Externalities and Perverse Incentives

in #economics2 years ago


(Source: CNN)

So the headlines are aflutter today, alternating between the G7 pledging 20 million USD of relief efforts and Trump skipping G7 meetings about the amazon.

If you haven't heard, a lot of the Amazon rainforest is on fire, which isn't great.

In mainstream economics, the Amazon is a classic case of an externality. The rainforest performs a lot of non-monetized functions. The trees convert carbon dioxide to oxygen. The biodiversity supplies lots of raw ingredients for pharmaceuticals and other products. So we, meaning humans around the world, use a lot of "products" of the Amazon, but we don't pay for them directly. Hence these costs are "external" to the market economy.

The usual answer to externalities is a tax enforced from on-high. So the powers that be can use that tax to both suppress demand and use the revenue to combat whatever issues are created by using the externality.

Unsurprisingly, trusting politicians to tax the "right" amount and then use that money on the "right" efforts does not work very well.

So now, the Amazon is on fire. And the G7 is pledging 20 million worth of firefighting planes and equipment. That sounds good.

Of course, whoever ends up going to Brazil to fight the fires have to eat and sleep. They will probably stay in hotels at some point too. Maybe do a little shopping on their downtime.

In other words, the relief efforts are good for business.

That seems like a pretty perverse incentive to me.

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