Permit Trading Systems
Market-based safety regulation has much in common with permit trading programs. In emissions trading programs, for example, the government assigns to each regulated entity a pollution allotment for a particular pollutant, often based on past usage.32 The government then allows each entity to achieve its allotment in whatever way it thinks best and also allows different entities to trade pollution rights with one another. The theory is that allowing such transactions enables the achievement of any desired level of pollution reduction at the lowest possible cost. The flip side, of course, is that it allows maximum pollution reduction for any given cost to be imposed on industry as a whole. As with the market-based safety regulation proposal, emissions trading regimes save the government from the task of making decisions about what technologies are most likely to prevent pollution. The government’s role in both approaches is limited to setting goals, facilitating the market, and monitoring ex post compliance. A permit-trading system does not count as a prediction market. Its purpose is not simply to produce a prediction but rather to facilitate mutually beneficial transactions that impose no net cost on society. The fact that market activity produces useful information in the form of prices, revealing the least costly means of accomplishing a marginal increment in pollution reduction, is merely a happy artifact of market activity. This information might seem to be in the form of a prediction, because each business is forecasting how much it will cost to achieve a given level of pollution abatement, but this is a relatively straightforward forecasting problem for each firm. Market-based predictive decision making can be helpful when the government cannot easily measure the extent of some social ill that each regulated entity produces in a particular time period, and a permit trading system can be helpful when the government cannot determine which entities are most capable of reducing a social ill. In some contexts, the two approaches usefully might be combined. For example, in the safety context, the government may lack good information about the degree of danger posed by various practices, but it also does not have good information about which regulated entities or sectors can improve safety most easily. The market-based safety regulation approach sketched above insists that each firm reaches a specified level of anticipated safety. The government might, however, allow firms to trade rights to pose danger to the public. For example, a firm whose activities are anticipated to cause ten deaths annually but has been allowed a level of twenty predicted deaths by the government could sell its right to pose additional risk to some other firm. This would allow the firms that can increase safety most cheaply to contribute the most to given safety improvements. Trades might be allowed across industrial sectors. It would not be straightforward to allow such trading absent predictions of accidents.
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