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The Prisoner's Dilemma and The Environment
21/09/2005

Greg, of Sinister Thoughts, today pointed out an interesting article in the Guardian.

It's essentially about how corporations actually want the government to bring in environmental regulations, because without them they face a collective action problem. In other words, they cannot act on their own to do business in a cleaner way if the costs of doing so put them at a disadvantage versus their competition. Even if they want to be good corporate citizens, they can't afford to. But if the government requires it of everyone through law, then they don't lose out.

This is such a classic example of the prisoner's dilemma, and it just calls out for government involvement. (I'd really recommend that you go read The Efficient Society and The Rebel Sell.)

Anyway, this story reminds me of something that happened in a previous career. I was working in Detroit for a research facility that was working on making automobiles more recyclable. In a meeting, a senior executive from one of the Big 3 who was in charge of the recycling issue summed up their position neatly with one sentence:

We'll be happy to do anything we can to improve the recyclability of our vehicles, so long as it doesn't cost a penny more or weigh an ounce more.

Some environmental problems can't be solved by the market without intervention, because the costs of those environmental problems have been externalized. Even if a company wants to address those problems, they can't afford to do it unless all their competition also does it. (They can't afford to spend a penny more, even to avoid an externalized cost-to-society of a dollar. They end up behind by one cent, not ahead by ninety-nine.) This can only be resolved through regulation.

And regulation does work. The reason they don't want to make any changes that make the vehicle weigh more is because of CAFE -- the Corporate Average Fuel Economy regulation in the United States. The legislation worked well until the "light truck" loophole aided the SUV boom.

The point in all this is that sometimes government intervention is necessary, especially for environmental issues where the costs are externalized and the prisoner's dilemma prevents corporations from acting even if they wanted to. Unfortunately, the free market dogma these days is so strong that even reasonable regulatory interventions are sometimes fought off.


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