Exotic Policy

An IJC White Paper
On Policies for the Prevention of
The Invasion of the Great Lakes by Exotic Organisms

July 15, 1999
Eric Reeves

§ 10. Political economics: The use and misuse of economics, and the political realities of environmental regulation

Just as in physics every action is associated with a reaction, in economics every benefit is associated with a cost. I might take that analogy one step further to say that in politics every public policy promoted by some interest is opposed by another interest. This is not because people are evil (whether or not they are) but simply because they are rational. The basic organizing principle of evolution, economics, and politics, is selection through the process of competition. The special interest which does not look out for its interest may be replaced by another who does. The business person who does not work to delay and subvert the process of government regulation may go out of business. The responsible industry leader who absorbs too much in the way of marginal costs doing the right thing may be outbid by the sleazebag competitor who does not care. This does not mean that all special interests are hypocritical in their protestations of promoting the public interest or that all industry representatives are lying when they say that they want to work with government regulators in a cooperative manner. But it does mean that, in order to be effective, we must give them an incentive.

As soon as we begin to talk about policies for the prevention of exotic invasions - or as soon as we begin to get specific about effective controls on such things as ballast water or aquaculture - the industry becomes wary of "excessive environmental regulation" and the "economic costs." As soon as we begin to talk about "costs and benefits," the environmentalists become wary of a sellout. How can you put a price on preservation of the environment, particularly when we are faced with permanent loss of biodiversity?(400) How can you put a dollar sign, Canadian or US, on our vision of the Great Lakes? The answer is that you can - that we all do every day, whether or not we like to think about it - and that you had better learn how to put a price on it if you want others to value it. But the environmentalist suspicion of cost/benefit analysis is in fact justified, for exactly the same reason that the industry suspicion of environmental regulation is justified - because the analysis is often sloppy. It is often sloppy in not fully accounting for the real costs of environmental degradation and loss of natural resources. It is often sloppy in not accounting for the realities of the market and the costs of marginal returns. And, what is the very worst of both worlds, it is often sloppy in not anticipating unintended consequences which give us low levels of environmental protection at high costs. I will try to avoid those errors here.

There are two basic problems in economics, relevant to all areas of environmental regulation, which bear on the problem of exotics. The first is the problem of accounting for the intangible values and public externalities which are not normally reflected in market transactions - which thereby justify governmental intervention to correct that market failure. The second is the problem of accounting for the action of markets on the margin and the unintended consequences of regulation - which amount to governmental failure.

My focus, in this section, is almost entirely on ballast water. That is because, as a matter of fact, it is not clear that there are any substantial costs to be concerned about in making the obvious and necessary reforms in the regulation of commercial uses of aquatics in aquaculture, baitfish, and aquaria. That may be debatable. But the industries concerned have yet to make a case that better federal, state, and regional coordination of existing regulatory programs, or development of better quality controls at critical points in the business processes, would harm those industries in any way. That sort of thing might well benefit those businesses to some extent. (That does not mean that it might not hurt some individual businesses, having difficulty coming up to standard. But, as a matter of public policy, that is not our concern. If regulation of the industry helps separate out the competent from the incompetent, that is good for both the environment and the economy.) Outright prohibition of commercial use of some species of exotic fish does in fact cause significant opportunity cost to those businesses. But here it seems so obvious that the benefit to the public of keeping out detrimental exotics so clearly outweighs the benefit to business of being able to make use of them that there is really very little to analyze and no strong argument against an outright prohibition. The more relevant issues to be debated, regarding regulation of commercial uses, are the more familiar legal process questions about how to coordinate government policies and create regulatory programs which are efficient, for both the public and industry - how, in other words, to keep down the "transaction costs" of regulation.

§ 10.1. The value of steel and fish: Putting down your money and making your choices

A fundamental principle of both democracy and economics, as both are more or less accepted in the liberal democracies of the United States and Canada, is that everyone's desires for good things in life are worthy of respect.(401) From the agnostic view of neoclassical economic theory (which seeks thereby to be objective and scientific, although there are some interesting philosophical problems with this claim) the goal is the greatest good for the greatest number, however those numbers might define what is good for themselves.(402) The prevailing schools of modern economic theory(403) also maintain that, in general, a free market is the most efficient way to achieve that goal. But the bias in favor of a free market, although very strong, is instrumental rather than ideological. Modern economics clearly recognizes the existence of "public goods," "externalities," and "market failures" which justify intervention for the greatest good. Although it makes it inconvenient to do the math, there is nothing in economic theory which justifies ignoring a value or a cost just because it is difficult to put a price tag on it.

Moreover, in its bias toward the free market, economic theory is just as critical of pleas for government interventions in favor of "economic development." When we talk about the need to do something serious about ballast water in Seaway shipping, advocates for Seaway shipping warn of the "economic" consequences to the industry of the United States and Canada. But the same parties, in arguing for continued government subsidy of the Seaway, use an "economic" argument that ignores the importance of free markets. "One thing that bothers me…" says the Administrator of the US St. Lawrence Seaway Corporation, "is that everyone talks about the cost of the Seaway. This is significant, but we should focus more on the economic benefit, which is enormous. When you talk about the two nations investing from $70 million to $80 million in the Seaway System, you also have to look at the gigantic economic benefit, the number of jobs, the personal income, the economic activity which directly and secondarily results from Seaway commerce. Not enough people look at that side of the equation."(404) This is good political rhetoric, very commonly used, but it is the sort of bad economic theory that bothers any serious economist. The economist looks further, to what is really the other side of the equation. The other side of the equation is the "opportunity cost,"(405) the resulting economic benefits which could be enjoyed by the public if the government money spent on the subsidizes were allocated by markets instead. Any expenditure of money, whether for dog food, computers, or the steel shipped through the Seaway, has ripple effects through the economy, creating economic benefits, jobs, and personal income. The question is where the money is best spent for maximum effect. This is a question of efficiency. And, unless definite public goods or externalities not reflected in market prices are identified, the market is the far more efficient means for obtaining the maximum increase in these secondary economic benefits, jobs, and personal income. If the government expenditure on the Seaway lowers the cost of incoming steel, as it certainly does, then there certainly is a benefit to industries who depend on heavy use of steel. But that artificially lowers the competitive value of the all the alternative goods in the economy. It lowers the relative value of domestic iron ore and the domestic shipping which carries that ore inside the lakes. It lowers the relative benefits to those who produce substitute materials, such as wood and plastics. It lowers the economic benefits otherwise available to those who manufacture products which make less use of steel, such as computers (which have had massively beneficial ripple effects throughout the economy) and, yes, even dog food. If buying a second car is not artificially cheap, you might decide to spend more time on long walks with your dog instead of long drives in that second car or you might decide to buy a bicycle instead - either of which would benefit your health and lower medical costs. This may sound silly, or not. It depends on your personal choices. But the whole point of the free market is that it enables you to make your personal choices, silly or not, in incalculable small ways which add up to economic growth and prosperity for all. I cannot predict what actual decisions millions of people will make in response to higher steel prices. Nor can an economist. But neither of us has to. That is the beauty of leaving it up to the free market.

This does not mean that there might not be an argument in favor of subsidization of the Seaway, but simply that it is not logically based on the benefits of normal economic activity that are most effectively generated by the free market. As I will discuss below, there is an argument that the Seaway provides a special "public good" not encompassed by this sort of normal market activity.

What, then, does justify governmental interference in the market? The market fails to efficiently allocate goods and services when some activity generates a significant "externality." Externalities can be either good or bad. When they are good, they may also be special kinds of indivisible externalities called "public goods." When they are bad, they are sometimes called "social costs" or "negative externalities." In the field of environmental economics, a negative externality is "pollution." Externalities, good or bad, can be technically defined as "effects on third parties that are not transmitted through the price system."(406) Another way it is often stated is that the market price does not reflect the "true cost" of the economic activity. The ship that spills oil without having to pay for the clean up and the damages to natural resources is getting a "free ride" at the expense of the public because those very real costs are not reflected in the market price of oil. The fishers who drive a species to extinction through over-fishing have created a "tragedy of the commons" because they have taken the common resource without paying for the full cost of it.

Putting a price tag on the environment. The difficulty of putting a price on environmental quality is not, in principle, any reason to ignore its value. It is sometime said that "an economist is someone who knows the price of everything but the value of nothing." Those who work in the subfield of environmental economics might wish that were so, because the problem is actually just the opposite. Economists know very well that intangibles such as our desire for "ecosystem health" or "natural balance" have some real value. The problem is that it is difficult to put a price tag on these things, and therefore they do get left out of the equations too often. The following categorization of potential environmental values - all of which are applicable to the problem of exotic invasions - provides an analytical framework for making sure that nothing gets left out of the accounting.(407) The distinction between the two main categories, "use value" and "non-use value," reflect in a rough way the distinction between the concept of the environment as an "economic resource," or a concept of environmental protection as an issue of "sustainable development," on one hand, and the broader concept, on the other, of the environment and natural balance as something of profound human or spiritual importance. Without going too far into that philosophical debate (which I will touch on again below), my point here is to emphasize that both concepts (which in fact overlap) are relevant to the cost/benefit analysis:

(a) "Use value." This is the value of things in the environment as resources. It includes (1) "direct use value," which may be either (i) "priced" or (ii) "unpriced," and (2) "ecological function value." In the case of exotic invasions, the use value to be protected includes the native fisheries and other uses of the natural system which are impaired by invasions. The fisheries have direct priced value when fish are sold, and also unpriced value consisting of the use of the fish for recreation (which indirectly generates priced value in terms of tourism dollars). The integrity of the native system also has use values which are both priced and unpriced. A direct priced value is the amount of money that will not have to be spent on control measures, such as the sea lamprey control program or the cleaning of zebra mussels out of water pipes, if the native system is not impacted by invasions. An unpriced direct value of the same nature is the value to consumers lost when the zebra mussel causes taste and odor problems in water supplies, blooms of submerged aquatic vegetation, or added bioaccumulation of toxics which harm human health. One must also subtract from the lost value whatever value is gained from clearer water, which is certainly attractive, or possible assistance to increased production of mayflies, which benefit fishing.

These are the familiar sorts of things that we try to put a price on when talking about the damage done by past invasions (discussed in § 2.3 above). They include such things as $3 billion a year in cost to the US Great Lakes and Mississippi Basin from the zebra mussel, significant damage (maybe in the range of $1 billion per year?) to a Great Lakes fishery worth maybe $3 billion dollars per year (but compensated for, in part, by artificial stocking of other exotic fish) by the lamprey. However great these costs may be, it must be remembered, they are "sunk" costs. That damage has already been done,(408) and has to some extent been compensated for by control measures. But it does have relevance to the cost/benefit of future prevention measures if one assumes that future invasions, of creatures unknown and unpredictable, with equally unknown and unpredictable ecosystem effects, are likely to occur in the absence of effective preventative measures.

(b) "Non-use value." This includes (1) "option value," (2) "bequest value," and (3)  "existence value." Non-use value, particularly bequest and existence value, are where the cold-blooded economists and political scientists take account of the intangibles. This includes, among many prosaic things, the more deeply-felt "spiritual" or "philosophical" values, including even the non-anthropocentric view, sometimes called "deep ecology," that the natural world has a moral claim to existence separate from its utilitarian value to humanity. In fact, the anthropocentric and non-anthropocentric points of view fade into each other in a rather fuzzy manner(409) and, as a matter of general public policy or social science, we do not really need to sort it all out here. It is sufficient to note that people have a whole variety of complex and difficult-to-define feelings about the value of natural things, that those feeling have a real effect on their quality of life, including their mental and physical health, and that those commonly held feelings are entitled to respect in a democratic polity premised on promotion of the general welfare. The social scientists - and also the policy advocates, charged with making convincing arguments to political leaders accountable to the people - are not really concerned with the ultimate philosophical foundations of these feelings, however interesting they may be. We are concerned with documenting the reality and objective consequences of those feelings.

The first subcategory here, "option value," is really the unpredictable value of use in the future. It is what is being identified when environmentalists argue for preservation of the rain forests because the multitude of planet and animal species contained therein, many not yet identified, may have important future use for pharmaceuticals. Maybe, or maybe not. Some skeptical economists argue that advances in bioengineering are making such future value less significant and that, anyway, if the rain forests really had that sort of future value, pharmaceutical companies would be buying up large tracts for private preservation. And what, if any, is the option value of maintaining some semblance of a "natural ecosystem" in the Great Lakes? No one is predicting that the next invasion of the Great Lakes by an unknown exotic is going to wipe out some native creature in the Great Lakes which holds the secret to the cure for cancer. No. But future invasions of the Great Lakes by a wide variety of organisms with unpredictable ecosystem interactions could well result in significant decreases in water quality (both biologically and chemically) and loss of recreational value. Imagine a Great Lakes with chronic taste and odor problems, floating clouds of organic material with bioaccumulated contaminants, periodic catastrophic blooms of submerged vegetation or toxic algae, widespread fish diseases or dieoffs, or chronic outbreaks of human pathogens or parasites. All speculative. But who predicted the devastation done by the sea lamprey or the carpeting of the bottom of the Western Basin of Lake Erie by zebra mussels? Given the transformations already observed (and the potential increase in vulnerability due to global warming) this is not fanciful. All those possibilities have a great deal of relevance to the option value of ecosystem integrity in the Great Lakes. We may not want to sell Great Lakes water to the rest of the world - or, at least, we want to be very careful about how we get into that line of commerce - but this reservoir of unfrozen fresh water, the largest in the world and 18% of total supply,(410) certainly has considerable economic option value in a world running short of fresh water.

More generally, economic expansion, the movement to decentralized post-industrial methods of production, and the aging of the populations in advanced economies, along with environmental deterioration of many areas around the world, are all likely to make the future recreational value of the Great Lakes increase enormously.(411) These are options not to be lightly discarded. I should make clear that I am using "recreation" in a broad sense which includes much more than just the opportunity to fish, swim, or make a nuisance out of oneself on a "personal watercraft." What we are really talking about here is the importance of preserving a connection to the natural environment - a connection which would be poorly satisfied by the transformation of the Great Lakes into little more than artificial fish-stocking ponds or swimming and boating pools, paved over on the bottom by zebra mussels and sterilized by organochlorides, even if the water were very nice and clear. There is a growing body of scientific evidence documenting something environmentalists have always felt was intuitively obvious - which is that human beings need exposure to natural ecosystems in order to preserve mental and physical health. This is called the "biophilia hypothesis." It is relevant to both present use value and option value, but it may be particularly relevant to option value because we might not know how much we miss biodiversity until we lose it. Gerald Gardner of the University of Michigan and Paul Stern of the National Research Council sum up the literature as follows:

Biologists Rene Dubos (1968), Hugh Iltis, Orie Loucks, and Peter Andrews (1970) have argued that humans have an innate need to be near plants, animals, and other natural stimuli. These scholars claim that if humans are deprived of these stimuli, human emotional health may be impaired. Natural stimuli, more specifically, include the shapes of foliage and vegetation, the sounds and motions of animals and bodies of water, annual seasonal changes, and so on ....

Recently, Edward Wilson (1984) and others (Kellert and Wilson, 1993) have extended Dubos/Iltis et al.'s idea into what Wilson calls the "biophilia hypothesis." This hypothesis holds that humans have a genetic, evolution-based need for "deep and intimate association with the natural environment, particularly its living biota [plants and animals]" (Kellert and Wilson, 1993, p. 21) for maintenance of physical and emotional health and for personal fulfillment. Dubos, Iltis et al., Wilson, and others argue that more and more people will be living in environments lacking natural stimuli in coming years. As global population grows, more people will live in urban areas (Ross, 1994), which are filled with concrete, glass, and steel structures, but generally lacking in natural stimuli. Expanding human settlements will also continue to consume farmlands, woods, and wilderness areas. And more people are likely to be exposed to deteriorated environmental conditions such as air pollution. As a result, these scholars predict, growing numbers of people will suffer impaired emotional and physical health. Indeed, illness and other pathology now found in urban areas versus rural areas may be caused in part by the absence of natural stimuli in urban areas today.(412)

Gardner and Stern, after a careful review of experimental data in addition to this literature, find that "When held up to the strictest standards of empirical proof for a genetic predisposition, the evidence for the biophilia hypothesis does not appear at this point compelling…. However…we are impressed by the number and variety of research results that are consistent with the biophilia hypothesis."(413) The source of biophilia, as a matter of evolutionary theory, remains unproven by the available evidence. But there seems to be strong indication that humans are biophilic - which therefore provides the justification for considering it a significant element in the cost/benefit analysis.

The second subcategory, "bequest value," is closely related to option value. This is a matter of how much we value the "biological heritage" we pass to future generations, as distinct from the future use we can somehow capitalize on during our lifetimes. Both evolutionary theory(414) and the traditional laws of inheritance(415) suggest that human beings put a high value on being able to pass on wealth to their descendents. But this does not necessarily generalize into a desire to save natural resources for all. Both of these two subcategories, option value and bequest value, are subject to private "discounting." I value more what I can extract from resources right now, rather than preserving it for future options or bequests to the benefit of all humanity, because I get to enjoy it now, and also pass along what I gain to my immediate family. (There may be a total loss in resource value. But there is a gain to me and my descendants, which is what I and my genes mostly care about.) Another aspect of this problem is that there is often a significant conflict between the "private discount rate," a high rate putting preference on immediate gain, and the "social discount rate," a lower rate reflecting a greater desire on the part of society as a whole to preserve resources for the future.(416) When analyzing what is good public policy, we are entitled to use a lower, social discount rate - which means putting a higher value on options and bequests.

Also, it is interesting to note that the future amount of option and bequest value may be raised by change in marginal value. The concept of "marginal value" points out that the current value of something depends on how much of it one already has relative to the current supply. (This is the basic insight behind the statement that "It's all a matter of supply and demand." Another way of putting it, which gets right to the point, is that "All the action is on the margins.") One of the classic examples used to explain the concept is the comparison of water and diamonds. Water is intrinsically more valuable than diamonds. You need it to live. You can survive without diamonds. But Marilyn Monroe did not sing that "water is a girl's best friend" because diamonds are relatively scarce compared to water. Most of us have enough water to live, and could do with a few more diamonds. If we are dying of thirst on the desert, that is different, and we value the water more. With apologies for belaboring that concept (because it may be the single most important concept in all of economics) I would submit that the marginal decrease in the relative supply of biodiversity in the future of the planet, which is almost a certainty at this point, will increase the future value of that commodity to humans beings finding themselves increasingly starved for natural stimuli. One only needs to think of the tremendous amount of money which inhabitants of affluent societies are willing to spend on entertainment, recreational vehicles, and all manner of personal health products in order to see the potential market for providing unique biodiverse enclaves as they become more scarce.(417)

The last subcategory of non-use value, "existence value," is the most difficult to measure - and therefore is the one most often left out of cost/benefit analyses - but may be the most important value of all. "Existence value" is the value of knowing that something exists, even if one does not ever make (or even intend to make) use of it. I may put a real value on the continued existence of whales, spotted owls, and elephants, even if I have no intention of ever traveling to the particular areas of the oceans, the woods, or the savannas to actually see them. There is nothing frivolous or silly about this aspect of environmentalism. Consider the same principle in an entirely different realm of life. What civilized person would not feel a sense of loss if all the original works of the Italian Renaissance artists were destroyed, even if he or she were never planning to travel to Italy? In fact, the Allies took extra measures under direct orders from General Eisenhower, which did cost lives, to avoid the destruction of similar treasures during the Second World War.(418) Or, to be less dramatic, consider the simple pleasure which many people take in reading gossip about celebrities they never expect to ever meet, even though similar stories which are honestly fictional in novels and short stories have far better plots and character descriptions. They like to know (or think) that the people they are reading about are real. And it sells in the supermarkets just as well as fish.

Putting an actual price on environmental existence value is not always so easy. One measure might be the contributions which people make to environmental organizations. But that in fact seriously understates the real value. Most of us are "free riders" on the work of environmental organizations. To begin with, most of us do not give to every cause which we support, often because our contribution is relatively small (unless we are rich enough to make noticeable bequests, which is an entirely different matter), because we hope (rationally) that some others will, and because we resent all those other free riders out there. (This is a basic problem in "game strategy" called the "Prisoner's Dilemma."(419) The dilemma is that cooperation to achieve a common good would benefit all parties, but only if they all cooperate, and each individual has a strong incentive to defect from cooperation, especially if someone else might. This is in structure exactly the same as the "tragedy of the commons" in resource management. All fishers would benefit by preservation of the stock. But each individual fisher will benefit more by taking as much fish as possible - especially if others are doing so. Thus, they are all prisoners a self-defeating competition.) In addition to that basic problem, environmental organizations are especially disadvantaged because the most important good they produce is information, which is a largely indivisible "public good." In balancing my relative contributions to a charity for the homeless versus an environmental organization, I tend to short-change my favorite environmental organizations in comparison to how deeply I feel about the cause because the organizations I like the best are already doing a fairly good job of bringing issues onto the public agenda. (The homeless shelter, by contrast, is not providing an indivisible public good. Every contribution means another bed or meal.) Once the issue is on the agenda, I and all other environmentalists can also do much by paying attention to how we vote, in order to encourage government to adopt parts of the agenda we support. This is the sad paradox which makes it hard for environmental organization to do well during periods when they have done an excellent job of publicizing their issues and there is widespread public support for their cause.(420) The way that we escape the free-rider problem, usually, is through government programs which make everyone (or at least a good number of others) contribute something. Therefore, the same persons who neglect to contribute to an environmental cause may well support taxing themselves for the same purpose. Government is, in this case, the more efficient means for capturing the value otherwise lost by the lack of a pricing mechanism in the market. That is why we have government environmental programs. (This is not an argument against supporting environmental organizations. Please, by all means, do so.)

So what does it all add up to? The different categories of value overlap in real life, and there are a number of practical problems limiting the ability of economists to measure non-use values. (Field experiments have been done in order to determine actual "willingness to pay" for public goods such as environmental quality, and they do result in some substantial price tags, but work in this field is fairly rudimentary.(421)) Nevertheless, there are some general indicators of reasonable parameters. For example, old polling data from 1970 in the US, which is the year in which the US enacted the largest piece of air pollution control legislation,(422) indicates that 54% of the heads of households were "willing to pay $15 a year more in taxes to finance [an] air pollution control program."(423) A much more detailed survey taken after the Exxon Valdez spill in Prince William Sound, in 1989, asked heads of households in the US, outside of Alaska, very specific questions about what they would be willing to pay in an initial one-time tax to prevent or mitigate another spill in that area. More specific questions, backed up by technical information tend to produce much more thoughtful and realistic answers. It was clear from the way the questions were put in this survey that the amounts asked for would only go to prevent or mitigate spills of that type in that area in the future, not to prevent all forms of pollution or prevent it in all areas of the US. Also, it is important to note that the survey excluded Alaskan residents, and thus focused on non-use existence value for the general population rather than more personal interest in Prince William Sound. With respect to this one-time tax proposal, 67% were willing to pay $10, 52% were willing to pay $30, 51% were willing to pay $60, and 34% were willing to pay $120.(424)

According to 1990 and 1991 census data, there are approximately 12.6 million US and Canadian heads of households in the Great Lakes basin.(425) (This does not include all the inhabitants of the eight states and the two provinces, nor any of the people outside those jurisdictions who regularly use the basin for recreation.) It would probably be reasonable to assume that half of those heads of households care about preserving the existence of the natural biodiversity in the basin. Some would care much more if it were put in more pointed terms, such as saving their local beach from catastrophic blooms and dieoffs or their favorite game fish from extinction. A conservative estimate might be that 6.3 million heads of households would be willing to vote to use $10 per year and $60 in a one-time payment the first year, out of their general tax dollars, to prevent new exotic invasions of the Great Lakes. That would produce a value of $63 million per year on preventative programs in the Great Lakes, and a one-time value, to initiate needed technological changes, of $378 million in the first year.

This is by no means a full accounting. This is mostly non-use and non-use existence value. It is quite clear that fishers, users of water in industrial facilities, and residents impacted by taste and odor problems in their drinking water, among many others, would be willing to pay a great deal more to prevent such problems. A full accounting of all costs would probably bring us into the range of $1-2 billion per year. Unfortunately, those other costs do not translate into political support for government action in any amount reflecting the true cost because of the problem of marginal rates of return. Those who have already been harmed by the major invasions of the past - although they know who they are, and are in some cases extremely angry about the cost - have already been impacted. Programs to prevent new invasions will benefit someone else, not yet identified, but may well not provide the same level of benefit to those already impacted. (This is, in political terms, the problem of the "special interests" not reflecting the "general interest.") That is why the great preponderance of the control and research efforts have gone into dealing with past invasions, to the justifiable benefit of those identifiable interests severely impacted by the past invasions, rather than to programs to prevent new invasions, despite the obvious logic in favor of putting the weight of effort into prevention. Again, what is rational for individuals or discrete groups is not rational for the society at large. This is one reason why, as a matter of practical politics, it is important to identify the more general non-use value, even though it is much less in absolute amount.

The most expensive preventative measure, but also the most valuable, is an effective option for dealing with ballast water. It could cost as much as $1.2 million per ship to retrofit existing vessels with a control technology or (in combination, or alternatively) as much as $2 per metric tonne ($2,000/1,000 MT, in the terms of the estimates given in § 3.7 above) to exchange or treat the water effectively. (These are all high estimates.) Let us look at these figures as a sanity check. There are about 25 core vessels in the third party Seaway fleet who regularly trade into the Great Lakes, among a larger variety of 200 to 300 vessels showing up each year. Although the figures are much less certain than we would like, we can safely assume that the amount of foreign ballast water being carried into the Seaway each year is something less than 1 million metric tonnes per year. (The best available estimate given in § 3.2 above was 720,000 MT/YR.) Therefore, $63 million per year in non-use value of prevention would more than cover yearly treatment of the water at $2 million per year and leave a great deal of value left over to cover enforcement, research, and preventative programs addressing all the vectors of concern, as well as a comfortable cushion if the estimate of the quantity of water is too low. The initial start up non-use value of $315 million above the yearly allocation ($378 - $63 million) would cover retrofitting 260 vessels. That is more than ten times the core number, and more than the number of vessels actually showing up in a typical year. The optimum number of vessels to retrofit would in fact be much less. This makes it pretty obvious that the benefits exceed the costs. But that does not answer the question of how to structure an effective regulatory program for internalizing the costs and creating the needed change (and does not mean that the public should have to actually bear the cost of preventing the biological pollution).

Perception of risk. Before discussing regulatory strategies, I should mention something about the perception of risk. The really bad ones, such as the sea lamprey and the zebra mussel, come along much less frequently than the more ordinary nuisances. That does not in any way mean that we are safe from the next big one for a while. Unfortunately, however, that is sometimes how the public perceives the nature of the probability of rare events. On the other hand, there is a general psychological tendency to underestimate the probability of fairly frequent events and overestimate the probability of highly infrequent events. There may be some rather complex perceptual and emotional factors behind this, or it may be simply a cognitive tendency - simple mental sloppiness - to average out estimates on unknowns. (Or perhaps it compensates for the first tendency to some extent?) At the same time (which may seem inconsistent with that averaging tendency, and is also contrary to the whole logic of insurance) there is generally a much greater willingness to pay the cost of insuring against relatively infrequent but low cost risks than to pay for insuring against relatively frequent but highly costly risks (even when, mathematically, the benefit works out to be exactly the same). In other words, people are relatively more motivated to take action to prevent risk of events which are more common, even if less disastrous.(426)

This has some interesting but confusing implications for public discussion and educational efforts on the issue of exotics. It might imply that the public is too quick to assume that another invasion as bad as the zebra mussel will not happen again for a while - because it just did - or too quick to assume that such dramatic invasions are frequent. However they perceive that, they are more likely to feel motivated to take action (vote and spend their money) to prevent the almost constant but relatively less harmful flow of less notorious creatures than they are to take the same action to prevent another really bad one in the future. To be honest, scientists need to be quite clear that they cannot predict when another really bad one will come in. But they can appropriately stress the virtual certainty that we will continue to suffer the less severe impacts of many less noticeable creatures, at an almost steady rate, unless better preventative measures are taken. Also, this may warn those of us steeped in the issue, who tend to be more concerned about the unpredictable ecosystem effects and the ultimate loss to the biodiversity of the planet, that the general public might actually be much more concerned about the fact that exotics are simply a "nuisance."

§ 10.2. All the action is on the margins: Some familiar economic fallacies

Before getting into the serious nitty-gritty of how to make a regulatory program work, we should clear the deck of a few common economic fallacies which tend to obscure intelligent discussion of these issues:

Compensating a failing industry. The fact that the public would be willing to pay something to have the pollution prevented - and that there is in fact a real value which the market is not currently internalizing in the price system - does not mean that the public should pay the affected industry a subsidy or "compensation" to cover their costs of correcting the problem. These compensations are frequently requested, and most often granted, when an industry is already on the ropes and pollution controls have the possibility of putting individual firms out of business. But the fact that a particular industry is producing a product for which there is already a low demand in the market (or is highly inefficient in producing that product) is an absurd reason to give it a bonus for also being a polluter. We normally proceed, as a matter of both legal philosophy and economic logic, on the basis of the proposition that "the polluter pays." There is room for some accommodation here. A public subsidy to correct an externality is not in principle a violation of economic principles, and it should be considered if there is a form of subsidy which will in practice result in an efficient allocation of resources. In fact, a fundamental principle of economics known as the "Coase Theorem" holds that it makes absolutely no difference in the total welfare produced for society whether a polluter is penalized or paid off for not polluting if one ignores the "transaction costs" involved in making and allocating the payments.(427) The problem, however, is that in real life transaction costs are significant. Those include information costs, the costs of policing parties to insure honesty, political costs, and the costs of capture of benefits by the interests being subsidized.(428) On the other hand, the transaction costs of regulatory programs and administration of penalties - many of them the same types of cost - can also be substantial. Underlying all this, there are significant issues about how to adjust marginal rates of cost and benefit in an efficient manner. Failure to account for those significant issues can result in regulatory programs which are not only inefficient but also counter-productive.

Passing the costs along. A common objection to government regulation (whether through prohibitions or taxation) is that "the costs will just be passed along to the consumer." In economic theory the appropriate response to this objection is a disdainful look combined with that Generation X response, "And your point is…?" Passing the costs along to the consumer is precisely the point of the market. That is how we achieve overall economic efficiency. If the market price of oil reflects the true cost of the collateral damage to the environment, more people will conserve energy or use alternative energy resources. If the fishers have to pay high license fees to protect the common fishery, the higher price of fish will reduce consumption (or increase the use of aquaculture fish) and save the species from extinction. Raising the price of the harmful activity - preferably no more and no less than the true cost - is the best possible result of government intervention in the market.

The lowest common denominator. Frequently, as we have been doing in the case of ballast water, the government gets into the questionable business of trying to specify an "engineering standard" based on some standard of "technological feasibility" or "economic reasonableness." Aside from the very big question of whether or not the government should be in this business at all (which I discuss further below) a common fallacy is the notion that what is feasible and reasonable has to be so for everyone in the business, doing business just as they have always done so before. In other words, the feasibility or reasonableness standard becomes a standard based on the lowest common denominator set by the most inefficient or highly polluting segments of the industry. This ignores the basic nature of life in business. The free market separates out competitors and promotes efficiencies by distinguishing, at the marginal rate of return, between those who can make a profit at that rate and those who cannot - and also by forcing some of those who cannot to alter their business practices so that they will. This fallacy has reared its ugly head in our attempt to deal with ballast water in the form of an assumption that any treatment method found to be reasonable for the industry must be economical for the maximum loads of ballast currently carried into the Great Lakes.(429) Once there is some cost attached to the quantity (or organic content) of water carried, most vessel owners will find ways to reduce that through better planning of cargo commitments and ballasting operations. The average will come down. There are of course costs associated with the adjustments which have to be made. But it is the essence of business, the wonder of the free market, that smart business people will find the cheapest alternatives or combinations of measures. Some will not succeed in doing so. Some vessels which would have carried cargoes out of the Great Lakes will forego those cargoes because bringing in the necessary ballast on the inbound trip has become too expensive for them. But they will open up that business for competitors who have found a way to manage their ballast more efficiently. Our public policy should be to encourage that competition to a higher level, rather than protecting all businesses against failure at a low level of efficiency.

§ 10.3. The policy options: Command, Litigation, Markets, unintended consequences, and real solutions

When an externality is identified - and there are many of them, once one begins to look - there are four basic public policy options: Those are (1) to use some sort of non-regulatory or quasi-regulatory approach (education and voluntary programs), (2) to regulate through prohibitions and permits, often including specification of engineering standards (a command system), (3) to regulate through the creation of private rights and liability which can be either negotiated or litigated in court (private property rights), or (4) to regulate through some sort of incentive system (either the negative incentive of taxation, the positive incentive of subsidies, or some combination thereof) designed to stimulate market solutions. There are also mixed approaches, such as regulatory prohibitions accompanied by private rights, or the creation of a market in pollution permits (which combines aspects of both a command and a market system). In the area of environmental law, we have generally used a regulatory command system. According to a considerable body of scholarship on the subject, that approach has generally been a costly failure. In the case of the regulation of ballast water under the current US law, our current combination of voluntary programs and a regulatory command system is not yet very costly, in terms of the burden on the marine industry, but it is most certainly a failure in terms of effective and timely action.

Non-regulatory and quasi-regulatory approaches. First, as the economists take pains to point out, it may literally "not be worth the bother" of trying to do much about it. Most externalities are minor, and the process of trying to readjust the market to make the price perfectly reflect all these minor costs generates other costs and inefficiencies which overwhelm the benefit to be achieved by the exercise. I may be justifiably infuriated by people who litter, but the costs of policing the streets to prevent littering or of prosecuting a private lawsuit to redress my sense of injury is a lot more than the cost of simply paying for municipal street cleaning services. That said, there may still be some value in less costly non-regulatory or quasi-regulatory approaches. A nominal prohibition of littering, to express social disapproval, may have value even if it is too expensive to enforce. Similarly, public education efforts may be cost-effective - although that is probably debatable in the case of littering.

There are likely to be vectors for transport of exotics across ecological zones that are impossible to seal off with any reasonable effort. Millions of recreational boats and bait buckets being carried across the landscape from river to pond cannot be inspected and sterilized without a massive level of governmental expenditure and intrusion.(430) The best that government managers can do about that is establish some common-sense rules, make them as consistent and understandable to the public as possible, enforce them where practical, or where most important to address specific hot spots, and spread the word with educational programs and voluntary efforts by concerned user groups. (But the high ratio between cost and benefit we face when trying to prevent the spread of exotics already established somewhere in the Great Lakes is all the more reason to put our effort into preventing invasion of the basin in the first place.) Public education, supported by some formal sanctions which are difficult to actually enforce, is basically the approach taken by a number of the US states, especially Minnesota and Michigan, to help slow down the spread of exotics around the region.(431) It is certainly less expensive (and less intrusive, which is a type of cost) than an inspection program. Whether or not it actually pays off is another question. Minnesota Sea Grant has done some public opinion polling to document that people are at least paying attention to the message - and have been using the information from the polling to more effectively allocate their exotic educational budget. For example, they have found that signs posted immediately at the ramps where people pull their boats out of the water seem to have the most impact on behavior.(432)

Similarly, US and Canadian federal authorities have worked with marine industry to encourage voluntary controls on exotics in ballast water. One of these efforts, the program for the control of the European ruffe in Lake Superior through voluntary exchange of ballast water in the depths of the lake, was in fact initiated and developed by the two major domestic shipping associations, the Canadian Shipowners Association (CSA) and the Lake Carriers' Association (LCA). The public received the benefit of this program for virtually nothing - for little more than the time that it took to go to a few meetings and get the names of the US and Canadian Coast Guards added to the bottom on the voluntary guideline as official blessing of the program. The two industry associations gained some well-deserved public recognition, the warm glow(433) which comes from the sincere desire to be doing the right thing, and the benefit of being left free to design and police the program themselves. That is economic efficiency. Unfortunately, such warm-and-fuzzy "win-win" voluntary efforts have real limits. No matter how much industry leaders might sincerely want to do the right thing (a very real factor, in my opinion, for the representatives of CSA and LSA whom I have dealt with) they cannot voluntarily assume too many costs without endangering their competitive position. Where they have a significant monopoly over the relevant market (which is true, in some sense, of the two domestic lake carrier associations(434)) they have some latitude to indulge themselves in warm glows or write off the costs to good public relations. But even monopolies must compete against potential suppliers of substitute goods. If the lakers incur too much expense trying to help out with the exotics already in the Great Lakes, they thereby endanger their competitive position against the Seaway shipping (ironically the very source of the exotics) which is selling foreign steel to replace domestic ore.

Where there is more direct head-to-head competition, the problem is even more severe. When the Vancouver Harbour Master asked the shipping industry using his port to participate in a voluntary program for the exchange of ballast water, the representatives of the industry readily agreed to participate, but asked him to issue a standing order making it a mandatory program in order to establish a level playing field for all the ships which might incur delays or other costs due to conducting exchanges.(435)

Also, we need to recognize that voluntary programs, while reducing compliance and enforcement costs, may in fact obtain less compliance than programs with legal enforcement. The voluntary guidelines for exchange of ballast on vessels entering the Great Lakes put out by Canada in 1989 do seem to have achieved a respectable level of compliance. According to survey reports (which is an important limitation on the reliability of the measure) the level of compliance with the voluntary guidelines was 89%.(436) But compliance became virtually 100% according to enforcement measures (more objective, even if far from perfect) after the US instituted mandatory regulations in 1993.(437) Enforcement of the mandatory regulations also led to additional measures, such as a requirement for exchanges on vessels stopping at intermediate coastal ports, which had not been observed under the voluntary program. The cost to the US taxpayer for that US Coast Guard enforcement program in the Great Lakes, in order to achieve that additional 10% (or more) of compliance with the same exchange regime, was about $300,000 per year during that period.(438) Although that fails to account for the significant level of Canadian governmental support for the US Coast Guard enforcement program, which should be assumed to be at least equal in cost, it seems to have been a relatively good investment in raising the level of compliance.(439)

Regulation through prohibitions, permits, and prescriptions. This is what most social control consists of, going back to the Ten Commandments and the Twelve Tables of Rome, and it is a reasonable approach for the obvious things. The laws against murder and theft are fairly understandable and, although we might get into complexities about the degree of culpability in various situations, the prohibitions are accepted as nearly absolute without argument. Although there is a thing known as "justifiable homicide" in the Common Law of the US and Canada, we do not need to establish regulatory agencies to permit a certain amount of homicide. (The issues of abortion and euthanasia show where that analysis may break down on the edges, but the main point remains valid.) On the whole, we can quite efficiently state a general prohibition in absolute terms and let the courts deal with the very few special cases which test the limits of the rules.

Things become a great deal more complicated, however, when we try to take that traditional approach to the complex issues created by pollution. The essential problem with pollution is that, as much as we might not want to admit it, we want to have a certain level of pollution. The US Federal Water Pollution Control Act Amendments of 1972(440) promised to clean up all US navigable waters by 1985.(441) Theoretically, that should have not been necessary, because all pollution of US navigable water was already prohibited by the Refuse Act of 1899.(442) Instead, what we have had, under both of the major pieces of water and air pollution legislation enacted around the same time in the early 1970s,(443) is three decades of prohibitions, exceptions, studies, attempts to prescribe engineering standards, more studies and exceptions, and the establishment of a massive and expensive system for permitting pollution. Serious study of the history of these two fundamental pieces of pollution legislation in the United States raises serious questions about whether or not they have made any substantial contribution to the promotion of water and air quality, and certainly indicates that they have been more expensive and less effective than anyone, industrialist or environmentalist, would want.(444)

This is not a criticism of the basic goals of the legislation, nor a condemnation of the US Environmental Protection Agency, which is the lead agency for the enforcement of most US environmental statutes. One observer notes that "no organization could possibly cope with the continuing flow of legislation and the detailed regulatory responses required of EPA."(445) Aside from the sheer massiveness of the task (which is not really a problem facing the US Coast Guard in carrying out its responsibilities to regulate ballast water under NISA 96), EPA has faced some basic problems built into the structure of the legislation (which is very much the same problem facing the US Coast Guard under NISA 96). The first problem facing the regulatory agency is the difficulty of deciding what is reasonable to prohibit and permit. This puts the agency into a long process of negotiation with the regulated industry. The industry has the advantage in available information. The industry has no incentive to make the process easy for the agency (despite diplomatic protestations of wanting to work with the agency in a cooperative and non-adversarial manner), and has no incentive to advance the state of the technology. As one representative of the auto industry put it in discussions about achievable technology for emission standards, "We're all worried that if we sound hopeful, what will the damned standards be tomorrow?"(446)

That expression of a very understandable reservation about the process from the point of view of the industry could well have been a quote from a representative of the shipping industry working with the government agencies on ballast water. At one of many meetings I attended on the Great Lakes Ballast Water Demonstration Project, a cooperative government-industry project to experiment with filtering and some other technologies,(447) one of the other government representatives asked an industry representative whether or not this project would demonstrate the economic feasibility of filtering as a shipboard technology. The question was answered by the consulting engineer, who very honestly and directly replied that "This project cannot prove that filtering will be economically feasible, but it might prove that it will not be."(448) It was simply not designed for that purpose. Industry representatives, bringing considerable expertise in naval architecture, marine engineering, shipboard operations, and maritime commerce, have closely worked with the US Coast Guard, the Marine Board, the Federal ANS Task Force, the Great Lakes Panel on Aquatic Nuisance Species, the Canadian maritime agencies, and the maritime agencies of other nations at the International Maritime Organization, from the very beginning of the process, ever since ballast water became an issue in 1988. Their attitude has been completely cooperative and responsible. And, as one might expect, they have completely dominated discussion of the technical issues. How could they not? And what is the result after a decade of study? The result is no clear analysis of the costs of the competing technologies,(449) much less any agreement on one or more which are "economically feasible." A leading example of this failure to deal with the central issue was the much-anticipated, long-overdue report of the Marine Board of the US National Research Council, which was specifically mandated to identify feasible options by NISA 90, and which shut down consideration of alternatives not being actively considered by the Marine Board during the years of its preparation. The report, finally published in an expensive and hard-cover glossy form in 1996 (not quite in time to be available before the drafting of NISA 96) contained a great deal of interesting and useful analysis in qualitative terms. But it completely neglected to provide anything in the way of quantitative cost comparisons and, although it suggested further work on several leading options, failed to provide the estimates documenting that any of them would be economically feasible.(450) This has left the US Coast Guard in the position of having no better option than to once again go back to the industry experts and ask them, again, what they would like to do. At a recent workshop on ballast water technology, a representative from the US Coast Guard Research and Development Center, newly assigned to be in charge of the problem, indicated that he would be looking anew at all options, that he could not proceed except in a close partnership with industry, and that we should look forward to a 15 to 20 year research effort to identify feasible options.(451) During all this time, one must always keep in mind, new ships which will be in service for 20 to 30 years, which could be fitted with technology for far cheaper than what it will cost to retrofit old vessels, are being built without any requirements whatsoever.

In fact, after ten years of special committees, workshops, scoping studies, and continued efforts to work out "cooperative solutions" with industry, the only answer which has been produced is, in essence, "it needs more work." There is always some other interesting technological gismo to be looked at. Always "another snake oil salesman," as one of the industry representatives himself often put it. But no option is ever deemed acceptable. And, in the meantime, the industry representatives have succeeded in securing significant protections against being forced to adopt any meaningful measures in the future through special protections written into NISA 96 and the draft annex to MARPOL on ballast water. (See §§ 7.3, 7.5 above.) No one should be surprised. Any US Coast Guard officer coming out of the inner councils of MEPC in London expressing dismay that the convention is becoming a means of insulating industry from serious regulation would playing the part of the Vichy French policeman in Casablanca coming out the gaming room in the back, saying that "I'm shocked, shocked to discover that gambling is taking place in this establishment!"(452) That is the way the game is played by big people. Government-industry collaboration, what has lately been called "partnering," may sound like a nice idea. But the industry interests are not the authentic "partners" of the government agencies. Partnership means an identity of interest, in both law and politics, and a government partnership with industry in that sense is a violation of the fiduciary responsibility to the general public. This sort of collaboration is fundamentally undemocratic because it favors the powerful and well-organized interests over the more diffuse and local environmental interests.(453) Those local environmental groups are also "special interests." No one really speaks for the "general interest" - but that is what the government agencies are supposed to attempt to do. That is why we have government agencies rather than business syndicates to run our public affairs.

When we finally get around to legislating engineering standards at some time far in the future, it is almost a sure bet that they will be subject to the "grandfathering" which is very typical in both environmental regulation and international maritime regulation. Unless it is done with great care, such a provision can led to some of the worst unintended consequences of engineering regulations. A grandfather rule provides that an auto, facility, or vessel already built with current technology is exempt from making the technological improvements, or is given some other dispensation in terms of the extent or timing of those improvements. This has the effect of making old autos, facilities, and vessels which might otherwise have been removed from service in the natural course of things, and which are often the worst polluters, relatively more valuable - which means that they are kept in service longer. This has had an especially ill effect on auto emission standards in the United States, because older autos are dramatically worse polluters. It has a similar effect in the shipping industry, where the older vessels are more likely to spill oil, and, even worse, are more likely to have casualties which kill people.

Strangely enough, engineering standards are counterproductive on the other side of the equation as well. A firm engineering standard is set by the government, usually reflecting some rough average of cost/benefit which ignores wide variances in cost/benefit among various segments of the industry, including not only variances in age but also variances in overall technological design, economy of scale, operating market, and (not an inconsequential factor) sophistication of management. Those on the low end of the scale (high cost and low benefit) will beg for grandfathering provisions and other special exemptions, and engage in the classic delaying tactics which can negate enforcement efforts for years.(454) Those on the high end of the scale will met the standards, collect their public relations kudos for being responsible companies, and do little more, even though they could do much more to reduce their pollution.

It may seem intuitively impossible that we could be stuck with these unintended consequences on both ends of the curve, but that is in fact part of the mystery of marginal rates of return, in contrast to average rates of return. An illustration, based on a plausible scenario for the regulation of ballast water, may clarify this. Suppose that the US Coast Guard eventually settles on filtering as an engineering solution many years from now. (It still seems to be the preferred technology, for reasons which are not entirely clear.) Let us suppose that the standard is 50 microns, because that is the lowest level which seems to be economically feasible for most vessels, and it gets a lot of the big things we want to get. (That includes adult aquatic animals, fish eggs and veligers, most of the mussel veligers - or at least messes them up quite a bit as they plop through - and big pieces of plants and seeds. It misses a number of smaller organisms, such as some of the invertebrate eggs in the range of 20 to 100 microns, microscopic pieces of weeds, algae cysts in the range of 5 to 25 microns, some of the fungi in the range of 1 to 100 microns, some of the protozoa in the range of 1 to 80 microns, and bacteria and viruses which are less than 1 micron.) Many of the newer and larger ships, taking advantage of new construction and economies of scale, can actually do quite a bit better. It may well be that they could filter down to 25 microns or adopt other measures, such a filtering system combined with an ultraviolet system. This is a fair assumption, based on the a priori assumption that the level of 50 microns is only settled upon as the engineering regulatory standard (after many years and marginal but important improvements in the technology) because it can be done at a reasonably tolerable cost for the average vessel. Some vessels will fall below and above that average. (Given the realities of the political process, probably more will fall on the side of doing less than they can, because they will be silent, while those who are being asked to do more than they can will protest loudly.) Those who fall above will have no incentive to do any better. Some of those below may pay an exorbitant cost, and may even be driven out of business. But many other ships, particularly those older handysize bulkers in the Seaway trade which are worth only $1 to $10 million each on their useful life and would cost a $1 million apiece to be retrofitted, will be grandfathered. They will still be required to conduct exchanges, but only at the old nominal exchange level of 85% (making certain assumptions about salinity, which we know to be false). Old NOBOBs will remain exempt, under the assumption that making them give up sufficient cargo for a partial exchange ("swish and spit") would put them out of business. Under the new national regulations (per the current rule in NISA 96) there will be a blanket exemption, now viewed as part of the grandfathering which is only reasonable, for old vessels which cannot safely exchange.

The result is that there are four groups of vessels: (1) Group One is exempt, and is not required to make any other adjustments, such as installing some other technology, cheaper although less effective, or forgoing some cargo loss, in the case of the NOBOBs, in order to conduct exchanges. This is a great loss to the environment because of the heavily contaminated water which will continue to come in. It is a loss to the economy because it is a reward for inefficiency. And it may well also be loss to safety, because these include rust buckets which would have otherwise gone sooner to scrap. (2) Group Two is not exempt, but is having great difficulty meeting the requirement, and, given the competitive pressures, either goes out of business or goes into another trade. This is a loss to the economy. It is a benefit to the environment, in that these vessels no longer bring in any water. But it is a benefit bought at a great cost. (3) Group Three includes vessels clustered around the "average" for which the regulatory engineering standard was designed. If the standard was well designed (a questionable assumption about something engineered by government bureaucrats) they will be providing a good benefit to the environment for a reasonable economic cost. (4) Group Four includes the vessels that really could do much better (filter at 25 microns, or use an add-on) but who have no incentive to do so. This is a loss for the environment.

I have not afflicted the reader with the graphs of intersecting curves, shaded areas, and formulas which you see in an economics textbook, because I want to be honest about the fact that I do not have sufficient information to predict the shape of the curves or the quantitative values to put into the formulas. It depends, in essence, on how large each of the four groups of vessels are and how high the cost benefit curves rise for each of the vessels in groups two through four. But here is the point. Only Group Three represents an efficient cost/benefit balance. All other groups represent a loss to the environment or to the economy. There might be an overall benefit to the environment if Group Two, alone, is extremely large. But that will be bought at great cost to the economy, and is therefor not likely to be tolerated. The better bet is that Groups One and Four will be rather large, and will therefore result in a significant loss to the environment. The most tragic aspect of this situation may be that the industry mangers and engineers in Group Four, those in the best-run, most sophisticated, and generally most responsible fleets of the world - those from whom we might otherwise expect the invention of creative cost-effective solutions - have no incentive to cooperate in inventing those solutions. That is a tremendous opportunity loss for everyone.

This analysis does not, of course, depend on whether the US Coast Guard selects filtering or some other technology. It applies equally to levels of required exchange or levels of treatment with ultraviolet light, biocides, or heat. In sum, therefore, the traditional regulatory approach being used by the US Coast Guard (under mandate from the US Congress) is a prescription for delay, ineffectiveness, high cost to industry, and discouragement of creative solutions. It is better than nothing. But we can do better.

All that said, regulation in the traditional form of prohibitions and permits might be perfectly appropriate for some of the other vectors, particularly the commercial use of exotics in aquaculture, baitfish transportation, and aquarium fish sales. The reason is that, in many cases, there may be no technological or economic limitations on the practicality of a policy of zero discharge. Just as we are not interested in permitting a certain acceptable level of murder or theft, we are not interested in permitting a certain level of discharge of detrimental species - or to recognize the use of detrimental species as a legitimate economic activity. The rub, however, comes in when we try to define which species (or genetic strains) are in fact detrimental - and who has the burden of proof on that issue. Here, there are significant transaction costs to consider, mainly in the form of "uncertainty cost," which is the cost of generating good scientific information on the risks. In other words, it may be perfectly feasible to have a policy of "zero discharge" of bad organisms, but it is not so feasible to have a policy of "zero risk" in defining which organisms are bad. Other things being equal, there is good legal and economic logic to a decision rule which says that the proponent of the use has the burden of proof to show a reasonably low level of risk. Also, it is important that the process for making the determination include input from others, in the environmental community, who have a significant interest in providing contrary information. The worst inefficiency of current federal, state, and provincial regimes for control of these vectors in the Great Lakes is probably less in the fact that they rely on traditional command regulation and more in the fact that they do not address this critical problem of obtaining relevant information through clear approval criteria and provisions for regional coordination. It is costly to industry, as well as to the environment, because the existing processes are chaotic and there is little justification for one jurisdiction continuing to prohibit the commercial use of an exotic organism which another jurisdiction is allowing to be used in the basin.

Regulation through private rights and liabilities. This approach is worth mentioning, although it does not appear to have much application to the primary problem of ballast water. It might have more application to the vectors involving commercial use of exotics and other fish - aquaculture, bait, and aquaria - although I would propose to venture only speculative comments on the feasibility of that here. As has been recently illustrated in the case of highly publicized litigation in the United States via class action suits brought against tobacco and guns, private litigation can be a supplement or augmentation of regulation by government agencies. More generally and prosaically, the whole complex mixture of private rights and liabilities which we inherit from our traditional Common Law constitutes, in essence, a system of regulation of certain externalities by private action.(455) When a private party sues and wins massive damages for injuries suffered because a badly designed automobile gas tank caught fire, that does indeed raise the cost of making automobiles (which is not necessarily a bad thing, please remember) and, more significantly, calls attention to the need to put a few more resources into designing better gas tanks on the next model. The problem with this system of regulation, particularly in the more litigious United States, is that the "transaction costs" in the form of attorney fees, years of delay in resolution of issues, and process failures can be very high.

Nevertheless, private litigation has often been an extremely valuable tool for environmental organizations to bring attention to an issue and put pressure on errant industries or slow-moving regulatory agencies. This is the sense of a petition recently submitted to US EPA protesting the blanket exemption of ballast water from regulation under the US Clean Water Act National Pollution Discharge Elimination Permitting System.(456) More directly, is there room for effective private litigation against businesses which negligently release nuisance species?

In the case of ballast water, the problem of assigning causation to a discrete group of shipping interests would probably make certification of a class action and proof of the case rather difficult. In the case of an identifiable release from an aquaculture facility or bait dealer (which could possibly be linked back to a specific facility by genetic analysis) there are better prospects for successful litigation under basic Common Law theories of negligence or "nuisance," a rather arcane and confused area of tort law, but one which has been used in the past to redress environmental damages. One of the requirements in most jurisdictions is that the party seeking to sue for a "public nuisance" demonstrates some special damage, above that suffered by the general public. In the case of exotics affecting the quality of local fishing, local fishing groups might well be able to satisfy that requirement as a class.(457) In the case of a release of a cold water fish used in an aquarium or an ornamental pond, there is an "intervening action" by the person who bought the fish and released it which may well shield the aquarium supply house from liability under nuisance or general negligence law. This does not, of course, protect the person who actually dumped out the aquarium into the lake. But then there is a problem in proving that the species later found to be established in that lake came from that particular aquarium owner, as well as the practical difficulty of collecting any significant damages from the individual defendant.

In this sort of case, which is structurally similar to the tobacco company and gun dealer cases, one might sue under the theory of products liability. This requires showing that a product was produced or put into commerce in a "negligent" manner, or that the product itself was "unreasonably unsafe" or "defective."(458) Either formulation is basically the legal equivalent of a cost/benefit test. Should aquaculture and bait dealers be prepared to be held liable for accidental releases - and perhaps be compelled to buy insurance against that event, which would then internalize the risk into the cost of the product? Should the aquarium dealers selling cold-water fish to the Great Lakes region (which are readily identifiable from their sales catalogues) be responsible for turning loose dangerous products? These are all untried but potentially interesting questions.

Regulation through market incentives. Incentives can be either negative, in the form of graduated penalties or taxes, or positive, in the form of subsidies or rebates. They are more complex to design up front, and also highly controversial, which is why they are so seldom used. But they do have the potential to generate real payoffs in terms of environmental protection. Incentive schemes are often opposed by environmentalists because they seem to legitimize pollution by making it a "cost of doing business" or "selling the right to destroy the environment." This objection, however, ignores the reality of the problem of cost and benefits, and the significant failures of regulation by prohibition and permitting. Environmentalists who instinctively reject incentive schemes as an immoral sellout should ask themselves why the industrialists also dislike incentive schemes. In fact, for the business that is high up on the benefit/cost line in the area where the government-mandated technology is less burdensome than it should be, or for the business that is getting an exemption or successfully resisting enforcement, there is no attraction in moving to a negative incentive scheme. They are already doing less then they would have to do if they actually paid for the right to pollute and, as one observer puts it, "The business world knows that some environmentalists prefer a pure law to pure air."(459)

During my tenure as an active-duty US Coast Guard officer responsible for administering the Great Lakes ballast water regime, I was often amazed by the uncritical acceptance of a regime whose flaws I publicized. We have known for a long time that the level of exchange is manifestly inadequate, that the salinity standard we use to enforce it is fallacious, and that the NOBOB exception drives a gaping hole in the regulatory regime. Nevertheless, many people seem to be strangely reassured (judging from many uncritical press accounts) that we have a regulatory requirement in place. If we have a prohibition in place, no matter how flawed, that seems to be inherently reassuring. To be clear, it is far better than nothing. But any idea that we are anywhere near a 100%, 99%, or 90% level of protection is silly. As I sometimes put it to environmental groups who did express anger at the inadequacy of the regime, the only way to get a 100% level of protection against ballast water is to shut down the Seaway. That is not going to happen. (And talk about wanting it to happen, by some groups, only destroys their relationship with their natural allies in the governments of the Great Lakes region, without whom we cannot hope to make progress.) The practical question to consider, therefore, is how we can move the level up from the nominal level of 85% (effectively much less) to 90%, and then to 95% or 98%, including the NOBOBs, and as soon as possible. Time is a critical factor in the calculus here. A 90% solution put in place two years from now will do a lot more to protect the Great Lakes than a 95% solution that takes another ten years to put in place. If I have to accept the charge of being ritually impure in order to accomplish that goal, that is something this environmentalist, for one, is quite willing to live with.

The distinct advantages of an incentive system are as follows: (1) It would allow us to begin to institute practical measures immediately, by imposing low-level pressure to affect basic management decisions, such as the decision to load full cargo on a NOBOB or engage in cross-ballasting of a NOBOB inside the Great Lakes, which are completely unaffected by the current regulatory regime. (2) It would reverse current incentives for the shipping industry regarding the development of technological options and making them cost-effective. Currently, their rational motivation is to overstate the prospective costs, and to carefully avoid identifying any creative measures which might prompt the governments of the Unites States and Canada to institute mandatory changes. The longer we study the problem, the better for them. If they were paying a tax based on the quantity and contamination of the ballast discharged, they would have a positive incentive to develop new technology as soon as possible. The better the technology they come up with, the stronger would be their argument that no future increase in the level of taxation is necessary. And we would be happy to agree with them. (3) Individual firms whose ships and management skill allow them to achieve a higher level of effectiveness than their competitors, the Group Four above, would be motivated to do so. They would pay less tax and gain a justly-deserved competitive advantage. They would gain a larger share of the trade, to the great advantage of the environment. Conversely, the Group One and Two firms, who cannot clean up their water efficiently, would go out of business or lose their shares of the market.

Another way to look at points (2) and (3) above is that an incentive system is a system of incentives for the regulators as well as for the regulated. The better that the regulated industry does in making efficient and effective changes, the less the incentive for the regulating agency to crank up the level of taxation. The agency and the industry are not "partners" - always a problematic formulation of their relationship. But this would allow them to be parties to a political contract, from which both would benefit.

Although ballast water is the most obvious subject for application of an incentive approach, there might also be a useful application for some aspects of other vectors. For example, state and provincial agencies might consider putting a tax on the proportion of non-target species found in samples of baitfish shipments (even when not prohibited exotics). Not all buckets need to be inspected, as long as the sampling is random and unpredictable. But it would provide a powerful incentive for the industry to refine their processes for selection of baitfish.

Although an incentive system is clearly in accord with economic logic, the Seaway might argue that a tax on ballast water (or expensive prohibitions) would be bad for the environment because it would have the unintended consequence of diverting more of the internal trade from ships to trains, with resulting increases in air pollution. That argument is not necessarily convincing, given the high level of public subsidization of the Seaway trade as it is. But it can also be argued that all forms of transportation are highly subsidized in both the US and Canada, and this is no place to rewrite the general ground rules.(460) One might say the same thing about the argument that we should try to change basic standards for controlling air emissions by what amounts to a special subsidy of the shipping industry. However, the argument here, on behalf of industry, is that the significantly lower amount of air pollution per tonne of cargo carried by shipping constitute a positive externality which is not currently captured by the market (or government subsidy policies), and which should therefore by factored into any government environmental policy regarding shipping. There is something to that. There remain some highly complex questions about the synergistic interaction of taxes, subsidies, and regulatory costs in various competing segments of industry which are beyond the analysis I can present here.(461) As a matter of basic public policy, moreover, one must ask if a plea for government subsidy in favor of marine transportation in this case is consistent with other public policies to promote the revitalization of the railroads, which can also be justified on environmental grounds. In other words, yes, the public might lose in increased air emissions from trains compared to ships, but nevertheless gain more by reduced emissions from trains compared to trucks and cars because of the overall support to railroad infrastructure. In political economics, just as in ecology, one much look at all the relevant changes in the system.

To punt on this question, I would suggest that incorporation of some compensating subsidy for the Seaway is well worth it if it is necessary to make the scheme politically acceptable. There is some room for negotiation here if we can come up with a political contract which benefits both the environment and the industry. A viable compromise, for example, might be a scheme in which the individual vessels were taxed according to the amounts and concentrations of dirty ballast being discharged, but 75% of the taxes collected were returned to the industry, in the form of rebates per volume or value of cargo carried. (The other 25% would go to support monitoring, enforcement, and perhaps government research on control options.) It would not be illogical to pay the same parties being taxed, because the ratio between tax paid and rebate received would vary with each individual ship or firm, depending on how effective they were in managing their ballast water. A well-run company could actually make money on its ballast water management, and there would be a definite incentive to build new, cleanly designed Seaway-sized vessels.

Nothing is quite so easy and effective as this might sound, and there are some problems in the monitoring of such a scheme. Careful attention would have to be paid, up front, to the development of meaningful laboratory protocols for evaluating the level of contamination in ballast water and the field protocols for sampling the discharges. Much of this work, however, has already been done in a number of studies conducted for the purpose of evaluating the current regime. Moreover, there are ways to improve existing sampling. There is no reason why ships cannot be required to install sample ports right on the discharge lines, much as they are required to have on marine sanitation discharge lines under Canada Shipping Act Regulations, and there are other monitoring techniques which might advance the reliability of the process.(462) Altogether, it should be no more difficult than it would be to monitor the performance of prescribed technologies. In this case, however, the focus would always be on the bottom line of the actual threat in the water.