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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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18 comments
 
That's a lot to take in for a Sunday morning when I haven't had my coffee yet. But interesting, and good post. Thanks for the food for thought. I'll have to check out that book and I added that page to my Wikipedia queue.
 
I prefer companies adopt a B Corporation class status. On another note, I highly recommend companies read Ray C. Anderson's "Business Lessons From A Radical Industrialist". 
 
It's all about providing the proper incentives right? When the market doesn't properly account for certain things as you've described I agree that it's government's role to provide the framework to provide accountability for these things.

That said, when corruption is in the mix the math gets screwy fast. Add to that the fact that pollution often doesn't cause immediate harm so it is easy for things to go on below the radar.

Near the end you make this point, "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)."

Today companies are often sued for the damage to the environment already. The equation itself seems pretty simple, that is, make it so Cost to pollute > Cost to prevent/dispose properly. However, "Cost to Pollute" does not equal the cost to cover damages. Instead, the true "Cost to Pollute" = SettlementCosts + Bribes + LitigationCosts.

Bribes = Costs paid in brides to politicians to exert pressure for governmental regulatory agencies to look the other way. AdjustedDetectionRate = The new "detection" rate that was bought through bribes. Remember too, the detection rate itself is probably rarely 100% to start with.
SettlementCosts = Avg Settlement * Legal Loss Rate * AdjustedDetectionRate
LitigationCosts = Avg Litigation Cost * AdjustedDetectionRate

The problem here is that the "Cost to pollute" is much easier to "influence" than the cost of prevention/disposal.
 
You make good points, but cynical ones, +Max McNally. :-) There are certainly many creative ways to make prevention and cleanup cheaper, too.
 
Agreed. There are certainly many creative ways. I'm certainly not advocating against them. And I'm certainly not saying this is the way everyone operates. I just think that, in general, the heavy polluters are probably not particularly ethical to start with. If they are willing to illegally pollute with all the known consequences to the society in which they live I hardly think bribery is much of a stretch at all.

If the thought of bribery and government corruption is considered cynical thinking in other states then it makes me quite happy to hear. Based on events in my own state though I'm not sure we have reached that level of maturity here. :(
 
Emissions permits are property rights, and I support an emissions trading scheme for addressing climate change - the most important problem the world faces, more important than terrorism.

The problem is that the vested interests and their allied (and in some cases bought-and-paid-for) "skeptical voices" on climate change have so poisoned the debate on climate change that any solution to it is now seen by a large fraction of Republicans as an anti-American conspiracy, even if it is based on property rights and sound science. Sigh.
 
I think polar bears have it too easy.
 
+Trey Ratcliff I'm sorry, are you under the mistaken impression that climate change is only affecting polar bears?
 
+Robin Green Facetious 1. Treating serious issues with deliberately inappropriate humor; flippant
 
Yeah, I mean, it's not like climate change is going to cause a rise in sea levels and drive millions of people out of their homes or anything. It's not going to have trillions of dollars of economic impact, or (in a triple whammy with rising populations and peak oil) lead to worldwide food shortages. It's all about the polar bears.
 
How about I make a facetious joke about terrorism, anyone going to be laughing then? I didn't think so.
 
Robin mentioned emission permits. I would prefer firm emission penalties starting at the first emission. The reason I am opposed to emission permits is that they are often given by the Government for free or for a cost that is lower than the value of the clean air to the people due to a lack of free-market negotiation, meaning some amount of negative externalities occur without any legal mandate to compensate for them, up to the point of the cap.
 
Well, the cap is supposed to be set low enough that it actually has a serious impact on the problem. The biggest problem with the scheme used here in the EU is that the cap is too high - it's too timid. If you meant that a side-effect of the giveaways is that other pollutants with a more local rather than global effect can continue to be emitted, then I agree, but climate change is more of a global issue - carbon emissions are largely fungible.
 
This is in an interesting conversation to me, and I was hoping to see more discussion. On the other hand, I do not know what is the point of this discussion in the Western world, if industries in India and China will be polluting away and growing for it. Can this be applied internationally?
 
Yes, this is where the initial allocation of property becomes (contra Coase) very important. If we say we in the West should have the lion's share of global emissions permits because we have historically emitted more, that is going to be a non-starter as far as China and India are concerned.
 
I prefer internalizing the externalities through taxation of pollution and other environmental damage. This is a form of the government as a business, but differs from the one suggested in your post in that it facilitates efficient economics through well known pricing. Suing selected customers is not a good way to run a business; charging all customers the same market clearing price is.
 
+Warren Dew A fixed tax percentage is not really a market clearing price. Jurisdictions are not really like businesses because they define ground rules under which businesses have to operate.
 
Sorry, I guess I wasn't clear. The tax would be on the amount of pollutants emitted - say, per pound of CO2 - not as a percentage of anything. I agree this is not exactly like operating as a business, but it seems to be related to that model from Christa's post.
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