The compensation conversation

Steve Landsburg chides Greg Mankiw for not getting to the heart of the compensation issue with regard to cap and trade.

The real question on the table is: Do we want to empower our government to punish bad behavior that was perfectly legal when it occurred? If you answer one way, you’ll favor compensation for slaveholders, retraining programs for displaced workers and free (or at least inexpensive) cap-and-trade permits for polluting firms. If you answer the other way, you’ll reverse those judgments.

I’m not sure that is the ‘real’ question framed that way but by way of contributing to the compensation here is why I neither want to compensate slave-owners nor polluters for their lost profitable but previously legal behaviour. In each case, when making the investment in assets or buying them from others who had, they had some expectation that the legality of those activities might change. Actually, I don’t know about the slave owners but for electricity generators they have known this was coming since the mid-1990s. That was precisely the time these assets were privatised in Australia and so one can only imagine that they discounted their payment accordingly. Same goes to Governments who still hold those assets. If they didn’t do so, they were stupid and I am sure the one thing we can all agree upon is that we shouldn’t be compensating asset holders when they are forced to realise the book value of their stupidity.

2 thoughts on “The compensation conversation”

  1. Josh,

    I agree with everything you say right up to

    one can only imagine that they discounted their payment accordingly

    I know you’ve been watching the electricity markets as long as I have…and the prices paid for Victorian assets at the time of privatisation reflected LRMC of new investments of the technology at the time…This for assets in a market where there was likely to be significant excess capacity if operated properly as they subsequently were.

    Nonetheless, the apparent lack of rationality in their buying decisions doesn’t diminish the arguments for not compensating them.



  2. They probably also had an expectation that they could bully the government into compensation when the rules did change, so they may well have factored that into the price, too.
    If we do give in, then we’ll be validating that expectation and the same thing will happen for future regulatory changes.


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