Bloomberg has an interesting article on Amazon:
For a little while earlier this year, it seemed as though 87-year-old Rosie Thomas and her neighbors in the small town of Gainesville, Va., had beaten Amazon. Virginia’s largest utility, Dominion Energy Inc., had planned to run an aboveground power line straight through a Civil War battlefield—and Thomas’s property—to reach a nearby data center run by an Amazon.com Inc. subsidiary. After three years of petitions and protests in front of the gated data center, skirmishes punctuated by barking dogs and shooing police, Dominion agreed to bury that part of the line along a nearby highway, at an estimated cost of $172 million.
Within a month, however, the utility and state legislators had passed on the cost to Thomas and her fellow Virginians. The state’s House of Delegates approved Dominion’s proposal to raise the money needed for the Amazon line with an as-yet-unannounced monthly fee. “Lord, have mercy,” Thomas said when a neighbor gave her the news this spring in the gravel driveway of her one-story clapboard home, where she was watching the metal disk spin inside the electricity meter on the side of the house. She was already struggling to pay her monthly $170. Leaning forgotten against Thomas’s mailbox was an old protest sign that read “UNPLUG Amazon Extension Cord.”
Ronald Coase‘s research on externalities forced economists to think about concepts such as villains, victims, and fairness in an entirely new way. Thus imagine a pig farm that creates unpleasant odors for nearby suburban residents. Coase would argue that neither the farm nor the homeowners “caused” the problem, rather it was jointly caused by their interaction. There is no such thing as a “fair” solution, only an efficient solution. It doesn’t matter “who was there first”.
In the power line case, we don’t have enough information to know the efficient outcome. All we know is that the actual solution ended up costing $172 million. That solution was efficient if both of these hold true:
1. Amazon’s next best alternative cost more than $172 million.
2. The psychic damage to the public from an ugly power line in this location exceeded $172 million.
In this case, we don’t have enough information to know if either is true.
Coase would say that we should assign property rights in such a way that we are more likely to get an efficient solution. But that’s not easy to do.
If there were only a handful of Virginians adversely impacted by the power line, they could probably negotiate an efficient solution with Amazon. But it’s difficult to ascertain the value of open skies when there are lots of people involved. And Amazon has no incentive to reveal the cost of its next best option (such as moving the building elsewhere) if it thinks someone else will pay for the buried power line.
Just thinking out loud, what about the following solution:
1. Ratepayers vote on whether they’d be willing to pay an extra $172 million in utility bills, if the line ends up being buried.
2. Amazon is told they must also pay the full cost of burying the line.
In that case, you only end up building the line if both conditions are met, value to ratepayers and no good alternative for Amazon. But now you’ve collected $344 million—which is more than what’s needed. What to do with the money? If you give it back to ratepayers, you remove their stake in the decision. I suppose you could give it away in foreign aid, but it’s unlikely that Virginians would agree to that option.
Another option is to try to figure out which value is easier to estimate, the value of clear skies to ratepayers or the cost to Amazon of an alternative solution. If the cost of an alternative to Amazon is obviously greater than $172 million, then bury the line and have ratepayers pick up the cost (assuming ratepayers decide to vote for this option.) If it’s easier to figure out the value of clear skies to ratepayers, and if that value exceeds $172 million, then have Amazon pick up the cost if they decide to stay in this location.
I’m probably missing something here—are there any other solutions? (And don’t say, “Virginians need to stop obsessing over the Civil War.”)
When should externalities lead to government intervention? Generally when one side of the issue is so widely dispersed that they need a single agent to negotiate on their behalf.
READER COMMENTS
Philo
Aug 30 2018 at 12:27pm
“When should externalities lead to government intervention? Generally when one side of the issue is so widely dispersed that they need a single agent to negotiate on their behalf.” This is generally unrealistic. Government is very responsive to special interests: In a contest between a special, concentrated interest and a widely dispersed, rather dilute interest, we should expect government simply to serve the special interest.
You might better have said: “When should externalities lead to intervention by a *deus ex machina* . . . (etc.).” That could not be mistaken for a realistic proposal.
Scott Sumner
Aug 30 2018 at 1:42pm
Philo, It depends how corrupt the government is. It’s probably true that the average regulation does more harm than good, but the less corrupt the government, the more likely that the regulation does good. I think you can argue that certain specific regulations, say reducing pollution from car exhaust, were beneficial. Even there, a “tax on car exhaust” approach probably would have been slightly better.
The tradable permits on coal plants emissions were one of the most effective regulations, and also one of the most market-oriented.
Philo
Aug 30 2018 at 5:11pm
’Corrupt’ is too harsh a term for special-interest influence in government, which is close to being a law of nature.
Scott Sumner
Aug 30 2018 at 11:58pm
I don’t think it’s too harsh. I recall someone who worked for a large Scandinavian firm telling me they didn’t even have a lobbying department.
Philo
Aug 31 2018 at 11:56am
You might want to make it clear that your implicit policy advice is directed at people who live under idealized, quasi-Scandinavian governments, not at Americans.
Floccina
Aug 30 2018 at 5:34pm
It depends how corrupt and THOUGHTFUL the government is
Alan Goldhammer
Aug 30 2018 at 2:30pm
Scott – very timely post for those of us living in Montgomery County MD. We are one of the ‘finalists’ for the Amazon 2nd campus and had a very divisive Democratic primary for County Executive. The candidate who favors ‘controlled growth’ was the winner over the more business friendly candidate. The issues on the forefront of the primary debate were what costs should be passed on to business and developers for schools, utilities, etc. versus what should be loaded upon homeowners (including renters who have to cover their utility bills). Just as the Amazon issue you write about, many localities are facing similar issues and the question is how to best finance development.
There are no easy answers and we now have a third candidate who entered the county executive race as a pro-growth independent (she is a former Democratic county council member).
Matthias Goergens
Aug 31 2018 at 8:58am
Actually, land value tax is a pretty ‘easy solution’.
It also answers the question of what the state should invest in: if it’s not explicitly welfare, then an investment should raise LVT by more than it costs to be worth it.
robc
Aug 30 2018 at 2:37pm
Scott,
Add a condition:
When the cost of the market externality is less than the cost of the government externality.
Far too often, the cost of government intervention is greater than the original cost of the externality.
Scott Sumner
Aug 31 2018 at 12:00am
I agree.
stoney batter
Aug 30 2018 at 5:55pm
Why not some sort of double blind auction? Every citizen in the town submits their personal estimate for the value of clear skies. Amazon submits their estimate for the value of the right to build a power line.
If the sum of the townspeople’s individual estimates is less than Amazon’s estimate, then Amazon values the right to build a power line more than the citizenry values clear skies. Amazon pays each citizen the amount he/she originally estimated, and then builds the power line.
If the sum of the townspeople’s estimates is greater than Amazon’s estimate, then they value it more highly. Each citizen pays Amazon his/her own estimate, and Amazon opts for its next best alternative to power its data center.
This seems like it would lead to an efficient outcome to me, though obviously executing it would be difficult and probably completely unfeasible.
Scott Sumner
Aug 31 2018 at 12:02am
Stoney, I don’t think individual residents would have an incentive to reveal the actual value of the clear skies, due to the free rider problem. But perhaps I’m missing something.
Matthias Goergens
Aug 31 2018 at 8:59am
Also, why only pay to Amazon? And not also my fly by night operation that also wants to build an ugly powerline?
P Burgos
Aug 31 2018 at 12:31am
I like the logic of the voting solution, but I think that it is highly impractical to address externalities, because there are so many of them. Perhaps it would be better to let voters weigh in on major regulations, with some kind of neutral referee doing studies on the ranges of estimated benefits and costs and putting those on the ballot. That way voters got to have their say as to what they value, but then the rules of the game are set and people don’t have to go to the polls every time someone wants to build anything.
Tom DeMeo
Aug 31 2018 at 8:31am
We are talking about an eminent domain taking here, and based on the description, the primary benefit is targeted to a single corporate entity, not the broader community. I understand that the legislature provided the broader public consent, but this type of stuff always has a whiff of corruption to it. I don’t think many of us internalize that when we own a property, we always need to understand it is subject to an eminent domain taking if a powerful corporation wants it.
Seems to me that quite a bit of this argument hangs on one of Coase’s ideas. Could someone please explain “it doesn’t who was there first” to me? That seems crazy
Hazel Meade
Aug 31 2018 at 11:31am
I’m inclined to think this is Amazon’s fault for not determining how they were going to run power to the facility before breaking ground. It could also be considered the fault of the government for giving Amazon the impression that they would provide power to the facility without getting the agreement of the affected residents. or more broadly, it’s a systematic fault to have governments making deals with corporations to build facilities that impact private property held by third parties without the formal agreement of the impacted third parties.
I would suggest that Amazon offer compensation to the residents affected for putting in the above ground power line if it is indeed cheaper than burying it. At $172 million to bury the line, you could pay 1720 people $100,000 each. I’m betting they don’t have to go that high.
Thaomas
Sep 1 2018 at 11:29am
Shouldn’t the normal rule be that Amazon when choosing the site for the data center should have taken account of the marginal cost of electricity supply which would normally include non-pecuniary costs of overground lines?
Andrew_FL
Sep 1 2018 at 11:57am
Virginians should stop obsessing over the Civil War, though
ChrisA
Sep 3 2018 at 5:15am
One thing that the article doesn’t make clear is what Amazon’s role in this was. Of course the media and the campaigners wanted to use Amazon as a bogey man, but probably all Amazon did was ask for a utility connection, they almost certainly didn’t decide on the routing of any power lines, that would have been Dominion Power. Also it would be very surprising to me that the next best alternative for Dominion Power was in fact $172m, probably they didn’t look for this better alternative because they already had the right to charge other customers for the cost, they had very poor incentives in other words to lower the cost.
When I was involved in a private company building similar infrastructure in a developing country with no such rights, what we would do is hold two or more competing routes. We would then negotiate with the landowners on both routes simultaneously with the transparent process that the first route to be agreed would get paid while the second route would get nothing. Of course we would have to make minor deviations but never major ones. Of course if we had the right to charge whatever we wanted to our customers we probably wouldn’t have bothered with this.
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