Freeman

ARTICLE

Who Pays for Clean Air and Water?

AUGUST 01, 1971 by FRANCIS ASPINWALL

Mr. Aspinwall is a Surveyor and Civil Engineer a Skaneateles, New York.

Dear……………………… :

I enjoyed our recent discussion on the subject of pollution and have been thinking further about the position so many people are taking these days:

In years past, greedy free-enterprise producers have heed­lessly ignored the public good in order to increase their profits; for example, by pouring their industrial wastes into the air or water.

Imagine if you will the situation in 1900 in some highly competitive business such as coal mining. For simplicity, assume there were five producers. And, as would be true in any competitive industry, their costs of production would differ, depending on capital available, em­ployee efficiency, location, and the like:

Producer

Production Cost per ton

Selling Price

Profit, % of sales

A

$3.50

$5.00

30

B

4.00

5.00

20

C

4.50

5.00

10

D

4.75

5.00

5

E

5.00

5.00

0

Bear in mind that the price of any commodity of a given quality in a competitive market is determined, not necessarily by the producer whose profits are largest, but by the one willing to sell for the least, whether he is enjoying a profit or suffering a loss. All others either meet that price or lose their market. So, in our illustration Producer E sets the price, and the others merely meet the competition.

Now, suppose that in 1901 the government had imposed strict laws against dumping acid wastes from mines into streams. Let’s say the effect would be to raise costs 25 cents a ton for each producer, which means that the selling price would have to advance to $5.25 a ton if E were to continue in business just breaking even:

Producer

Production Cost per ton

Selling Price

Profit,% of sales

A

$3.75

$5.25

28.6

B

4.25

5.25

19.0

C

4.75

5.25

9.5

D

5.00

5.25

4.8

E

5.25

5.25

0

The only way the selling price of $5.00 could be maintained is for E to take a loss of 25 cents for every ton he produces. If he chooses not to do so (a near certainty), then the price goes to $5.25 and everyone’s profit margin remains about the same as before.

If E decides to go out of the coal business, the over-all supply of coal is reduced accordingly, and the tendency is for the price of coal to rise, probably more than 25 cents a ton until the supply/demand equation gains a new equilibrium.

In any case, the cost of fighting pollution is passed on to the con­sumer; there simply is no way to force the producer to absorb govern­ment mandated industry-wide costs such as the installation of anti­pollution facilities. Nor, in the "bad old days," was there any way for the producer to profit from dumping wastes into the air or water; competition obliged him to pass any savings back to the consuming public.

So, if someone is to be blamed for ignoring the "public good," it will have to be the consumer who demanded coal instead of antipollution for his money.

Suppose that producer A had been public spirited and had voluntarily installed antipollution equipment without being pushed by government. Would consumers have been willing to pay him $5.25 for coal which other more "profit oriented" producers were still offering at $5.00?

This is a simplification of a complex supply/demand situation in the open market. But I think it is a valid model. There is no way, in a competitive market, for any producer to gain a monetary advantage for himself by polluting the air and water, assuming that government enforces its antipollution statutes evenhandedly. And this is always true in a free market for all producers, whether they mine coal, pump oil, cut timber, manufacture automobiles, or whatever. When consumers want to buy clean air and water, producers will surely arrange for abundant supplies in whatever form customers will pay for.

Cordially yours,

Francis H. Aspinwall

ASSOCIATED ISSUE

August 1971

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