Misalignment of objectives of commercial agents and commercial and society is an economic problem?

 By Ian Page

I commented recently that something seems wrong with economics or its application as it doesn't seem to be able to effectively capture the external costs of production and use to society in a way that actually drives commercial actors to make decisions that are right for society at large.

examples are the way that CO2 emissions, sewage release into rivers, and mining environmental costs are passed on to society, rather than an intrinsic part of the cost structure of industries and utilities. ( economic rule: anything free will be over utilised)

A further example is found all over industrial chemistry where very useful perfluorocarbon compounds are produced in a way that causes eternal and chronic issues for health ozone and global warming because the environmental aspects were not considered  during research  ( or ignored) , various pesticides that have serious effects on useful insects, fertilizer that reduces the fertility of land, and a huge variety of chemicals that have been introduced into the human environment without consideration of their environmental effects , and have been in many cases grandfathered as the EU for example hasn't the time to evaluate them all properly.( there are hundreds  of thousands of these chemicals already in the environment eg bisphenol a,and  bromine derivatives to prevent sofas catching fire, non stick pans, waterproof clothes , and all the EU could do was give them E numbers and increase the scrutiny of new chemicals. The motivation of companies is to release the new chemicals and hope that any problems will occur after the current management has moved on! ( eg tetraethyl lead in petrol - poisoned the health of millions/billions  yet no penalty could be assigned to the people that built the product and market for it)

The solution to date is to sue the companies well after the event, but if the true costs are to be allocated , the company would simply go bust and transfer the costs to the state.

Something is needed as part of creating new products, for example building up an escrow  for remediation which is reviewed regularly to see if it is enough. This will add a cost of new chemicals with little known effects compounds released in small quantities , but be increased as experience is gained to put the actual societal cost into the retail price. This would actually limit patent breaking by chemists where the chemical is modified slightly in the hope that its good effects will be retained while being outside the patent which is one cause of the proliferation of chemicals.( approximately 30,000 perfluoro chemicals as a result of dodging patents , and dodging chemical by chemical restrictions of use in the refrigeration and heating industries amongst other uses.All of which I believe will have to be withdrawn and cleaned up in water supplies and anywhere a fire department has usd them on fires,.)

In addition any chemical released must come with its recycling disposal system

A thought piece in Nature , suggests ( without a supporting approach) that all chemists should as a professional feature, create the disposal route at the same time the chemical

I have also noticed two papers trying to model how various storage methods, flexible demand , wind and solar , and the motives of the various actors in the markets interact to result in negative outcomes for society- specifically the costs of transition can be exacerbated by bad , but understandable and legal behavior by actors to maximise their profits.  

It can be argued that this is a problem merely of market design, but this is closing the stable door after the horse has bolted as we have seen in the UK , where in one year bad but legal behavior of generators added 3.6 billion pounds to electricity bills and the regulator is struggling to find a way to stop it.

It seems more a problem of ethical and professional standards. There is no penalty for failing to follow the spirit of the system when it's possible to not do that and make a quick buck.

We have attempted to achieve this with the Hammurabi codex, the hippocratic oath, the duty of insurers, solicitors  and financial advisors to do what is best in their customers interests- and the penalties when a professional is found to have broken their trust.( not big enough, or often enough employed , but at the least the system are trying to do the right thing.)

I dont know if there is some way of baking these concepts into economics, or if you can't , establishing a super system which effectively controls economics.but without it we know we are making the transition more expensive, and also creating additional problems for ourselves and our successors.

A very UK specific issue is the use of gas for heating . The policy is to stop this . One obvius  implementation would seem to involve immediately not connecting any new gas supply to homes, offices or industry. Political shenanigans, and the interests of the gas industry mean that this won't happen before 2035 if then. No one seems to suffer from another decade of adding gas consumption to UK demand even though it's bad for the balance of payments and the environment.