Traffic congestion, siting of locally undesirable facilities, and air pollution are among many problems of urban environmental quality that appear more unmanageable today than twenty years ago. Their persistence suggests that the solutions of the past are not working; the use of economic incentives may prove more fruitful if the public bias against market-based approaches can be overcome.
Twenty years ago the United States experienced what was commonly called an urban crisis, characterized by riots in the inner cities, blighted neighborhoods, an increase in crime, congested freeways, deteriorating facilities, and worsening air and water quality. In response to these problems, the War on Poverty was initiated. The Kerner Commission and the Department of Housing and Urban Development were established, mass transit and municipal waste treatment subsidies were implemented, freeway construction was begun in earnest, and the Clean Air and Clean Water acts were passed. After a while the urban crisis seemed to fade from public consciousness.
Yet today distinctively urban predicaments are again in the news, and there is widespread belief that they are becoming increasingly unmanageable. The issue of manageability applies with particular force to urban environmental crises where attempts to improve the quality of life have had unforeseen, if not always unforeseeable, results. Such is the case with regard to traffic congestion, the siting of locally unwanted facilities, and air pollution—three problems that have defied the somewhat simplistic solutions applied a generation ago. These solutions, at best, have only partially mitigated the problems at hand and, at worst, have exacerbated them.
Traffic congestion
Since the nineteen-fifties, the construction of an extensive network of expressways in every major urban area has enabled Americans to travel broadly in their own country and to live the suburban life-style that most seem to prefer. Less desirably, however, the new freeways and interstate highways have increased our dependence on the automobile and allowed other forms of transportation to atrophy. While effecting a decrease in travel time and congestion over the short term, over the long term they have permitted the spread of low-density development—a phenomenon that has led to increasing congestion as commuters travel farther distances between their homes and workplaces. Many urban areas now support satellite employment centers that are almost impossible to service with mass transit.
In spite of massive roadway construction, the journey to work is steadily becoming more onerous. Average travel times are on the increase, and the duration of the rush hour is lengthening. Today about 65 percent of rush-hour traffic on U.S. freeways is considered congested, which compares to about 40 percent in 1975.
Facility siting
Delivering basic urban services such as water supply and trash disposal is becoming increasingly difficult and expensive due to facility-siting problems. In particular, it has become nearly impossible to site socially useful but locally undesirable structures such as landfills and major highways. The facility-siting difficulties of today are to a large extent an unexpected consequence of legislation on environmental protection enacted in the late sixties and early seventies and, more recently, of laws designed to safeguard the rights of parties that might be adversely affected by siting decisions.
In the past, siting decisions were relatively easy to make as they mainly involved narrow financial and technical considerations. Homeowners living near a proposed site typically had little control over siting decisions or the subsequent details of construction and operation. While local landowners received compensation for land taken for a facility, adversely affected third parties were generally ignored. And where publicly owned facilities were to be built, even landowners had little choice in the matter inasmuch as the authority of eminent domain could be used to force transfers of property.
As a result of legislation that protects sensitive habitats against destruction by development and of several court rulings that acknowledge the rights of third parties, those opposed to major developments now have greater access to the courts as well as legal precedents with which to fight siting decisions. Now these decisions can be and usually are challenged by individuals and groups with diverse interests. In effect, the definition of property rights has changed with the placement of new limits on the use of property in order to protect environmental quality and the interests of third parties.
The fact that third parties now have a role in siting decisions is certainly a desirable change, for they do suffer losses in such situations. However, this democratization of decision-making has come at a cost. Because no mechanism has yet been developed to allow rapid adjudication of claims brought by third parties, facility siting has become a difficult and costly problem for public officials. At best, projects are subject to lengthy delays while issues are being resolved; at worst, worthy projects are abandoned after considerable expenditure and, often, much acrimony. As these facilities are generally regarded as socially beneficial, nearly everyone wants them to be built somewhere—but "not in my back yard." Today the NIMBY syndrome, as it is known, is making the cost of new facilities very high by delaying or defeating numerous siting projects.
The Clean Air Act helped to decrease some kinds of air pollution, but air quality problems still plague many U.S. cities
Air pollution
Equally troublesome is the problem of maintaining urban air quality. The turning point in the regulation of air quality in the United States came in 1970 with the passage of the Clean Air Act, the federal government's first serious effort to reduce air pollution. Before 1970, air pollution control was largely within the province of local governments. Although successful in generally improving air quality, localities could do nothing to control automobile emissions, increasingly regarded as a major source of air pollution. In addition, because local air standards varied, advocates of federal legislation argued that nothing prevented polluting firms from shopping around to take advantage of less restrictive air quality regulations.
By establishing limits on emissions of those pollutants thought to pose the most significant threats to human health, the Clean Air Act was designed to do the job of cleaning the nation's air that local governments had been unable to accomplish. It appears that the act has indeed reduced emissions of some pollutants. In particular, ambient concentrations of particulates have fallen. Without the Clean Air Act, air quality would very likely be much worse. However, a number of cities still fail to meet air quality standards with regard to emissions of ozone and carbon monoxide. Furthermore, it now seems that some air pollution problems are not always directly traceable to the presence of high concentrations of pollutants in the air. An example is acid deposition, which results from the oxidation of the precursor pollutants sulfur dioxide and nitrogen dioxide. Although all regions of the country have complied with sulfur dioxide emission limits and nearly all with nitrogen dioxide limits, the United States still faces potentially serious acid rain problems.
Despite its undeniable achievements, the Clean Air Act has not improved air quality to the degree anticipated in 1970. Perhaps expectations were unrealistic. A more germane question is whether the act was predicated on an overly simplistic view of the air pollution problem, as it embodies what now appear to be two erroneous assumptions. The first is that there is a direct causal link between emissions and air quality; that is, we assume that by managing the one, we can manage the other. The second assumption is that we can determine the requisite amount of emissions reduction from the improvement we desire in the surrounding air quality.
Alas, the connections between emissions and air quality have proved to be much more complex than originally thought. Until recently, for example, air pollution chemists believed that general ozone formation was limited by volatile organic compounds (VOCs) emitted into the air. However, in Atlanta, where VOCs were substantially reduced between 1979 and 1987, ozone concentrations have hardly changed at all. Similarly complex is the relationship between ozone and acid compounds in acid rain.
The significance of the debate over the efficacy of the emissions reduction policy becomes apparent when potential human health effects are considered. Recent clinical evidence suggests that the health effects of ozone in the air may be more serious and may be felt at lower concentrations than once thought. Elevated ozone concentrations have already been directly linked with reduced lung function. Although epidemiologic studies cannot easily support a causal link, new evidence suggests that ozone at low concentrations may lead to long-term lung tissue damage that contributes to chronic lung disease.
Searching for solutions
What these urban problems—traffic congestion, siting of locally undesirable facilities, and air pollution—share is the limited effectiveness of solutions applied to them in the past. The construction of more highways has only resulted in more traffic and is unlikely to be a remedy for overcrowding on the nation's freeways in the future. Measures that attempt to correct injustices and protect environmental quality in the siting of facilities have inadvertently made facility siting more difficult. The current emissions reduction policy, while effecting a decrease in some kinds of air pollution, may have improved urban air quality as much as is practicable; changes in land use and commuting patterns may be necessary to realize further improvement.
As a result of these disappointments, management strategies that rely heavily on economic incentives are being reconsidered. Such an approach is not new; economists have been suggesting the use of market mechanisms to deal with congestion and pollution issues for years. More recently, they have studied the possible benefits of using economic incentives to ease the facility-siting crisis.
Although economists have proposed the use of market mechanisms to resolve some urban problems in the past, their advice has often been disregarded. In the 1960s, for example, urban economists were suspicious of proposals to build more transportation facilities to solve urban congestion problems. They looked askance not only at increased investment in expressways but even more at large fixed-rail mass transit systems, and recommended instead user fees to ration access to roadways. Failure to impose such fees contributed to consequences that surprised few economists—too much congestion and, probably, too many freeways.
Environmental legislation and court rulings that protect the rights of third parties result in more challenges to facility-siting decisions.
Perhaps this outcome will increase the receptivity of urban authorities to practical pricing schemes that discourage highway use or ration freeway access. With such schemes there are practical problems too, such as the impossibility of pricing access to all urban streets—which is one reason why street construction is a function of government. In the face of this difficulty, tolls could be determined for only part of a transportation network, presumably the limited-access freeways that are main commuter routes. But if access is restricted on these routes, an increase in traffic on smaller thoroughfares would likely result.
Singapore provides an example of one large city that does use fees to limit use of roads. Since 1975, cars entering the center of the city during the rush hour must display a sticker that costs $5.00 (in Singapore currency) per day. When first instituted, this sticker fee cut the number of cars entering the city by 75 percent. Even today Singapore is much less congested than other cities of its size.
To overcome the difficulty of siting major facilities, the market approach would be to find those who oppose development and who have the power or a property right to stop it, and to compensate them as a way of mitigating opposition. At first glance compensation seems to be an attractive way of dealing with siting problems because it offers the potential for resolving disputes by mutually beneficial trade rather than by costly, prolonged, and often idiosyncratic litigation. However, a closer look suggests a number of difficult questions that must be answered.
First, who should be compensated? To be fair, compensation should be accorded those who would be injured by the development. Yet to facilitate siting, compensation should go to those with the legal and political power to delay or cancel the project. These two groups may not be the same.
Second, how much compensation would be necessary, and how would the amount be determined, given that potential beneficiaries have every incentive to conceal their true preferences? One way of overcoming this problem would be to auction off the undesirable facility to owners of competing sites to discover who would accept the least compensation for it.
Third, who would guarantee that compensation will facilitate siting, and how would such assurances be enforced? Compensation may do little good unless all groups and individuals with the ability to halt or delay development agree or are somehow required to honor the negotiated outcome.
Despite economists' recommendations, policymakers have not embraced market-based solutions to these urban crises.
And fourth, how should decisions be made? The developer might be required to negotiate with each affected individual, or entities such as local governments might have negotiating authority. The rights of nongovernmental bodies such as environmental groups must also be considered.
As a result of these and other practical difficulties, the use of compensation schemes in facility-siting has enjoyed mixed success in the United States. Certainly the 1980 Massachusetts Hazardous Waste Management Act, designed to facilitate siting decisions in part by encouraging the use of compensation, has not worked as anticipated. Because it denied a community's right to veto the siting of hazardous waste facilities under certain conditions, many communities regarded the act's preemption of local authority as coercive. By 1986, five attempts to site facilities using the law had all failed. However, compensation has expedited facility siting in France, which has managed to site enough new nuclear power plants to derive about 70 percent of its electrical generating capacity from nuclear energy. Until recently French national authorities made large contributions to local governments. Local residents have enjoyed lower electric rates. The inducement was large enough that localities considered a nuclear plant to be a desirable neighbor. Japan and Italy have employed similar local government incentives to site nuclear plants.
By contrast, in the United States, local and state governments, as well as the federal government, often take measures that prevent compensatory actions from being adopted. At one time in New Jersey investments in nuclear plants were channeled into the local tax base of the rural communities in which a plant was located. Then the state passed a law that prevented local governments from benefiting from such investments, thereby removing any incentives for neighboring populations to accept these large, otherwise locally undesirable facilities.
With respect to protecting air quality, the use of economic incentives has been suggested as a way of curbing the formidable cost of pollution control efforts. Until about 1983, however, local, state, and federal authorities ignored the possibility of using incentives. When enacted, the Clean Air Act was viewed entirely as a command-and-control approach to air quality management in which the authorities directed polluters to adopt a particular pollutant-reducing technology or to meet some performance standard. No use of economic incentives was envisioned. Although such incentives were not ruled out in the preparation of implementation plans, no state made use of them.
Construction of more roads has only increased traffic congestion—an outcome that surprised few economists.
That view changed in the early eighties for several reasons. One was the perceived high cost of controls. Another was the change in administration; Republicans tend to be more comfortable with economic approaches than Democrats. Still another was the issue of nonattainment. By the late 1970s it was clear that many urban areas were not going to attain national air quality standards. Among other things, amendments to the Clean Air Act, enacted in 1977, made it difficult to add new sources of emissions in areas that failed to meet air quality standards without a compensating reduction in emissions from sources already located in those areas. This constraint evolved into policies that allowed some transfer of discharge permits—permits that allow holders the right to discharge certain amounts of pollutants into the air and water over a given period—and that gave promise of a more cost-effective approach to emission reductions.
Unfortunately, experiences with marketable discharge permits have so far been disappointing. Few trade gains have been realized, in part because very few trades have taken place. One analysis of marketable permit policy in southern California concludes that the policy was not effectively administrated. California's policy allowed some generators of pollution to discharge emissions without getting permits to do so. In addition, the mandatory review and approval of permit trades by local air pollution agencies inhibited trading and tended to eliminate the economic value of permits. The value of a marketable emission permit policy will always be limited if there is an uncertain connection between emissions and the desired policy outcomes.
Political questionability
One problem affecting the use of economic incentives is their apparent political unpalatability. Despite the recommendations of economists, policy-makers have generally failed to embrace market-based approaches for dealing with traffic congestion, facility siting, and air pollution. The irony is, as has often been observed, that economists have the most influence over policy in those areas in which they disagree among themselves the most. For example, economists do not agree on macroeconomic issues such as the causes of inflation, unemployment, and economic growth. They are much more in agreement about microeconomic issues such as congestion tolls, compensation payments, effluent charges, and marketable permits; on these matters, however, they have almost no influence.
Despite its achievements, the Clean Air Act has not improved air quality to the degree expected.
What accounts for the apparent public bias against market-oriented approaches to some of our most pressing urban problems? Evidently the costs and disadvantages of such approaches are more obvious than the advantages. Persuading commuters that everyone will be better off with hefty tolls for road use is a tough sell. Marketable discharge permits are easy to ridicule as selling a right to pollute. Some local officials and citizens object to compensation as a form of bribery. Yet these policies, while not panaceas, clearly have a lot to offer, as two decades of research on their benefits reveals. Unfortunately, less attention has been paid to the question of how to design these policies to make them more palatable to public officials and the electorate at large.
Winston Harrington has been a fellow in the Quality of the Environment Division at RFF since 1980.
A version of this article appeared in print in the January 1990 issue of Resources magazine.
