Assignment of Property Rights to Solve Environmental Crisis

In the book The Origins of Virtue, which +Trey Ratcliff recommended, Matt Ridley discusses the importance of property rights in establishing cooperation between individuals for resources. (The central premise of the book is that genetics and society play an important role in determining whether human nature is inherently good or inherently evil. Trey recommended it after my philosophy hangout about whether Hobbes or Rousseau was right about human nature: https://plus.google.com/u/0/104973761519912571719/posts/M4Rk6geZFuY and my followup on the apparent selflessness of insects: https://plus.google.com/u/0/104973761519912571719/posts/5q7qpCtbDSS, also discussed extensively in Ridley's book). In response to the discussion of property rights, however, I would like to share the Coase theorem: to best deal with a negative externality, if there are no transaction costs to negotiation, assign property rights to anyone, regardless of who it is (and, by extension, if there are transaction costs to negotiation, assign property rights carefully) (http://en.wikipedia.org/wiki/Coase_theorem)

Say you have a factory producing useful objects, but it also pollutes the river, making the people who live downstream sick.
Suppose now you assign the right to clean water to the people. The company polluting the water then gets sued when it pollutes, and if the cost of the lawsuits is higher than the cost to change production methods, they will change production methods.
But what if you assign the right to the water to the company, such that the company can sue if someone else pollutes, and can sell the right to pollute? Well, you might argue that the company would pollute the water to makes its objects because it costs nothing to pollute. However, if the people downstream value clean water more than the company gains by polluting it, they will come together to buy the right to clean water from the company, paying enough to justify the company changing production methods to maintain this clean water income. In other words, there would be an opportunity cost for the company to pollute.
If, however, there are high transaction costs for the people downstream to negotiating with the company, such as the cost to hire a lawyer and the cost form committees, then the water will only get clean if the company gain from polluting plus the negotiating costs are less than the downstream people's value of clean water. Clean water might not always happen, even if the people value clean water more than the company gains by polluting it. In such a case of high transaction costs, the government, or whoever assigns property rights, should carefully consider who values this resource the most, recognizing that because of transaction costs, if they assign the property right to the person who values it less, the market will not correct itself. Alternatively, the government could try to minimize all transaction costs, such as by creating environments where negotiating over these rights is very cheap.

I remember watching the Planet Earth series a while back. They highlighted polar bears losing their icy habitat and wetlands being paved over, then they mentioned the staggering value the environment provides to humans each year, in things like water filtration, air filtration, non-farmed food production, etc. The number? $33 trillion dollars a year, according to a 1997 publication in Nature. Water filtration from New York's Catskill mountains alone is worth $1.3 billion dollars a year, this filtration being performed by tree roots and the microorganisms that reside around them. How much is conservation worth to you if without it, you would have to pay an additional $20,000-$40,000 after-tax dollars per family per year for the services, like clean food, water, and air? Imagine imposing that same cost on a person in poverty in Asia.

When it comes to the environment, we ignore long-term costs for short-term gain. As any law- or economics-trained person would guess, this is a "tragedy of the commons" situation. As we learned from Coase, what is the solution in such cases? An assignment of property rights. While I am more often than not opposed to big government, this is one place where governments are needed, if only to provide that the long-term goals of society have short-term incentives, such as by assigning and enforcing property rights.

Take the example of New York's wetlands. If that land were not protected, and someone bought and built houses there, at about $100 million dollars of one-time profit, they would make a killing. But, it would cost society $1.3 billion per year, $130 billion over 100 years. But assign property rights to the outcome of the wetlands, the clean water, and no one would build a house, because it would be more profitable to use the land for water filtration than housing.

As an alternative to assigning property rights in the water to the people who can negotiate over it (if it somehow seems unfair-- an illogical conclusion in light of the Coase theorem), governments could run the environment like a business owned themselves. "After all, sustainability means running the global environment-- Earth Inc.-- like a corporation: with depreciation, amortization and maintenance accounts. In other words, keeping the asset whole, rather than undermining your natural capital." - Maurice Strong. When companies harm the environment by $1.3 billion in societal loss per year, the government could sue the companies to recover the cost. After a few such suits, companies would no longer exploit the environment unless it were cost-effective to do so (which, hopefully, would be never). In his book, Matt Ridley argues that historically government ownership has not worked as effectively as individual ownership.

What do you think: do you prefer a property rights system or a government-owned system?
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