What sort of environment will we bequeath to our children, and who will decide the political and economic weight we place on the utility of future generations? We can think of two fundamental institutions at the heart of this decision—markets and government. Unfortunately, both suffer from pervasive failures, and it will be foolhardy to entrust the decision entirely on either one. As a corollary, it will have to be a joint effort between the market and the government, with the latter charged with the unenviable mandate to improve resource allocation through enlightened regulation and with a generous nudge from concerned citizens.
Addressing deep-seated market failures in future public interest is a non-trivial task. Let us briefly recognise why. Externalities, according to economists, such as emissions from power plants and automobiles to name two sources, prevent the market from reaching a socially-efficient equilibrium. For example, the clean-up cost of environmental damage is often ignored by firms making their production decisions. The cost is, therefore, ‘external’ to the firm and borne in the form of health costs, for example, by people with no say in deciding how much to produce. On part of the producer, there is no compelling incentive to internalise such external costs, reflecting the ‘tragedy of the commons’. In the case of ‘bad’ externalities such as pollution, the markets, therefore, will produce too much of it. Markets will not readily internalise the externalities because of the presence of very high transactions costs, and, thus, to reach a socially-efficient equilibrium, these costs will have to be forced by regulation. Hence, the oft-heard dictum ‘tax the externality’, or make the polluter pay. Practical examples include upping the emission standards for automobiles and permits for discharge of hazardous substances among others.
In emerging markets such as India, that are faced with numerous public service deficits, there is another reason for damage to the environment. Excessive reliance on private and/or self-provisioning of services such as water, mobility and electricity worsens the already toxic air-quality in a number of our bigger cities. A recent study by ICRIER, WRI and New Climate Economy attempts to estimate the ‘true costs’, i.e., total costs, including external costs of service provisioning for four cities in India across three services—water, transport and electricity. It is evident that while each city has its own set of dynamics that determine availability and cost, an overwhelming result is the high external cost associated with self-provisioning across different services. By underestimating the true costs of self-provisioning, it is implicit that we are over reliant on it than is socially optimal.
For example, energy end-use is of several types—electricity for residential purposes, fuels driving industrial production, petroleum products used in mobility and traditional fuels used for cooking and lighting homes—and the nature and extent of self-provisioning varies with the economic background of the consumer. Marie Antoinette’s infamous remark ‘Let them eat cake’, when applied in this context, reflects the fact that the well-off tend to secure access, overcoming last-mile connectivity issues no matter what the cost. Intermittent electricity supply means that most households that can afford it invest in either inverters or diesel generators, creating a mini self-sufficient ecosystem in each home. For those with more modest means, alternatives such as kerosene or firewood are used for both cooking and lighting. The self-provisioning market for energy is therefore quite heterogeneous with households segregating themselves into distinct cohorts based on affordability. What is true for all types of self-provisioning, however, are the higher external costs associated with it.
In recent times, meticulous empirical evidence confirms that using certain fuel types for cooking (kerosene and firewood) are harmful to health, especially that of women since they are directly exposed to the toxic fumes from burning these fuel types. With a majority of the population breathing contaminated indoor and outdoor air, the pollutants that get lodged in our lungs make a permanent home in our bodies. When children breathe the noxious mix, we should be aware we are compromising their health. The furore over air pollution in India’s cities over the last few months is testimony to the declining air-quality and also reflects the growing awareness on the subject. In this context, the government’s initiative to equip each Indian home with gas cylinders is a welcome move.
Similarly, the Delhi government’s scheme of odd-even car-rationing is an attempt to reduce toxic emissions from private vehicles, whose use has grown even as public transport in Delhi has improved considerably, but perhaps not enough to cater to increasing demand and incomes. Most of the affluent households own multiple cars—on average, one car per family member. Thus, the roads are congested, with barely one or two people travelling in a car meant for four or five people. With increased traffic, we tend to leave our cars idling in traffic and contribute to the local pollution in cities. Admittedly, commuters have limited choices, especially at the last-mile, and this is where there is room for the gap to be filled by the host of city-focused initiatives. Pilots in Delhi suggest that bicycles could become attractive at the last-mile, provided separate spaces are created for them.
It is hard for citizens to function without alternatives, whether it is mobility or electricity or some other essential service. But, have we taken a moment to think about the environmental impacts of our choices? Just like the producer, individuals (in their role as producers and consumers) too have no incentive to internalise the external cost imposed on society at large. Diesel generators are a necessity in the face of serious supply deficits since we cannot rely on utility provided electricity. Brown-outs are met with ‘costlier’ self-provisioning—after all, in the 21st century, electricity, like the internet, is a basic right! But then, as residents we breathe the noxious fumes we produce.
Some studies also estimate the economic loss from worsening air quality in cities on health outcomes. Most recently, the World Health Organization declared that there are about 7 million premature deaths globally because of air pollution exposure. The intent is not to alarm, but merely to make us aware of the consequences of our choices. For example, when total or true costs are considered, renewable energy might be an economical option. The price of solar-generated electricity has come down to a lucrative R5 per kilowatt-hour for purely rooftop-installed panels. Unfortunately, although there are other options for energy, there are none for water-supply. Of all the water supply in the world, a meagre 2% is freshwater that the entire world’s population relies on. In the case of water supply, it is impossible to drink water directly from the taps, which has allowed for a mushrooming water purifier market. In some ways, it is a chicken-and-egg situation. Will change have to wait for improvements in public service delivery? Can citizens put pressure on the government to induce change? And finally can citizens chip in by demonstrating a behavioural shift in favour of cleaner choices? In the final analysis, it will perhaps have to be a mix of all three with city governments leading the charge. Some cities are already working on changing service-delivery models. Both Surat and Pune have water treatment plants, and in the case of Surat, the municipal corporation is operating its own wind and solar plants. Hopefully, this perspective on service provisioning should help our policymakers decide on options while working on the smart city plans. As the government has often pointed out, the smart in India’s smart cities is not so much technological, as has been the case in the West, but the provision of basic and clean services of water supply, sanitation, transportation and energy to its residents. One hopes that the tragedy of the commons in our cities does not play out like a Shakespearean tragedy that invariably ends in the death of most of its major characters.
Kathuria is director and chief executive and Sagar is consultant, Indian Council for Research on International Economic Relations. Views are personal