Sunday, May 29, 2011

Field Experiments and Free Riding

In today's NY Times, Rob Stavins and I are both quoted in this piece about California's continued effort to launch a serious carbon cap and trade program as part of its ambitious AB32 legislation.   I would love to see this effort succeed but I would like to focus on a slightly different point here.

We all agree that ideas are public goods and that learning offers positive spillover externalites to society.  So, a question arises -- who is the "sucker" who runs the "policy experiment" to generate this new knowledge?

When we know that we don't know the truth and there exists a costly (but we don't know how costly) experiment that can be run (such as cap & trade), the free rider problem will arise.   Everyone will delay running their own experiment hoping that somebody else will run the experiment. If the experiment fails, then others won't imitate California while if the AB32 experiment succeeds then others will join the "coalition of the willing" and cap & trade could diffuse and build up into a national effort.

I have argued that California should be rewarded for running this experiment.  The rest of the country appears to view us as Berkeley hippies who will push ahead with this effort even without an explicit incentive. You may be right about this but the recession and lingering unemployment have pushed many moderate greens to ask tougher questions about whether the California "green push" is good public policy.

Contrast environmental policy with medical clinical trials. If I am suffering from a health problem, I will seek any cure and will be happy to sign up for a randomized trial because I may be randomly assigned to the treatment group and the new pill may help me.  In contrast, in the case of environmental policy --- the people of California know that they cannot single handedly stop climate change.  We are volunteering to be the "green guinea pig" and the lessons we learn here will spread widely.  We need a mechanism where we can "sell" this new knowledge or at least be rewarded for generating this knowledge.  Each Republican should have to take their family for a one month vacation in California each year.  Such a cultural exchange program would generate tolerance and cash for the people of California.