These excerpts from Paul Krugman's blog commenting on this paper: http://www.aeaweb.org/articles.php?doi=10.1257/aer.101.5.1649
"Markets Can Be Very, Very Wrong
Muller, Mendelsohn, and Nordhaus have a new paper in the American Economic Review ....
What MMN do is estimate the cost imposed on society by air pollution, and allocate it across industries....
...they’re focused on measurable impacts of pollution on health and productivity, with the most important effects involving how pollutants — especially small particulates — affect human health, and use standard valuations on mortality and morbidity to turn these into dollars.
Even with this restricted vision of costs, they find that the costs of air pollution are big, and heavily concentrated in a few industries.....
It’s important to be clear about what this means. It does not necessarily say that we should end the use of coal-generated electricity. What it says, instead, is that consumers are paying much too low a price for coal-generated electricity, because the price they pay does not take account of the very large external costs associated with generation....
At one level, this is all textbook economics. Externalities like pollution are one of the classic forms of market failure, and Econ 101 says that this failure should be remedied through pollution taxes or tradable emissions permits that get the price right....
So if you really believed in the logic of free markets, you’d be all in favor of pollution taxes, right?
Hahahahaha. Today’s American right doesn’t believe in externalities, or correcting market failures; it believes that there are no market failures, that capitalism unregulated is always right. Faced with evidence that market prices are in fact wrong, they simply attack the science.
What this tells us is that we are not actually having a debate about economics. Our free-market advocates aren’t actually operating from a model of how the economy works; they’re operating from some combination of knee-jerk defense of the haves against the rest and mystical faith that self-interest always leads to the common good."
Couldn't have said it better myself.
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