Haggis_McMutton wrote:This future discounting stuff is an interesting subject. It might merit a thread in itself.
Let's take something like the
Ford Pinto scandal(short version supposedly a decision was made to not recall a defective car line because a cost analysis showed that it would be cheaper to pay the lawsuits than to do the recall). Let's pretend this actually happened.
Now, in that scenario what non-monetary cost did they fail to incorporate in their analysis? One option seems to be the moral cost that the people involved might have to pay, but Ford was a Nazi so lets say that is 0. The other option I see is PR cost. They failed to consider what would happen if it got out that their cars exploded and especially if it got out that they decided to leave the exploding cars in use. Incorporating this cost pushes the analysis towards recall.
It seems to me that the same thing can apply to many other areas, however the caveat here seems to be that the customers / voters / public must have:
1. a reasonable chance of getting access to said information
2. a reasonable chance of caring about said information and
3. a reasonable chance of being able to inflict a cost upon those who took the decision
If we take the government out of the picture, is the above the main method through which the incentives would be jiggled towards more or less environmentally friendly decisions ? Or am I rambling incoherently again ?
The "main method" is one of profit and loss incentives with prices and property rights (I kept it real short on Law and somewhat on prices). Within the ecosystem of markets, humanity can develop better means for serving one another--on a voluntary basis while being in tune to consumer preferences. Those who fail to do so are punished monetarily and possibly psychologically--however that may be for each person. At the very least, the market is more efficient in innovating and adapting, but with government intervention, they can kick out those incentives (marginally) by getting import quotas, subsidies, favorable regulations for themselves, impose higher start-up costs on others, etc. Marginally, because it's not like the company can 100% ignore profit derived from voluntary exchange.
Ford PintoThe optimal incentive structure would be one where people pursuing their self-interest create outcomes which promote the general interest. The optimal death rate is not zero (otherwise the price of everything would be ridiculously high, people's standards of living would decrease, etc.), but with Ford's Pinto at the time of sale certain risks should have been mentioned. It's generally implied that when we buy something, we assume it to be reasonably safe--and if there's a problem that is dangerous, it should be made clear beforehand. (Perhaps, the demand for arguing about implied consent is the cause of lawyers.)
As mentioned, Ford Pinto grossly underestimated the future costs of that debacle. Over time, what happened? Did Ford keep making Pintos? We can imagine a later scenario where the price of lawsuits would be perceived as less than the recall, but has Ford committed the same mistake twice?
The legal system punished Ford for its recklessness, and the consumers--having realized what has been done--reacted appropriately. This hurt Ford's profits, and because Ford is in a competitive business, it responds to profit and loss incentives. Apparently, since then, it seems that Ford is producing appropriate vehicles--except of course government intervention through bailouts, import quotas on foreign competition's cars, and numerous clauses in "Free Trade" Agreements marginally diminish Ford's sensitivity to consumer demand. It's difficult to say how much government interference through these means contribute to Ford's reduced sensitivity to consumer demand.
(And to correct for confirmation bias, let's incorporate the production lines of all other cars within the US. Has it been nothing but Pintos? Has it been 0.001% Pinto but the rest non-Pinto?). What explains this? One group will shout "REGULATION" while I'll talk about profit and loss incentives, prices, property rights, etc. to provide a fuller and more accurate description.
Is your description the main method? There is no particular method as you've described since profit and opportunity cost are subjective (as are interest rates and time preferences, much to Mets' chagrin). Nevertheless, the market is an ecosystem. It evolves and adapts. Numerous methods are tried, some are selected and others are discarded. For example, some companies realize that being more "socially responsible" yields greater profits, for others it isn't the case. And underlying these profit and loss incentives is always the government--which rewards as well as punishes both 'good' behavior and 'bad' behavior. The government distorts prices and those incentives with arbitrary punishment, unfair subsidies/support, lawsuit caps (BP Oil Spill), forcing people to use Federal Reserve Notes (US dollars), etc., and this is something very few people realize. They have an anti-market bias and an odd, almost mystical, view of government.
How quick and capable of innovating are government organizations--compared to organizations on the market? The 'method' of the threat of bankruptcy and diminished profits force companies to maintain supply alongside consumer preferences. This is profit and loss incentives at work. Government organizations operate within bureaucratic and political incentives (inflating the budget--regardless of consumer/citizen preferences, doing a crap job (like the DMV), pandering to votes using rhetoric and lies, etc.).
But I'm getting more off-topic. Haggis, if people want to voluntarily exchange some portion of their earnings for campgrounds and outdoor activities, then producers would become cognizant of this profit opportunity (this is entrepreneurship). If turning a forest into long-term lumber is more valuable than turning it into a campground, then it'll be used for lumber because people place more value the goods which involved lumber within the production process. They opt for more houses made of wood or for furniture. But as Mets fails to realize, resources are allocated on the margin. It may be the case that having a forest of which 30% is for lumber and 70% is for recreational activities may be the profit-maximizing choice. For buyers, perhaps 10% is dedicated recreational activities, 30% for the house, whatever.
How do we know what's best for society? It depends on consumer preferences and voluntary exchange, thus requiring people to convince others that X is better than Y (marketing--as on TV and even on here). The immoral method of doing this is to have the federal government take people's money, nationalize forests which become 'common' property (or no one's property), impose dumb bureaucracies, and be cheered on by the uninformed voters. People who subscribe to the later philosophy believe that they know what is best for everyone--they presume this knowledge. They're paternalists who assume that those in government are willing and are capable of knowing and then carrying out the goals of "the people." It's a faith-based system, which has expanded the State, contributed to these worldwide wars and counterinsurgencies that the US is involved in, reinforced predatory governments, perpetuated poverty through subsidies, curbed our ability to coexist voluntarily, etc.
Government is a package deal, and self-interested groups like environmentalists only want their piece of the pie. In seeking that small piece of the pie, they contribute to "Leviathan," which we use such political clout to expand into other endeavors--beyond the preferences of the environmentalists. They fail to factor in their social costs of contributing to an organization which is fueled by involuntary exchange, impervious to bankruptcy, can largely ignore the uninformed voters' preferences, colludes with select businesses, etc.
At least Ford learned from its mistakes (but it does get bailed out, doesn't it?). With government, it's a journey in the dark because without prices, it can't have rational planning. It loses the profit and loss incentives because it steals the money--instead of trading for it based on the value of the goods offered. The government loses an objective criterion for measuring performance (monetary profit), thus it loses the ability to know how well it is satisfying consumers.