A lot has happened since ORVI originally published our post on the disastrous toxic train derailment in East Palestine, Ohio. Cleanup efforts are still underway by the railroad operator, Norfolk Southern, but they have raised new questions about the safe transport of contaminated soil and water on public roadways to state disposal sites. New water test results from the Ohio Environmental Protection Agency (EPA) and independent study teams highlight how scattered and inconsistent the initial emergency response by state and federal agencies was and have called into question the process officials, such as Ohio Governor Mike Dewine, followed before making proclamations about the safety of the community.
Testimony in Pennsylvania from the director of the Commonwealth’s emergency management agency has prompted further questions and concern about Norfolk Southern’s overnight decision to vent not just one, but five derailed train cars carrying the carcinogen vinyl chloride. At issue is whether that decision may have been motivated by Norfolk Southern’s desire to quickly reopen the tracks rather than by legitimate safety concerns. According to the testimony, the rail company declined to elaborate to Ohio and Pennsylvania officials on why it changed its course of action overnight.
On the federal level, Senators Sherrod Brown and J. D. Vance of Ohio have proposed tougher regulations for railroad operators and the EPA has ordered Norfolk Southern to pay all cleanup costs associated with the disaster. In addition to a lawsuit from the US Department of Justice, Norfolk Southern faces lawsuits in both Pennsylvania and in Ohio, where Attorney General Dave Yost called the disaster ‘entirely preventable’.
Debate remains heated over what the total ‘cost’ of the disaster will be and how to define fair compensation for residents whose health and livelihoods remain impacted. Perhaps foreshadowing a future point of contention, Norfolk Southern CEO Alan Shaw declined to commit to paying long-term medical costs for East Palestine residents during a high-profile hearing in the US Senate on March 9, 2023. This post explains how the costs of such disasters are often estimated and why the debate over costs and compensation is likely just beginning.
The Basics of Welfare Economics
“How did you get that number?” Not an uncommon question when so many corporate, media and government reports and experts ‘project,’ ‘estimate,’ or ‘conclude’ the costs of disasters, new projects, or policies. It is increasingly important for the public to understand how and why these costs are calculated. For instance, such estimates are often used in litigation to determine compensation. Although we do not wish to speculate, it is safe to assume this will be the case in litigation involving the train derailment in East Palestine. There will be different numbers bandied about by all manner of experts and officials. How should citizens and residents make sense of the cost estimates of this disaster?
Attempting to quantify the costs associated with natural disasters such as long-term health impacts, property damage, and lost business/tourism revenue, or investment in public goods such as clean water and clean air, has a long history in the field of economics. “Cost-benefit analysis,” a framework widely used in policymaking, has its roots in 19th century France. Economists in the 1920s and 1930s developed and refined a theory of welfare economics which closely examined the concept of externalities and social cost and applied these ideas to cost-benefit analysis.
An externality is a side-effect of commercial or industrial activity that is not reflected in the cost of the goods and services being produced. The most commonly cited externality is pollution—which has environmental and public health effects that the company responsible for the pollution does not pay and does not pass onto their consumers through higher prices. (This has been a high-profile discussion lately around “the social cost of carbon,” which attempts to estimate the environmental, health, and climate cost of CO2 emitted by companies.)
A basic principle of economics is that resources are inherently scarce; there is physically not enough to go around for everyone. For things like ‘clean air’ and ‘drinkable water,’ however, this principle does not generally hold. These ‘goods’ are not bought and sold at the store or on the internet nor produced in factories. In theory, there is no natural restriction on the supply of clean air or clean water. Additionally, there is perhaps near infinite demand and no clear price tag. This is in stark contrast to things like oil, cars, or cell phones, which are limited in supply and, where we can directly see market prices (even if they are artificially influenced by government policies such as taxes or subsidies). How, then, do we find out the cost of non-market goods that cannot be bought and sold?
In other words, is it possible to ‘put a price tag’ on something like the ability to drink clean water, breathe clean air, and ultimately enjoy good health for residents in East Palestine?
To determine the value of these things, economists search for what they call the willingness-to-pay for benefits or the willingness-to-accept compensation for losses.
For example, let’s say that an electric utility company plans to build a new coal-fired power plant in a small town. The pollution and smells generated by the plant would undoubtedly disturb nearby residents and, over time, harm their health and quality of life. Some residents might choose to move and pay the costs of moving. They may have to sell their homes for less than they were previously worth before the coal plant opened. However, that cost, which is caused by the discomfort, inconvenience, and illness (and associated medical costs) for residents, is not reflected in the cost of electricity sold by the plant.
Enter welfare economics. Economists might use this framework to estimate the residents’ willingness-to-accept compensation—that is, an amount of money (adjusted for inflation) that the residents would accept that offsets their previously unmeasurable loss of utility (the benefit or satisfaction they previously had from not having a coal plant nearby). The idea is that there is an amount of money that residents would be willing to accept to make up for the smells, pollution, and potential health effects they would have to endure.
The problem is, where would the money come from? The power plant is under no legal obligation to compensate nearby homeowners. And, were it to raise the price for its electricity in order to generate funds with which to pay compensation, it would risk losing sales to lower-priced competitors.
A second possible solution is that governments could tax the plant’s pollution at a rate that matches the compensation residents would be willing to accept. Of course, this would only work if all power plants were taxed for their externalities. In the real world, that almost never happens.
So, who pays for externalities? Usually society at large, with heavier burdens falling on some, such as the people who live near our hypothetical power plant. Sometimes, the government will partially compensate people who are disproportionately impacted using public funds. And rarely, companies can be forced to pay. That’s what state and federal officials have made clear they believe should happen in the case of East Palestine. Norfolk Southern’s CEO Alan Shaw seems to agree, repeatedly claiming that the company will “do whatever it takes to make things right,” yet he often neglects details or dodges questions about which costs or how much the company might be unwilling to cover.
For example, a serious concern among East Palestine’s residents is the decline in home values. In this case, a decline in willingness-to-pay might be measurable by economists using housing market data to quantify the effect on prices of perceptions and concerns about the derailment and chemicals on home values.
Can you really estimate someone’s willingness-to-pay or willingness-to-accept?
Economic modeling is only as good as the assumptions we make and the data we have. Many people hear the word “assumptions” and immediately dismiss studies or reports. But that would be a mistake. Some assumptions can be very good, especially when they are based on large amounts of experience and observation. And often, they are quite literally the best we can do. But the public should always ask questions when numbers are presented. Demystifying the methods and processes that we use is something that economists have not always done well.
Still, the process of estimating costs is not as simple as adding up the medical bills and receipts for air purifiers. Some methods of estimation rely on survey data (economists call these “stated preference” methods because we are relying on what people actually say). Surveys, when designed and administered well, can be insightful. Other methods use data that is observed from actual behavior (economists call these “revealed preferences” methods because we are relying on what people reveal—not through their words, but through their actions).
To make this more concrete, in the stated preference approach, economists might design a large survey about the coal plant and its effects, administer it to residents in the town, and collect data about what the residents would be willing to accept in order to “approve” the plant being built.
A revealed preference approach might examine things like home sales and purchases to determine if the coal plant impacted people’s decisions about living in the town. In such a scenario (if the study is empirically sound), any decrease in home price attributable to the coal plant would constitute a buyer’s willingness-to-accept. That is, the buyer only buys the home at the lower price point, despite the coal plant being there, but would not have purchased it if the price were higher. The challenge here is that such studies need observational data, which means data collected after the fact. If we wanted to conduct analysis before the plant was approved for construction, the revealed preference method would rely on data from other communities where a coal plant had previously been built. These can be very insightful, although it is important to bear in mind that when you start crossing city, county, school district, state or national boundaries, extrapolating results between communities can become more fraught with issues.
Equity Concerns with Cost-Benefit Analysis
Although it may be possible to assess externalized costs with a reasonable degree of accuracy and make those who are responsible pay, we still face the challenge of compensating individuals and families fairly. And that can be challenging because not everyone will be affected to the same degree or even in the same ways by the pollution from our hypothetical power plant. Some peoples’ home values will be more affected than others. Nor will everyone experience negatives from the coal plant in the same ways. Perhaps some residents cannot afford health insurance. Any respiratory problems from the coal plant’s emissions might go untreated, as they choose not to incur the large financial cost of seeking medical attention. Such an out-of-pocket cost could eat a lion’s share of their income, stretching already thin budgets and putting at risk other needs such as rent or food. As time passes and the effects go untreated, they may worsen. In the most horrific scenario, these residents experience reduced life expectancy from chronic exposure to the pollution.
Conversely, residents who are able to afford health insurance may seek immediate treatment at a much lower cost as a share of their income. Such treatment might result in mitigating the impact of the pollution. Or, it might result in a recommendation to move to a different town—a recommendation that higher-income individuals with more secure or flexible jobs (such as working from home) are more able and likely to act on.
Cost-benefit analysis and traditional welfare economics offers very little insight into if and how these inequalities should be taken into consideration. Should lower-income residents without health insurance receive progressively higher compensation from the electricity company? Should everyone in town receive the same compensation since the electric company is not responsible for the inequality in the first place? Should the solution be some sort of joint-intervention between the electricity company and the government, with the government focusing on the disparity between residents?
These are questions that will need to be addressed as the aftermath in East Palestine continues to unfold. Unfortunately, it is all too likely that they will be at least partially answered in courtrooms via litigation. In the coming months and years, the public will see various and often conflicting estimates of the “cost of the disaster.” What is most important is to remember that these are not financial costs—they are human costs. ‘Cost’ is a much more benign and emotionless word than talking about the disaster in terms of the health and well-being and daily lives of school children and parents, retirees and grandparents, business owners and workers of all manner in the community. It is crucial to ensure that the methodology used to determine the final compensation for East Palestine’s residents accounts for the long-term health and economic challenges the region will face. If the analysis is done well, then amid so much confusion, one fact about the cost will become certain: it is staggering.