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Air pollution explainer: What’s an externality?

David Weinberg Dec 9, 2013
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The economic word of the day is externality. A cost or a benefit that accrues to someone unrelated to a particular transaction. Air pollution is the classic example, and that’s exactly what will be at issue in the Supreme Court tomorrow. States like Ohio and Kentucky that rely mainly on coal for electricity are challenging regulations issued under the Clean Air Act that says they have to pay if their pollution blows across state lines.

David Popp, public administration professor at Syracuse University, says one way to think of externalities is to imagine you are at a neighborhood barbeque grilling steaks, and the smoke from your grill is blowing into your neighbor’s yard, causing his asthma to flare up. You are getting all the benefits from the grill, the tasty meat, “but the harm done by the smoke is harming the person next door,” says Popp.

This is essentially what’s going on in Rust Belt and Appalachian states where a large percentage of electricity is generated by coal. That pollution blows east. States that exceed EPA air quality standards have to reduce pollution, but for many eastern states, “part of the pollution they have to get rid of is something they have no control over because it’s not being generated in their state,” he says.

When it comes to reducing emissions, requirements vary by region.

“Regions that have worse air quality now, typically will have more stringent requirements on facilities located in those states,” says Dallas Burtraw, a senior fellow at Resources for the Future.

Coal-burning states want to avoid those requirements because they have economic costs. They come in many forms, like scrubbers on coal-burning power plants, paid by the utilities. The EPA can also slow down permitting for new construction of industrial facilities. Burtraw says the cost being paid now is a hidden tax, levied on people in the Northeast, “and that hidden tax is the health effects of the people that are exposed to that air pollution.

The argument over the good neighbor rule comes down to who should pay the cost of that externality. The Midwest neighbors, in this case, say tighter restrictions will hurt their economy and won’t make a difference in air quality. The Supreme Court will hear the arguments tomorrow.

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