1
00:00:00,172 --> 00:00:02,968
♪ [music] ♪

2
00:00:09,080 --> 00:00:12,440
- [Alex] We've already looked at one
solution to the externality problem,

3
00:00:12,440 --> 00:00:14,880
Pigouvian taxes and subsidies.

4
00:00:14,880 --> 00:00:17,650
You might call that
the economist’s solution.

5
00:00:17,650 --> 00:00:20,440
There's another solution,
however, which is very common

6
00:00:20,440 --> 00:00:23,200
and quite popular to the man in the street

7
00:00:23,200 --> 00:00:25,562
and that's command and control.

8
00:00:25,562 --> 00:00:27,502
That's what we're going to look at now.

9
00:00:31,360 --> 00:00:34,270
Command and control
is pretty much what it sounds like.

10
00:00:34,270 --> 00:00:39,150
The government says,
"You cannot do this or you must do this."

11
00:00:39,150 --> 00:00:41,270
For example, the Department of Energy

12
00:00:41,270 --> 00:00:45,030
in an effort
to reduce the consumption of electricity,

13
00:00:45,030 --> 00:00:50,250
recently said that it is illegal to sell
washing machines in the United States

14
00:00:50,250 --> 00:00:53,820
if they consume more than
a certain amount of electricity.

15
00:00:54,110 --> 00:00:57,160
The only washing machines
that it was legal to sell

16
00:00:57,160 --> 00:01:00,710
had to consume
less than this amount of electricity.

17
00:01:01,210 --> 00:01:05,320
So, what were the results
of this command and control program?

18
00:01:05,950 --> 00:01:07,980
Well, here's Consumer Reports:

19
00:01:08,280 --> 00:01:10,910
"Not so long ago
you could count on most washers

20
00:01:10,910 --> 00:01:13,200
to get your clothes very clean.

21
00:01:13,200 --> 00:01:15,930
Not anymore.
What happened?

22
00:01:16,300 --> 00:01:19,670
As of January 2007,
the US Department of Energy

23
00:01:19,670 --> 00:01:24,850
has required washers
to use 21% less energy...

24
00:01:24,850 --> 00:01:27,780
but our tests have found
that traditional top-loaders--

25
00:01:27,780 --> 00:01:30,530
those with the familiar
center-post agitators--

26
00:01:30,530 --> 00:01:34,490
are having a tough time
wringing out those savings

27
00:01:34,490 --> 00:01:37,490
without sacrificing cleaning ability..."

28
00:01:38,310 --> 00:01:41,770
So the government said
you have to use 21% less energy,

29
00:01:41,770 --> 00:01:44,970
but if things were that easy
everyone would do them.

30
00:01:45,420 --> 00:01:48,140
There are trade-offs everywhere,

31
00:01:48,140 --> 00:01:52,620
and by requiring the washing machines
to use less energy,

32
00:01:52,620 --> 00:01:54,870
the trade-off
is they didn't clean so well.

33
00:01:55,460 --> 00:01:59,120
Eventually, the technology
has gotten better and will get better,

34
00:01:59,120 --> 00:02:01,020
and perhaps, this will be possible.

35
00:02:01,580 --> 00:02:06,450
But one of the problems
with a command and control approach,

36
00:02:06,450 --> 00:02:10,570
is that the government
is not always aware of the trade-offs.

37
00:02:10,570 --> 00:02:16,470
They're not always able to choose
the least cost way of achieving a goal.

38
00:02:16,930 --> 00:02:19,020
Let's take a closer look at this problem.

39
00:02:19,800 --> 00:02:24,210
Command and control is rarely
an efficient way of achieving a goal.

40
00:02:24,210 --> 00:02:25,420
Why not?

41
00:02:25,420 --> 00:02:29,170
Well, there many ways
to achieve most goals.

42
00:02:29,170 --> 00:02:33,160
For example, let's look at some of the ways
in which we could use less electricity.

43
00:02:33,160 --> 00:02:35,990
We could turn down
our thermostat a little bit.

44
00:02:35,990 --> 00:02:38,420
We could shut the lights off
when we leave a room.

45
00:02:38,420 --> 00:02:41,660
We could turn off our computers
at night when we're not using them.

46
00:02:41,660 --> 00:02:43,550
We could use more solar power.

47
00:02:43,550 --> 00:02:46,180
Firms which use a lot of electricity

48
00:02:46,180 --> 00:02:51,650
have many, many different ways to use less
by adjusting their production processes.

49
00:02:52,570 --> 00:02:56,330
Now if we want to cut back
electricity consumption by, say, 10%,

50
00:02:56,330 --> 00:03:01,260
we want to cut back
on the 10% of electricity uses

51
00:03:01,260 --> 00:03:03,040
which are least valuable.

52
00:03:03,610 --> 00:03:08,510
We want to reduce electricity use
in the way which is least costly.

53
00:03:09,000 --> 00:03:12,000
The problem is,
out of all of the millions,

54
00:03:12,000 --> 00:03:15,930
and perhaps,
billions of ways of reducing electricity,

55
00:03:15,930 --> 00:03:19,900
is government going to choose
to command and control us

56
00:03:19,900 --> 00:03:22,990
to reduce electricity
in the least cost way?

57
00:03:23,260 --> 00:03:24,450
Probably not.

58
00:03:24,790 --> 00:03:28,560
Government
simply does not have enough information

59
00:03:28,560 --> 00:03:33,590
to order the least costly method
of reducing electricity consumption.

60
00:03:34,870 --> 00:03:37,370
Now, let's compare our command and control

61
00:03:37,370 --> 00:03:40,660
with an alternative method,
a tax on electricity.

62
00:03:41,340 --> 00:03:45,080
A tax on electricity
would allow the users--

63
00:03:45,080 --> 00:03:47,520
would give them flexibility--

64
00:03:47,520 --> 00:03:52,010
to find the lowest cost ways
to reduce their use of electricity.

65
00:03:52,730 --> 00:03:55,620
If a tax of, let's say,
a few percentage points

66
00:03:55,620 --> 00:03:57,910
would reduce electricity consumption

67
00:03:57,910 --> 00:04:01,600
by exactly the same amount
as the command and control approach.

68
00:04:01,600 --> 00:04:03,150
The difference is,

69
00:04:03,150 --> 00:04:07,790
is that each one of us would look
at the higher price of electricity

70
00:04:07,790 --> 00:04:09,570
and would choose,

71
00:04:09,570 --> 00:04:13,420
based upon our different circumstances
and knowledge and flexibility,

72
00:04:13,420 --> 00:04:18,869
which ways we could reduce electricity
in the least cost.

73
00:04:18,869 --> 00:04:22,130
Some of us would turn down lights,
some of us would turn down thermostats,

74
00:04:22,130 --> 00:04:25,320
some firms would change
the production processes a lot,

75
00:04:25,320 --> 00:04:28,880
others would change their production
processes just a little bit.

76
00:04:28,880 --> 00:04:33,440
Each one of us
would access our own information,

77
00:04:33,440 --> 00:04:37,930
and in this way with much,
much, much greater flexibility,

78
00:04:37,930 --> 00:04:40,170
we could reduce electricity consumption

79
00:04:40,170 --> 00:04:45,200
by exactly the same amount
as the command and control approach.

80
00:04:45,200 --> 00:04:47,830
But we would do so at much lower cost

81
00:04:47,830 --> 00:04:50,760
because each user of electricity

82
00:04:50,760 --> 00:04:54,830
would have the flexibility
to choose the least cost ways of doing it.

83
00:04:55,810 --> 00:04:56,790
Think about it--

84
00:04:56,790 --> 00:04:59,420
how many people would choose
to reduce electricity

85
00:04:59,420 --> 00:05:03,840
by paying a lot more for a washing machine
that doesn't clean very well?

86
00:05:03,840 --> 00:05:05,770
Probably not too many.

87
00:05:05,770 --> 00:05:10,570
That illustrates that when government
chose to reduce electricity consumption

88
00:05:10,570 --> 00:05:14,100
by requiring washers
to be "more efficient"

89
00:05:14,100 --> 00:05:18,400
that actually wasn't the least-cost way
of reducing electricity.

90
00:05:18,400 --> 00:05:22,330
That was actually a very high-cost way
of reducing electricity,

91
00:05:22,330 --> 00:05:25,850
because it meant that we had dirty clothes
and we really didn't want that.

92
00:05:26,940 --> 00:05:32,170
Finally, let's remember that the goal
is not actually to use less electricity.

93
00:05:32,170 --> 00:05:34,860
The goal is to reduce pollution.

94
00:05:34,860 --> 00:05:36,480
That's why a Pigouvian tax

95
00:05:36,480 --> 00:05:42,720
is really one of the most efficient ways
of reducing or controlling an externality,

96
00:05:42,720 --> 00:05:48,260
because a Pigouvian tax
is targeted on the problem--

97
00:05:48,260 --> 00:05:49,610
the pollution.

98
00:05:49,610 --> 00:05:52,443
So, the closer we can get the tax

99
00:05:52,443 --> 00:05:55,416
to the good which is actually
causing the problem--

100
00:05:55,416 --> 00:05:58,380
which is not electricity
but instead which is pollution--

101
00:05:58,380 --> 00:06:02,260
the more efficient,
the lower cost way we will have

102
00:06:02,260 --> 00:06:07,600
of solving the externality problem,
of reducing pollution at least cost.

103
00:06:09,400 --> 00:06:12,310
Is command and control
ever a good solution?

104
00:06:12,310 --> 00:06:16,770
Yes, it can be precisely when
flexibility is not a virtue.

105
00:06:17,210 --> 00:06:20,550
So, if the best approach
to the problem is well known--

106
00:06:20,550 --> 00:06:23,980
we don't need experimentation
and innovation and new ideas--

107
00:06:23,980 --> 00:06:25,780
we know the best approach,

108
00:06:25,780 --> 00:06:29,550
and if success
requires very strong compliance--

109
00:06:29,550 --> 00:06:32,020
that is when flexibility
is not a good thing--

110
00:06:32,020 --> 00:06:35,350
then command and control
may be the best approach.

111
00:06:35,350 --> 00:06:39,240
So for example, let's consider
the eradication of smallpox.

112
00:06:39,240 --> 00:06:42,370
Now, smallpox is a terrible disease.

113
00:06:42,370 --> 00:06:45,350
It has killed more people
in the history of the world,

114
00:06:45,350 --> 00:06:48,380
billions of people,
than, perhaps, anything else,

115
00:06:48,380 --> 00:06:50,480
except, perhaps, old age.

116
00:06:50,920 --> 00:06:53,170
To get rid of smallpox
we had to isolate--

117
00:06:53,170 --> 00:06:58,860
every single time
there was a new case of smallpox--

118
00:06:58,860 --> 00:07:01,190
we had to isolate the people
with the smallpox

119
00:07:01,190 --> 00:07:04,660
and vaccinate everyone
in the surrounding community.

120
00:07:04,660 --> 00:07:08,090
And the World Health Organization
and other organizations

121
00:07:08,090 --> 00:07:10,600
did this time and time again.

122
00:07:10,600 --> 00:07:14,810
Wherever a case, anywhere in the world,
of smallpox appeared,

123
00:07:14,810 --> 00:07:17,230
we isolated and vaccinated.

124
00:07:17,230 --> 00:07:22,140
And over time smallpox
had fewer and fewer places to hide,

125
00:07:22,140 --> 00:07:26,680
until by 1979,
there were no places to hide left.

126
00:07:26,680 --> 00:07:31,030
Smallpox had been eradicated
from the face of the planet.

127
00:07:31,660 --> 00:07:34,450
That was a tremendous boon to humanity,

128
00:07:34,450 --> 00:07:36,870
but really the only way
it could have been done

129
00:07:36,870 --> 00:07:39,070
was command and control.

130
00:07:39,070 --> 00:07:43,290
If we'd subsidized vaccinations,
that would not have been enough,

131
00:07:43,290 --> 00:07:48,070
because that inevitably would have led
to small pockets of people

132
00:07:48,070 --> 00:07:52,060
who were not immunized
and they would've continued to be carriers

133
00:07:52,060 --> 00:07:54,650
to spread it to other people in the world.

134
00:07:54,650 --> 00:07:58,410
So, command and control
got us very strong compliance

135
00:07:58,410 --> 00:08:00,870
and it eradicated smallpox
from the world--

136
00:08:00,870 --> 00:08:02,700
and that was a tremendous thing.

137
00:08:03,890 --> 00:08:07,130
Very briefly, let's just say
where we've been and where we're going.

138
00:08:07,130 --> 00:08:09,400
We've been looking at solutions
to externality problems.

139
00:08:09,400 --> 00:08:13,610
So far we've looked at two:
Pigouvian taxes and Pigouvian subsidies--

140
00:08:13,610 --> 00:08:15,906
Pigouvian taxes for external cost

141
00:08:15,906 --> 00:08:18,826
and Pigouvian subsidies
when there are external benefits--

142
00:08:18,826 --> 00:08:20,270
and command and control.

143
00:08:20,270 --> 00:08:22,870
The next thing we want to do
is to look at the Coase theorem

144
00:08:22,870 --> 00:08:25,670
and private solutions
to externality problems.

145
00:08:25,670 --> 00:08:28,360
It turns out that we've been
a little bit too pessimistic.

146
00:08:28,360 --> 00:08:30,520
There can be some market
or private solutions

147
00:08:30,520 --> 00:08:33,270
to externality problems
in certain circumstances,

148
00:08:33,270 --> 00:08:35,330
and that's covered by the Coase theorem.

149
00:08:35,330 --> 00:08:38,850
The last thing we're going to do
is look at tradable allowances.

150
00:08:38,850 --> 00:08:43,170
These have been extremely important
in practice in reducing acid rain,

151
00:08:43,170 --> 00:08:45,470
and may become more important
in the future

152
00:08:45,470 --> 00:08:47,940
in dealing with global climate change.

153
00:08:47,950 --> 00:08:49,890
Tradable allowances, as we'll see,

154
00:08:49,890 --> 00:08:52,870
are a sort of combination
of command and control,

155
00:08:52,870 --> 00:08:54,990
and ideas from Ronald Coase--

156
00:08:54,990 --> 00:08:56,490
and it actually turns out

157
00:08:56,490 --> 00:09:00,380
to be quite similar to Pigouvian taxes
and subsidies in the end as well.

158
00:09:00,380 --> 00:09:01,840
So, that's where we're going--

159
00:09:01,840 --> 00:09:05,140
Coase theorem and private solutions
and then tradable allowances.

160
00:09:05,140 --> 00:09:06,290
♪ [music] ♪

161
00:09:06,290 --> 00:09:09,620
- [Narrator] If you want to test yourself,
click "Practice Questions,"

162
00:09:09,620 --> 00:09:13,058
or, if you're ready to move on,
just click "Next Video."

163
00:09:13,058 --> 00:09:15,478
♪ [music] ♪