Analysis & Opinions - The New York Times

Pitfalls in Public Policies

| January 19, 2011

Can the U.S. Compete With China on Green Tech?

In a market economy, any industrial sector — green or otherwise — thrives because companies in the sector have comparative advantage in supplying the goods and services the market demands.

Government can affect the marketplace in a number of ways, such as through policies that increase demand for particular products. A prominently discussed example in the realm of green industries would be a carbon-pricing regime (tax or cap-and-trade), which would increase demand for products that generate low-carbon energy (wind turbines) or that economize on the use of energy (thermal insulation).

But it is important to keep in mind that a large domestic market does not guarantee a healthy industry. That is the lesson of Detroit. For decades, U.S. motor–vehicle fuel efficiency standards have driven the demand for fuel-efficient automobiles, but Japanese (and Korean) companies have enjoyed comparative advantage in producing these cars for the U.S. market. Likewise, at the end of 2008, the U.S. led the world in installed wind generation capacity, but half of new installations that year were accounted for by imports.

Although policies that affect product demand, like carbon-pricing regimes, will be necessary to bring about meaningful reductions in greenhouse gas emissions, they will not be sufficient. This is because there are other market failures that dilute the effects of price signals on decision makers.

The most important of these other "market failures" is the public good nature of information. Companies carrying out research and development incur the full costs of their efforts, but they do not capture the full benefits. Even with a perfectly-enforced system of intellectual property rights, there are tremendous spillover benefits to other firms. Inventions and innovations by one firm provide valuable information that leads to new inventions and innovations by other firms.

Firms pay the costs of their R&D, but do not reap all the benefits. This causes the private sector to carry out less than the "efficient" amount of R&D of new climate-friendly technologies in response to given carbon prices. Hence, other public policies are needed to address this R&D "market failure."

 This, however, is easier said than done, because government does not know — and, in principle, cannot know — which of the infinite variety of as-yet-uninvented technologies merit a push through government-funded research and development. The history of such efforts in the U.S. is not encouraging.

For more information on this publication: Please contact the Belfer Communications Office
For Academic Citation: Stavins, Robert N..“Pitfalls in Public Policies.” The New York Times, January 19, 2011.

The Author

Robert N. Stavins