Command and Control Solutions

What happened to the cleanliness of your clothes after the U.S. Department of Energy issued new washing machine requirements? The requirements — which require washers to use 20% less energy — mean that washers actually clean clothes less than they used to. Is “command and control" an efficient way to achieve the desired outcome (which is less pollution)? Rather than a standard requirement, such as the Department of Energy issued, a tax on electricity would provide users with greater flexibility in their washing—and would prompt people to purchase machines that use energy more efficiently and keep their clothes clean.

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- [Alex] We've already looked at one
solution to the externality problem,

Pigouvian taxes and subsidies. You might
call that the economist’s solution. There's

another solution, however, which is very
common and quite popular to the man in the

street, and that's command and control.
That's what we're going to look at now.

Command and control is pretty much what it
sounds like. The government says, "You

cannot do this or you must do this." For
example, the Department of Energy in an

effort to reduce the consumption of
electricity, recently said that it is

illegal to sell washing machines in the
United States if they consume more than a

certain amount of electricity. The only
washing machines that it was legal to sell

had to consume less than this amount of
electricity.

So, what were the results of this command
and control program? Well, here's Consumer

Reports: "Not so long ago you could count
on most washers to get your clothes very

clean. Not anymore. What happened? As of
January 2007, the US Department of Energy

has required washers to use 21%
less energy...but our tests have found

that traditional top-loaders, those with
the familiar center-post agitators, are

having a tough time wringing out those
savings without sacrificing cleaning

ability..."

So the government said you have to use 21%
less energy, but if things were

that easy everyone would do them. There
are trade-offs everywhere, and by

requiring the washing machines to use less
energy, the trade-off is they didn't clean

so well. Eventually, the technology has
gotten better and will get better,

and perhaps, this will be possible.

But one of the problems with a command and
control approach, is that the government

is not always aware of the trade-offs.
They're not always able to choose the

least cost way of achieving a goal.

Let's take a closer look at this problem.
Command and control is rarely an efficient

way of achieving a goal. Why not? Well,
there many ways to achieve most goals. For

example, let's look at some of the ways in
which we could use less electricity. We

could turn down our thermostat a little
bit. We could shut the lights off when we

leave a room. We could turn off our
computers at night when we're not using

them. We could use more solar power.

Firms which use a lot of electricity have
many, many different ways to use less by

adjusting their production processes. Now
if we want to cut back electricity

consumption by, say, 10%, we want
to cut back on the 10% of

electricity uses which are least valuable.
We want to reduce electricity use in the

way which is least costly. The problem is,
out of all of the millions, and perhaps,

billions of ways of reducing electricity,
is government going to choose to command

and control us to reduce electricity in
the least cost way? Probably not.

Government simply does not have enough
information to order the least costly

method of reducing electricity
consumption. Now, let's compare our

command and control with an alternative
method, a tax on electricity. A tax on

electricity would allow the users, would
give them flexibility to find the lowest

cost ways to reduce their use of
electricity.

If a tax of, let's say, a few percentage
points would reduce electricity

consumption by exactly the same amount as
the command

and control approach. The difference is,
is that each one of us would look at the

higher price of electricity and would
choose, based upon our different circumstances

and knowledge and flexibility, which ways
we could reduce electricity in the least

cost. Some of us would turn down lights,
some of us would turn down thermostats,

some firms would change the production
processes a lot, others would change their

production processes just a little bit.

Each one of us would access our own
information, and in this way with much,

much, much greater flexibility, we could
reduce electricity consumption by exactly

the same amount as the command and control
approach. But we would do so at much lower

cost because each user of electricity
would have the flexibility to choose the

least cost ways of doing it.

Think about it, how many people would
choose to reduce electricity by paying a

lot more for a washing machine that
doesn't clean very well? Probably not too

many. That illustrates that when
government chose to reduce electricity

consumption by requiring washers to be
"more efficient" that actually wasn't the

least-cost way of reducing electricity.
That was actually a very high-cost way of

reducing electricity, because it meant that
we had dirty clothes and we really didn't

want that.

Finally, let's remember that the goal is
not actually to use less electricity. The

goal is to reduce pollution.
That's why a Pigouvian

tax is really one of the most efficient
ways of reducing or controlling an

externality, because a Pigouvian

tax is targeted on the problem - the
pollution. So, the closer we can get the

tax to the good which is actually causing
the problem, which is not electricity but

instead which is pollution, the more
efficient, the lower

cost way we will have of solving the
externality problem of reducing pollution

at least cost.

Is command and control ever a good
solution? Yes, it can be precisely when

flexibility is not a virtue. So, if the
best approach to the problem is well

known, we don't need experimentation and
innovation and new ideas - we know the best

approach. And if success requires very
strong compliance, that is when flexibility

is not a good thing, then command and
control may be the best approach. So for

example, let's consider the eradication of
smallpox. Now, smallpox is a terrible

disease. It has killed more people in the
history of the world, billions of people

than, perhaps anything else except,
perhaps, old age.

To get rid of smallpox, we had to isolate
every single time there was a new case of

smallpox we had to isolate the people with
the smallpox and vaccinate everyone in the

surrounding community. And the World
Health Organization and other

organizations did this time and time
again. Wherever a case, anywhere in the

world, of smallpox appeared, we isolated
and vaccinated. And over time smallpox had

fewer and fewer places to hide. Until by
1979, there were no places to hide left.

Smallpox had been eradicated from the
face of the planet. That was a tremendous

boon to humanity, but really the only way
it could have been done was command and

control. If we'd subsidized vaccinations,
that would not have been enough, because

that inevitably would have led to small
pockets of people who were not immunized

and they would've continued to be carriers
to spread it to other people in the world.

So, command and control got us very strong
compliance and it eradicated smallpox from

the world - and that was a
tremendous thing.

Very briefly,
let's just say where we've been

and where we're going. We've been looking
at solutions to externality problems. So

far we've looked at two: Pigouvian taxes
and Pigouvian subsidies, Pigouvian taxes

for external cost and Pigouvian subsidies

when there are external benefits,
and command and control. The next thing

we want to do is to look at the Coase
theorem and private solutions to

externality problems. It turns out that
we've been a little bit too pessimistic.

There can be some market or private
solutions to externality problems in

certain circumstances, and that's covered
by the Coase theorem.

The last thing we're going to do is look
at tradable allowances. These have been

extremely important in practice in
reducing acid rain, and may become more

important in the future in dealing with
global climate change. Tradable allowances,

as we'll see, are a sort of combination
of command and control, and ideas from

Ronald Coase -

and it actually turns out to be quite
similar to Pigouvian taxes and

subsidies in the end as well. So, that's
where we're going, Coase theorem and

private solutions and then tradable
allowances.

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