the ARTistry of ARThistory occasionally done ARTfully

Archive for the ‘economics’ Category

How to make saving ancient buildings pay

Posted by gninja on June 8, 2007

The Medieaval Art Historian is busy, these days. Tour-guiding around New York city and learning Latin. Her Economic Objectorvist husband (aren’t I clever?) is not so busy. Just finished his own thesis and not teaching anything (in fact without legal rights to work at all until our visa is sorted. Or leave the country without permission to re-enter. Which in my case was a positive freedom, not a negative one, making it smart all the more). So I can fill in for the missus every now and then. Like now.

The recent news about the yellowing Tower of London and the similarly declining stature of the Taj Mahal brought this issue to mind. Michigan, too.

We should view these as the phenomena of interest. Not pollution, but the yellowing of the buildings. These are the ‘bads’ (as opposed to the ‘goods’ usually discussed in economics). They exist because there’s no market for them. We don’t actively pollute – polluting isn’t the good or service we buy, or in which we engage. Driving stinky cars and burning up our pre-history at a million years an hour is. Pollution is the negative externality of those activities. The trouble is, we don’t buy-and-sell the externality.

Pollution represents a cost to society, but when we drive we don’t pay that cost (I should say ‘they’ – I don’t drive). This is why we drive too much. Consider the example of electricity:

Electricity production causes acid rain. If we paid for the social cost of that acid rain along with the ordinary cost of electricity we would only consume Q2 units at price P2. Instead we consume Q1 units at price P1 – i.e. we consume too much electricity, for which we pay too low a price. As a result we get more acid rain than society wants (the equilibrium Q2, P2 is called allocatively efficient, by the by – meaning price equals marginal cost to society, and resources are allocated according to society’s preferences).

So – back to historical buildings. Why do they yellow with pollution? Because we pollute too much. We pollute too much because the prices of the polluting activities (road taxes, electricity prices, petrol prices) are all too low. That is, they don’t include the social cost of the negative externality. This is among the reasons why governments go around imposing taxes on things: so that consumers are forced to include the cost to society of their externalities (or producers – one can tax consumption or production, it makes no difference in the marketplace). By doing this, the government can make sure that Q2 gets consumed, rather than Q1 (for example).

This, by the by, is called a Pigovian tax. Pigovian taxes are taxes that are implemented to alter consumer behaviour to bring a market equilibrium in line with social welfare, rather than just raise money.

Now, we have options. The government/city council/etc. can impose taxes. Look at Ken Livingstone’s congestion charge, for example (and ignoring for the moment the ulterior motiveNew Yorkers beware!). That is used to keep the number of cars in certain parts of london down, for purposes of reduced congestion and pollution. Not by banning cars but by implementing a price for entering London. Hey, presto! A market solution appears where once there was no market at all.

The same principle applies to the damage caused to buildings. Make a ‘pollution tax’ in London, equal to the cost of cleaning up these buildings, divided by the polluters (cars, aeroplanes flying in and out of Heathrow and Stansted, the underground, GNER, ordinary industry). At the end of the day, the cost to society of pollution affecting our historical buildings will become a part of the prices we pay for the activities that cause the damage in the first place. Then we will be allowed to make our own trade-offs.

This is the principle behind the slightly different Coase theorem. The classic example is a manufacturer polluting the river that runs out back. Why do they do it? Because it’s cheaper to pump their shit in the river than it is to dispose of it properly. Since nobody owns clean air or clean water, nobody can sue the manufacturer for the loss – making it free. Coase’s original paper is all over the place.

The Coasean solution (Ronald Coase won the Nobel prize in 1991, incidentally) says, give ownership rights to people living downstream, or ‘sell’ pollution rights to manufacturer, where those rights cost around about the cost to clean up the river. Then the polluter and society interact in a market where therer was none before:

At one end of the extreme is no pollution reduction. Society doesn’t want that, because society doesn’t like pollution. At the other end there is zero pollution. Society, frankly, doesn’t want that either. We cant cars, and middle-class holidays overseas. The Coasean solution manufactures a market for pollution reduction, allowing us to decide how much driving and flying we want, and how much non-polluting we want.

A quick hat-tip to a colleague, Dave, who describes the Coase theorem as ‘my right to own a gun vs. your right to listen to Megadeth at 2 in the morning.‘ Let’s see the snots at Chicago law come up with that one.

There’s a problem or two, though, with the Coase theorem. First: it only works with zero (or nearly zero) transaction costs. What’s a transaction cost? How about figuring out how much the damage-due-to-pollution costs? We can figure out the cost of cleaning the Tower of London or the Taj Mahal – what about the cost of lost tourism? Cost to the ‘brand’ of London? That is harder – and more expensive – to figure out. And that’s just for the government side. That firm pumping their shit into the river. They then have to decide how much it’s worth to buy the permits to keep doing so. Then there’s the cost of getting everyone together to negotiate. A Coasean solution requires efficient bargaining.

Look out for more of this sort of thing as this carbon trading deal starts gaining more ground.

So will a Coasean solution work for historical buildings? Can we sell Ryanair and the motorists of Rome the rights to dump gypsum and acid rain on the Colosseum? Short answer = no, frankly. Remember those transaction costs? Suppose you advertised that you were going to sell pollution rights to motorists, trucking companies and Air Italia, and you were convening a big…convention…for all sides to come together and negotiate the optimal P (price/compensation) and Q (pollution reduction). Just think for a minute about all the people that would come, all the activist groups, architects, historians, industry lobbyists, CEOs, CFOs, etc. You’d be there all year. No efficient bargaining on the horizon at all.

What is more likely for historical clean-up is punitive/Pigovian taxation – imposing a tax on the polluters, and using the money to clean and maintain the buildings. That cost of production is then passed along to consumers. Whether we like it or not, our activities keep all of these Aspidistrae flying, and we should pay for it. If we want to keep the Tower of London.

This is all fairly hypothetical. We’ll need to see a lot more historical buildings suffer from acid rain before this becomes a discussion. In the meantime, there is always the new debate about carbon taxes vs. carbon trading. In the meantime, there is one interesting paper by a fellow by the name of David Throsby, called Paying for the Past: Economics, Cultural Heritage and Public Policy. It’s quite interesting.

Finally: there’s no doubt some disconnect here. A lot of my wife’s audience will not be at all amenable to my discussion – how can we place a price on culture and heritage? Our knees jerk us into insisting we can’t. But in fact we must. Because as long as these things remain ‘priceless’, they remain costless. Most industries and firms don’t care if the North Sea runs out of fish. They sure as hell don’t stop to worry about a few old churches. So ask yourselves this: who do our governments really really consider their constituents? Somehow I don’t think we contribute enough to their campaigns to count all that highly. Not highly enough for the government to go completely command and control about pollution. Nor are they efficient.

And lastly, we want unsullied churches, sure – but we also want Duane Reade, American Airlines and Interflora, and I dare you to say otherwise. A trade-off needs to be made, and economics is historically the lingua franca when it comes to this sort of thing. The sooner our side masters that tongue, the sooner we might stop getting trampled in parliaments, congresses and city halls.

Posted in economics | 2 Comments »