Coase, Pigou and Power Outages

During the October Blizzard here in New Jersey I had the opportunity to look at the world from the eyes of Coase and Pigou. I also saw externalities in a real fashion.

Let me explain. You see, as predicted, sometime mid Saturday, October 30, 2011, we lost all power. The proximate cause, falling trees. The real cause was multifold. First the town has a tree loving policy, Namely there is a strong group of folks, the Mayor appears to be at the core, who believe every tree and each of its parts are sacred, at least that is my opinion having attended the town meeting where the decision was made.

Now I like trees, I grow them, hundreds, and give them away. Yet having gotten my degrees in Botany and Horticulture from the school at the New York Botanical Garden, I know something of trees. The locals in town are fans of “native” trees, maples and ash. Now anyone who knows where we live it is the remnants of Lake Passaic, from the last ice age. It is then end of the ice flow from the north, the last of what we know as the New England terrain. Twenty miles south we have sand, here we have rocks and clay, dragged a thousand miles or more from the north by sheets of glaciers. Now the native trees are really grown up weeds.

Ash have invasive roots and maples break is a stiff wind, and with snow the come crashing down. The tree decision has allowed the growth of trees over, under and through all the power lines. Thus the falling trees, thousands, really. Totally predictable, and it happens every other month, not thousands of course but a dozen or so!

Thus the proximate cause is really a result of the decision by the town to allow this to happen. If it were like the adjacent towns we would have trimmed them or eliminated them. The costs to repair is orders of magnitude more than the cost to fix the tree problem. In classic Tort law, the owner of the property upon which the tree was growing would be liable for any direct and consequential damages. However, this may be mitigated by the actions of the town by abrogating the ability of an owner to remove a tree. However a town does not have a sovereign immunity as does the State or Federal Government, it is collectively liable. Thus one ends up litigating against one's self. Perhaps Coase never thought of that.

That leads to externalities. You see people want a town covered in trees. However the choice of having this lovely coverage is loss of power, frequently. The costs of loss of power is substantial. I had to move my company from New Jersey to Prague, could not rely on the power. In my office here I had to get motor generators, an even then we lost Internet access and thus business. Thus it cost me and others for the ability of some to have trees overhanging streets.

The solution is simple, cut the trees. Or if you were Coase, sue those who have trees and lead to loss of power. It is like the railroad and farmer familiar to Coasean arguments. You want trees, and I am harmed, the you pay me for the harm.

Now to Pigou. Let us assume we do not follow Coase, that we follow Pigou. Namely there is a cost to the externalities but there is a cost to remedies. Pre-emptive remedies are always best, namely prevention. That means cutting the trees. Let us put the tree huggers aside. I really hate ash trees, the roots are invaders of all surface areas and basements.

But my personal likes aside, I like metasequoias, but let us assume we cut and or remove the trees overhanging the roads and wires. Who then pays for it, directly and indirectly? Let me make three arguments.

1. The Power Company: We tell JCPL to get rid of all the tree problems. That in the long run saves them money but as a Public Service Commission controlled entity they will but it goes into the rate base calculation. Plus a mark-up. Thus we all get to pay whether they are our trees or not. I get the benefit of better power but at a cost for which I bear no liability. You see power lines are buried in my area and I have chosen trees that are much more durable. Thus I am being “taxed”.

What actually happens is JCPL must love this. It is not their "fault" and the costs become part of the rate base and as such increase rates. Even a one in a hundred year event raises the rates for the remaining 99 years!  Towns are filled with managers who have no idea of unintended consequences, yes they are lawyers. They oft times make their living on these results.

2. The Town: The Town takes the responsibility to remove the trees. They do this by raising the property taxes and hiring more people. Towns never outsource, they just get more people, more trucks, and exploding benefits. Again I get hit with the costs but now for an amount proportional to my property value not my electricity usage. I may be very prudent in electricity, which I am, but this approach will not reflect that point.

3. The Owner: Namely we tell the owner of the property what the standard is and they have the duty to remedy the problem. This allocates the costs to the source. The problem is that it may be a sudden increase in costs but that could be remedied. The picture below is a prime example. The cable and telco brought the lines between this dead tree! Yes a dead tree, which sooner or later will collapse. Is this negligent on their part. Is the owner liable for the damage subsequently caused. Cane we have a class action suit?

Thus the Pigou approach is to tax and cut, trees that is, but the Coasean approach would be either to sue or frankly place the duty where the problem is, and if not compliant and damage occurs then fine or sue. A fine is a zero transaction cost remedy, so that may be the best Coasean approach.

Just a thought.