reason.
10 See Hahnel and Sheeran 2009 for a more thorough explanation of intractable perverse
incentives that prevent voluntary negotiations in both the case of multiple victims, and in the
case of Coasian negotiations between a polluter and a single victim, from achieving efficient
levels of pollution, despite claims to the contrary by free market environmentalists and authors of
many mainstream economic text books.
8
However, most analysts, following Coase, treat the problems introduced by the
existence of multiple victims of pollution as an addition to the transaction costs
associated with negotiation. The rationale for doing so is that when there are
multiple victims there will be additional costs of negotiation either because there
are many more negotiations if the polluter must negotiate separately with each
victim, or because there will be costs associated with identifying and inviting
victims to join a coalition to negotiate with the polluter on behalf of all victims.
But multiple victims create far more serious obstacles to reaching efficient
agreements through voluntary negotiations than simply increasing the amount of
time spent in negotiations and lawyer fees. The real problem with multiple victims
is that because of perverse free rider and hold out incentives separate negotiations
with individual victims are unlikely to occur, even if the potential efficiency gain is
large, and because of a perverse incentive for victims to misrepresent damages
negotiations with a victim’s coalition will predictably yield inefficient outcomes as
well.
When there are multiple victims we should not expect separate negotiations
between the polluter and each individual victim to lead to an efficient outcome. If
the polluter has the property right each victim has an incentive to deny any harm in
hopes that other victims will step forward and pay the polluter to abate — the free
rider problem. If the victims have the property right each victim, and some who are
not truly victims, have an incentive to exaggerate harm and threaten to veto any
deal unless he or she receives the entire payment the polluter is willing to offer all
victims collectively — the hold out problem. In both cases separate negotiations
will end in failure and there will be too little abatement and too much pollution.
But this is not because the transaction costs of multiple negotiations are
prohibitive. It is because the existence of multiple victims creates perverse free
rider or hold out incentives for victims that will lead separate negotiations
predictably to break down.
Therefore, when there are multiple victims the only hope for successful
negotiations lies in organizing a coalition of victims to negotiate with the polluter
as a group. But there are two reasons multiple victims of pollution are predictably
unable to organize a coalition to negotiate effectively with a polluter — again,
neither of which has anything to do with the transaction costs of identifying
victims and issuing them invitations to join a victim’s organization. The first
problem arises even when each true victim is damaged to the same extent, but there
is no easy way to verify who is truly a victim and who is not. If the polluter has the
property right every victim has an incentive to deny their true status as a victim and
hope other victims will join the coalition and contribute money to pay the polluter
9
to cut back on emissions. On the other hand, if the victims have the property right
everyone has an incentive to claim they are a victim even if they are not, in order
to receive part of the payment the polluter will offer. In either case there is an
incentive for people to lie about whether they truly are victims. When the polluter
has the property right a voluntary coalition will have fewer members than it
should, lack the funds it should have to pay for abatement, and consequently there
will be too little abatement. When victims have the property right a voluntary
coalition will have more members than it should, the demand for compensation
will be inflated, and consequently there will be too little pollution.
Even if the problem of distinguishing between who should be included in a
voluntary coalition of victims is solved, there is another problem if it is clear that
victims are affected unequally but there is no objective way to determine who is
affected more or less. In this situation it is in the interest of members of a coalition
of victims to misrepresent how much they are truly affected if individual
contributions (when the polluter has the property right), or payments (when victims
have the property right), are allocated according to how much one is affected. If
polluters have the property right and victims who are more damaged are expected
to contribute more to pay the polluter to abate, people will under report their
damage and there will be too little abatement. If victims have the property right
and victims expect to receive higher payments if they report higher damages,
people will over report their damages and there will be too little pollution. Again,
these problems are qualitatively different from inefficiencies that arise because the
transaction cost of negotiations is greater than the benefit from correcting the
inefficiency, and it is misleading to treat them as such.
Misrepresentation: The second problem has gone largely unnoticed in the literature
on the Coase theorem which applies to the case of a single pollution victim. The
problem stems from two mistakes common in the literature: (1) Many misrepresent
negotiations between a polluter and a single victim as a “market based solution” to
environmental problems. But in Coasian negotiations the whole point is that there
is no market, and therefore there are no market forces to drive outcomes to an
agreement where emissions are adjusted to the point where the price paid per unit
of emissions equates the marginal damage to the victim and the marginal benefit to
the polluter. If the polluter and victim arrive at the efficient outcome through
negotiations it must be for some reason other than that they are driven to do so by
market forces. (2) Those who correctly analyze Coasian negotiations as one-on-one
negotiations over how to divide a potential efficiency gain have failed to notice
that Coase’s conclusion that the parties will settle on the efficient outcome hinges
on an implicit assumption that is highly implausible, namely that both parties have
10
what game theorists call “complete information” -- an assumption that is far more
restrictive and less plausible than the “perfect knowledge” assumption familiar to
microeconomic theorists. In effect Coase assumes that both the polluter and the
victim not only know what his or her own true marginal benefit or cost curve looks
like, but also know what the other party’s true curve looks like as well. Hahnel and
Sheeran (2009) demonstrate that only when this is the case, i.e. when both parties
have “complete information,” is there any reason to believe that voluntary
negotiations between a polluter and a single victim might reach an efficient
outcome. In the far more likely event that this assumption does not hold, Hahnel
and Sheeran (2009) demonstrate that if the true curve of the party with the property
right is unknown to the other party, the party with the property right stands to gain
by over exaggerating how much pollution affects their interests, and as a result
Coasian negotiations will predictably yield too much pollution if the polluter has
the property right, or too little if the victim has the property right.
In light of widespread mistaken conclusions about what voluntary negotiations --
including Coasian negotiations -- can be expected to achieve, it is wise to carefully
examine the participatory planning mechanism for possible perverse incentives.
Specifically: (1) Are there incentives for worker councils who emit pollutants to
under report actual emissions? (2) Are there incentives for either worker councils
or CAPs to misrepresent how much they are affected in order to influence how the
IFB will adjust estimates of pollution damages in subsequent rounds of the
planning procedure? (3) Are there incentives for individuals to claim they are
adversely affected, and therefore deserve to be included in CAPs, even when they
are not injured? (4) Are there incentives for people who are truly adversely
affected, and therefore deserve to be members of CAPs, to misrepresent the degree
to which they are affected?
(1) Are there incentives for worker councils who emit pollutants to under report
actual emissions? Because workers in a council do benefit from higher social
benefit to cost ratios for their enterprise, there is an incentive to under report
emissions whose damages form part of social costs and therefore appear in the
denominator of this ratio. Therefore, relying entirely on worker councils to self-
report emissions absent adequate monitoring and enforcement procedures is not
advisable.
To the extent that workers live closer to their enterprise than stockholders do,
members of worker councils in a participatory economy have more incentive to
11
take damage from local pollutants into account than private owners would.11
However, this is not to say that worker councils do not have an incentive to under
report emissions. The participatory planning procedure “charges” enterprises for
the damage their emissions cause. Therefore, to the extent that their emissions
damage any who are not members of the worker council there is an incentive for
enterprises in a participatory economy to disguise emissions, just as there is in
market economies where emissions are regulated, taxed, or emission permits are
required. If a worker council feels there is a low probability of detection, and/or
penalties for under reporting are insufficient, it might be tempted to under report
emissions to increase its social benefit to cost ratio -- making it easier to get a
proposal accepted during the participatory planning process, and increasing the
average effort rating they can award members.
In sum, there may be reason to believe that absentee owners interested only in
profits, operating in a social environment where anti-social, greedy behavior is
expected, might be more inclined to pursue their private interest at public expense
than worker councils functioning in an environment where social responsibility
and solidarity are highly valued. But this does not mean a participatory economy
eliminates the need for monitoring and enforcement with regard to emissions of
pollutants.
(2) Are there incentives for either worker councils or CAPs to misrepresent how
much they are affected in order to influence how the IFB will adjust estimates of
pollution damages in subsequent rounds of the planning procedure? If both
enterprises asking for rights to emit pollutants and communities of affected parties
granting emission rights behave as “price takers,” i.e. treat prices “parametrically”
in the participatory planning procedure – as all worker and consumer councils,
federations, and CAPs are instructed and required to do when submitting
proposals during the participatory planning process-- neither will misrepresent
how they are affected by emissions and the procedure will settle on the efficient
level of emissions, as explained. So the issue reduces to whether or not either
polluters or CAPs are likely to violate the directive to treat indicative prices quoted
during a round of the planning procedure as “parametric,” and if so, what the
consequences would be.
11 John Roemer based his claim that the incentive for firms to pollute in his model of “coupon” or
“managerial” market socialism (Roemer 1994) would be less than in a capitalist economy where
enterprise ownership was more highly concentrated on this argument. Nonetheless, a strong,
even if somewhat diminished tendency to under report remains in his model as well as in a
participatory economy, requiring adequate monitoring and enforcement to prevent excessive
pollution in either case.
12
In most cases there will be many different enterprises asking to emit a pollutant in
an area, none of which is likely to have information about how much the members
of the CAP supplying the emission rights are truly affected. So not only would
polluters lack information about the supply curve for emission rights necessary for
strategic maneuvering, their status as one among many seeking emission rights
would prevent them from taking advantage of any such information even if they
had it, unless they were able to form a “polluters cartel.”
On the other hand, in a participatory economy there is a single supplier of emission
rights for any pollutant – the community of affected parties. If a CAP knew what
the aggregate demand curve for emission rights looked like, instead of treating the
indicative price quoted by the IFB as a given it might be tempted to behave like a
monopolist in a market where the monopolist knows the market demand curve. In
this case the CAP would supply fewer emission rights than are socially optimal to
gain what is traditionally called “monopoly profits,” even though this means the
loss of some of what is traditionally called “producer surplus” due to failure to
grant permission to emit additional units for which the CAP would have been paid
more than the damage they caused its members.12 Therefore, if a CAP is willing to
ignore the directive to behave as a price taker, and if a CAP knows what the
aggregate demand for emission rights looks like, a CAP might restrict emissions
below the optimal level.13 While this would be undesirable, one must admit that at
least it would be an interesting new problem to contend with – an economic system
with a potential tendency to pollute too little.14
(3) Are there incentives for individuals to claim they are adversely affected, and
therefore deserve to be included in CAPs, even when they are not injured? Since
membership in a CAP entitles one to extra consumption rights a more serious
problem than not treating prices parametrically might be that people would claim
12 See the appendix for a brief diagrammatic demonstration of this result.
13 Recent work in auction theory suggests that if all proposals are treated as contractual
obligations if accepted, and if CAPs have no way to know whether or not there will be further
iterations in the planning procedure, and therefore whether their current proposal will be their
last, it may still be advisable for CAPs to treat prices parametrically even if they have
information about the aggregate demand function for permission to pollute. Nonetheless,
devising procedures to monitor, and penalize all participants for failure to treat prices
parametrically during the planning procedure seems advisable.
14 While economists consider this problematic, many environmentalists find it attractive.
13
to be adversely affected and deserve membership in a CAP even though they are
not. This means the process of defining CAPs -- deciding who should, and who
should not be included – must be carefully monitored. In all likelihood it would be
necessary to create a “judicial” system for settling disputes over membership in
CAPs. Presumably expert testimony of scientists and medical personnel would be
relevant, along with testimony on the part of individuals petitioning for
membership, as well as testimony from current members contesting their claims.
(4) Are there incentives for people who are truly adversely affected, and therefore
deserve to be members of CAPs, to misrepresent the degree to which they are
affected? In other words, even after membership is settled, might there not be a
perverse incentive for members of a CAP to exaggerate the degree to which they
are adversely affected by a pollutant? This depends on how CAPs decide to
distribute their extra consumption rights among members.
If extra individual consumption rights are distributed equally to all members of a
CAP, there is no incentive for anyone to exaggerate damages. Only if a CAP tried
to distribute more individual consumption rights to members who were presumed
to be more adversely affected is it possible that individuals would seek to take
advantage by exaggerating their damages.
Conventional wisdom in public economics long held that there was no way around
this perverse incentive to “report untruthfully.” However, path breaking work by
Clark, Groves, Ledyard and others in the 1970s revealed that, surprisingly, this
turns out not to be the case. (Clark 1971, Groves and Ledyard 1977, and Groves
1979).15 The key is to break the link between an individual’s reported damage and
how much she receives by using a formula to assign compensation based not on
her own declared damages, but instead on the damages reported by others in the
CAP. For example, an individual’s payment could be set equal to the average
payment minus the sum total consumer surplus reported by all others in the CAP.
In this way: (1) An individual cannot affect the size of her own payment by her
own reported damages because her reported damages do not appear in the formula
for calculating her compensation. (2) By misreporting damages an individual
would only cause the total amount of emissions to deviate farther from what she
would truly prefer. (3) Yet an individual reporting more damages than others would
receive a higher payment since what is subtracted for her is lower than what is
subtracted for others because what is subtracted for others includes her higher
15 Interested readers should see Hahnel and Albert 1990, chapter 3, for an accessible presentation
of the ingenious mechanisms for inducing people to truthfully report preferences for public
goods designed by Clark, Groves, Ledyard and others.
14
damages; while an individual reporting less damages than others would receive a
lower payment since what is subtracted in her case is higher than what is
subtracted for others because what is subtracted for others includes her lower
damages. In any case, a CAP that wished to award more consumption rights to
members who are more damaged could avoid creating perverse incentive to
exaggerate claims by using any of a half dozen incentive compatible mechanisms
now available.
In sum: Monitoring emissions and enforcement of agreements is necessary in a
participatory economy, just as it is in any economy for restrictions on pollution to
be taken seriously. If a community of affected parties willfully ignored the rule to
treat indicative prices parametrically during planning, and if the CAP had a great
deal of knowledge about the demand for emission rights upon which to base
strategic maneuvering, it might restrict emissions somewhat below efficient levels.
Therefore, monitoring and penalizing participants for failure to treat prices
parametrically seems advisable. Incentives for members of CAPs to exaggerate
damages can be overcome either by equal awards or using any of a number of
incentive compatible mechanisms for differential awards. Which leaves only the
perverse incentive to illegitimately claim membership in a CAP as a serious issue
to be dealt with, presumably through some appropriate adjudication process.
Before concluding it is helpful to review why problems that arise in voluntary
negotiations in market economies, including Coasian negotiations, are less likely to
arise in the participatory planning procedure with the PDRM described. There are
two lessons to be learned from a careful analysis of problems that arise when there
are multiple victims: (1) It is unrealistic to leave it up to multiple injured parties to
self-organize to defend their interests. They need help to overcome the transaction
costs of self-organizing. (2) They also need help to prevent them from falling
victim to perverse incentives to misrepresent themselves. The proposed PDRM
confronts these problems head on. First, it creates a powerful incentive for affected
parties to apply for membership in a CAP since victims receive compensation in a
participatory economy. But since this creates a perverse incentive for people to
falsely claim damage, it is proposed that time and resources are allocated to where
they are most needed: Scientific and medical testimony must be marshaled, along
with testimony by those whose status as victims is well established, to review
petitions for membership that may be exaggerated.
The PDRM also deals with potential perverse incentives to exaggerate damages by
people who legitimately belong to a CAP. CAPs must allocate benefits to
individual members in one of two ways: (1) Either give all members equal
15
benefits, or (2) Use an incentive compatible formula for calculating individual
benefits that does not include a person’s own self-declared damages. The first is
much simpler, and in most cases where degrees of damage are similar, or difficult
to know, should be acceptable. Whenever members of a CAP do not find this
satisfactory they are free to engage in a more elaborate system of dividing
compensation among themselves – provided truthful reporting is incentive
compatible with the formula they use.
The major lesson to be learned from a careful analysis of incentives in Coasian
negotiations is that private information generates perverse incentives in one-v-one
adversarial negotiations. The participatory planning procedure attempts to
overcome this problem by substituting a parametric procedure for one-v-one
negotiations. Instead of two players engaged in an adversarial game of divide the
pie, where private information can be used to one’s advantage, the planning
procedure directs players to respond to price signals “parametrically.” Monitoring
and enforcement of this rule for CAPs as well as other participants in the planning
process is recommended. Although, if players have no way of knowing that the
current round may not be the final round, manipulative behavior may prove
counterproductive in any case.
4. Conclusion
Under traditional assumptions a participatory planning procedure which includes
the PDRM will: (1) Reduce pollution to reasonably “efficient” levels, i.e. allow
emissions up to the point where the marginal social cost of emissions is equal to
the marginal social benefit, as argued in section 2. (2) Satisfy the “polluter pays
principle” since worker councils are charged for the damage their emissions cause
which is incorporated into the price consumers of their products must pay. (3)
Compensate the victims of pollution for damage suffered since members of each
CAP receive consumption credit for damages suffered from each pollutant, And (4)
induce polluters and victims to truthfully reveal the benefits and costs of pollution
because the PDRM is reasonably “incentive compatible,” as argued in section 3.
Uncorrected markets accomplish none of these four goals. And while in theory
markets could reduce pollution to efficient levels if corrective Pigovian taxes were
set equal to the magnitude of the negative external effect, or if emissions were
capped at socially efficient levels and emitters were required to own permits;
because markets are not incentive compatible for polluters and pollution victims,
markets provide no reliable way to estimate quantitatively how high corrective
taxes should be, or at what level to cap emissions.
16
However, it is important not to be overly enthusiastic about our results. In the real
world the PDRM described here would be most relevant, and therefore most useful
for local pollutants whose effects are not lethal, are relatively well understood by
victims, and do not extend far into the future where people who are not in the CAP
will also be affected. Obviously, there are many pollutants which do not fit this
description for which different policies would presumably be more suitable. Nor is
this PDRM any help whatsoever in addressing our most pressing environmental
problem today -- incipient climate change due to an over accumulation of
greenhouse gases in the upper atmosphere. Unless some means is found to
overcome powerful free rider incentive problems associated with reductions in
national emissions, unless countries can soon agree on fair reduction quotas, and
unless the advanced economies launch a massive Green New Deal to make their
economies carbon neutral in the most rapid technological “reboot” in human
history, solutions to all other environmental problems may soon become irrelevant.
Nonetheless, coming up with a procedure that would induce victims to reveal
truthfully what they believe their true damages are from pollution is not a trivial
accomplishment.
An Important Caveat: The participatory planning procedure, which can and should
include the PDRM described here, is part of an overall economic system that is
very egalitarian. In a participatory economy consumption rights are allocated
according to the effort, or sacrifices people make in their work as well as need.
This means that while there may be differences in the average incomes of different
communities of affected parties, those differences will be much smaller than in any
historical economy. Unfortunately, in an inegalitarian economy the pollution
damage revealing mechanism in this article would unfairly allocate pollution to
poorer communities. Consequently, it would not be advisable to append the PDRM
described in this article to economies that are not highly egalitarian. If there are
rich and poor communities, poor communities would be more inclined to bolster
their income by offering to tolerate more pollution than rich communities would
agree to tolerate even if their preferences for environmental amenities and for
income were identical. Only if communities have comparable incomes is it
advisable to allow them to express whatever differences of opinion they may have
about the dangers of different pollutants, and whatever differences in preference
they may have for income versus environmental amenities, as the above procedure
allows them to do. In The Political Economy of the Environment James Boyce
(2002) elaborates on a number of ways that a more egalitarian distribution of
wealth and income would benefit the environment. One more environmental
advantage of egalitarianism should be added to his excellent list: An egalitarian
17
economy creates an opportunity to implement a pollution damage revealing
mechanism that is sorely needed if we are to manage our relations with the natural
environment sensibly, whereas inegalitarian economies make this impossible
because they would turn any such mechanism into a transmission vehicle for
increasing environmental injustice.
APPENDIX16
In the figure above line IJKD is the aggregate demand curve for permission to emit
a pollutant, and line IMB is the associated marginal revenue curve. Line EMKN is
the marginal damage curve for the CAP. In which case the efficient level of
emissions is OC, and the damage caused by the last unit emitted is OF. If both
polluters and the CAP respond truthfully to indicative prices for the pollutant the
participatory planning process will eventually settle on OC units of emissions and
an indicative price equal to OF.
However, if the CAP ignores the directive to treat indicative prices as givens, and
the CAP knows what the demand, and therefore the marginal revenue curves look
like, it can calculate how to reap a “monopoly profit” equal to the area of rectangle
16 I wish to acknowledge the help of Evgeniya Rudneva, an economics major at Portland State
University, for help in preparing this appendix.
18
GMJH by setting the supply of emission permits equal to OA no matter what
indicative price the IFG quotes. As long as the CAP sticks to OA as its response,
eventually the IFB will adjust the price until it is equal to OH where demand will
equal supply and the CAP will reap the monopoly profit. In which case society will
suffer a welfare loss equal to the area of triangle MJK. The area of triangle LJK is
the lost “consumer surplus” – where the “consumers” in this case are the worker
councils emitting the pollutant. And the area of triangle MLK is the lost “producer
surplus” – where the “producer” in this case is the CAP. Together the lost
consumer and producer surplus add up to the social loss, the area of triangle MJK.
In sum: If the CAP knows what the demand curve for permission to pollute looks
like, and if the CAP is willing and able to violate the directive to treat indicative
prices as givens without fear of penalty, it will grant too little permission to pollute,
OA < OC; society will suffer a loss of wellbeing equal to the area of triangle MLK;
and the CAP will gain the monopoly profit, the area of rectangle GMJH, but lose
some of its producer surplus, the area of triangle MLK, by engaging in strategic
maneuvering.
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