THE American Economic Review just turned 100. It turns out that the original issue in 1911 featured an article by Professor Katharine Coman of Wellesley College entitled “Some Unsettled Problems of Irrigation”, and in the anniversary issue, Robert Stavins (via Mark Thoma) cleverly decides to retrace what's happened since then with economic theory on "commons problems". Basically, he writes, Pigou and Coase and those who followed them have done yeoman work that's led to the institutionalisation of tools like cap-and-trade allowances for fishing permits and pollution permits, which are superior to command-and-control rules both from an environmental and economic perspective:

First, economic theory—by focusing on market failures linked with incomplete systems of property rights—has made major contributions to our understanding of commons problems and the development of prudent public policies. Second, as our understanding of the commons has become more complex, the design of economic policy instruments has become more sophisticated, enabling policy makers to address problems that are characterized by uncertainty, spatial and temporal heterogeneity, and long duration. Third, government policies that have not accounted for economic responses have been excessively costly, often ineffective, and sometimes counterproductive.

For example, he writes, the 1990 law establishing tradable permits to bring down sulfur dioxide emissions rather than using command-and-control regulations saves the economy $1 billion a year. And with what he calls the "ultimate problem of the commons", greenhouse gases, "there is widespread agreement among economists (and a diverse set of other policy analysts) that economy-wide carbon pricing will be an essential ingredient of any policy that can achieve meaningful reductions of CO2 emissions cost effectively, at least in the United States and other industrialized countries (Gilbert E. Metcalf 2009; Louis Kaplow 2010). The ubiquitous nature of energy generation and use and the diversity of CO2 sources in a modern economy mean that conventional technology and performance standards would be infeasible and—in any event—excessively costly (Newell and Stavins 2003)."

The problem with this picture is passed along by Dave Roberts at Grist. The public, according to a new poll, does want to cut CO2—and smog, and mercury. But they want to do it through EPA regulation, ie command-and-control, not tradeable permits or Pigovian taxes.

I've never seen a behavioural economics study on this, but I'm sure somebody's done it, because it seems pretty widespread: people generally prefer rules telling them something is not allowed, rather than charges making them pay for it, even if the latter are clearly more efficient at maximising social value. Mr Stavins does recognise this, observing that in terms of political appeal, aversion to the word "taxes" is probably one reason why cap-and-trade systems for carbon emission permits have already been instituted in Europe; but he also notes that "now that cap and trade has been demonized—in US politics, at least—as 'cap and tax,' this difference has surely diminished."

The darkly ironic side of all this, of course, is that administrative command-and-control solutions like detailed EPA emissions rules are definitely more expensive than cap-and-trade or carbon taxes would be. If anything, when the public votes for EPA regulation rather than cap-and-trade, that's when it's imposing a tax on itself. Fifty years after Coase and 90 after Pigou, the economists are pretty sure they've finally got the solution for fixing commons problems without diminishing social value, only to have the public reject it because they think that's the tax. If the tragedy of the commons is "Romeo and Juliet", the rejection of Coasian cap-and-trade solutions to commons problems is "Blood Simple": a hilariously bitter demonstration of the human capacity for selfish stupidity that ends with the only guy who's figured it all out getting shot through a door by the wrong person for the wrong reasons.