Decentralized Policies: Liability
Laws, Property Rights, Voluntary
Action
Chapter 10
Incompatible Uses

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By "decentralized" policies we mean policies
that essentially allow the individuals involved in
a case of environmental pollution to work it out
themselves.
Two industrial plants around the lake.

One processes food.
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water of the lake is an important input in its operation.
The other is an industrial operation that uses the lake
for waste disposal.
A decentralized approach to finding the efficient level
of ambient water quality in the lake is simply to let the
two plants work it out between themselves.
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Decentralized Approaches: Advantages


Because the parties involved are the ones
producing and suffering the environmental
externalities, they have strong incentives to
seek out solutions to the environmental
problems.
The people involved may be the ones with
the best knowledge of damages and
abatement costs; therefore, they may be best
able to find the right balance among them,
that is, to find efficient solutions.
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Liability Laws


To be liable for some behavior is to be held
responsible for whatever untoward
consequences result from that behavior.
Compensation requires that those causing
the damage compensate those damaged in
amounts appropriate to the extent of the
injury.
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Changing Incentives

Make polluters liable for the damages they
cause.

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The purpose is to compensate people after they
have been injured, and…
get would-be polluters to make careful decisions.

Knowing that they will be held liable for environmental
damages in effect internalizes what would otherwise be
ignored external effects.
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Internalizing the Externality

Suppose common law requires polluters to
compensate those damaged in an amount
equal to the damages caused.


The effect of the law is to internalize the
environmental damages that were external before
the law.
Damages become costs that polluters will have to
pay and therefore will want to take into account
when deciding on emissions.
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Efficient?


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A liability system could lead this polluter to
emission level e*.
It would not require any centralized control
authorities to intervene and mandate
emission reductions.
It requires rather a system of liability laws that
would permit those damaged by pollution to
be compensated for damages suffered.
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Solving for e*?


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Liability appears to address the incentive
question as well as the question of
compensating those who are damaged.
It may solve the problem of determining just
where e* is along the emission axis.
But whether this is actually true or not
depends on the legal process—common law
or statute—through which the amount of
liability and compensation is established.
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Common Law


Common-law systems rely on court
proceedings in which plaintiffs and
defendants meet to make claims and
counterclaims, and in which juries often are
called on to decide questions of fact and
amounts of compensation.
Judgments normally are based on precedent
established from similar cases in the past.
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Strict Liability and Negligence


A variety of legal doctrines related to
nuisance and liability have developed over
time.
In the United States, the law now recognizes
the difference between strict liability, which
holds people responsible for damages
regardless of circumstances, and negligence,
which holds them responsible only if they did
not take appropriate steps to avoid damage.
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Difficult Hurdles

Plaintiff must establish a direct causal link
between the pollution and the damage.

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Must show that the polluting material was a direct
cause of their damage,
The material was came from the specific
defendant that appears in court.

Without being able to trace a polluting substance to
specific defendants, those who have been damaged by
it may be unable to obtain compensation.
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Transaction Costs

Transactions costs apply to liability systems
where plaintiffs and defendants are
competing in a court of law to determine the
question of liability and the appropriate
amounts of compensation.

Complicated scientific questions often are
involved, and judges and juries may find it virtually
impossible to sort them out clearly.
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Statutes

Legislation may require compensation when
a polluter causes damage.


In a system where victims are free to sue
particular companies for compensation of
pollution-related disease, there is presumably a
direct incentive for polluters to take steps to
reduce their potential liability.
The laws can provide the correct incentives only if
the compensation approaches the actual amounts
of damage.
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Property Rights

The case of a small lake that one firm used
for waste disposal and another for a water
supply.

Which one of the firms is really causing damage
and which firm is the one suffering damages?

The problem may come about simply because it is
not clear who has the initial right to use the
services of the lake; that is, who effectively owns
the property rights to the lake.
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Property Rights to the Lake
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
When a resource has no owner, nobody has a
very strong incentive to see to it that it is not
over exploited or degraded in quality.
The lake could be owned either by the polluting
firm or by the firm using it for a water supply.


How does this choice affect the level of pollution in the
lake?
Would it not lead to zero emissions if owned by the
one firm and uncontrolled emissions if owned by the
other?
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Will Ownership Affect the
Allocation of Resources?
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Look again at Figure 10-1.
Suppose the marginal damage function refers
to all the damages suffered by the brewery—
call this Firm A.
Assume the marginal abatement cost curve
applies to the firm emitting effluent into the
lake— call this one Firm B.

Is it possible that the same quantity of emissions
will result in either case?
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Case I



In the first case, suppose that Firm A owns
the lake.
In this case Firm B would have to buy
permission from Firm A to place its wastes in
the lake.
Any payment lower than marginal abatement
costs (a + b) but higher than marginal
damages (a) would make both parties better
off.
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Case II
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Firm B may use the lake any way it wishes.
Suppose that emissions initially are at e1.
Firm B is initially devoting no resources at all to
emissions abatement.
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At this point marginal damages are $r, whereas marginal
abatement costs are nil.
The straightforward thing for Firm A to do is to offer Firm B
some amount of money to reduce its effluent stream.
They could continue to bargain over the marginal unit as
long as marginal damages exceeded marginal abatement
costs.
Firm B would be better off by reducing its emissions for any
payment in excess of its marginal abatement costs.
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Coase Theorem

So, in this little example, if property rights
over the environmental asset are clearly
defined, and bargaining among owners and
prospective users is allowed, the efficient
level of effluent will result irrespective of who
was initially given the property right.
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Efficient Level of
Environmental Quality

The wider implication is that by defining
private property rights, we can establish the
conditions under which decentralized
bargaining can produce efficient levels of
environmental quality.

This has led some people to recommend
widespread conversion of natural and
environmental resources to private ownership as
a means of achieving their efficient use.
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Rules and Conditions

In order for a property rights approach to work
right—that is, to give us something approaching
the efficient level of environmental pollution—
essentially three main conditions have to be met:
1) Property rights must be well defined, enforceable, and
transferable.
2)There must be a reasonably efficient and competitive
system for interested parties to come together and
negotiate about how these environmental property
rights will be used.
3) There must be a complete set of markets so that
private owners may capture all social values
associated with the use of an environmental asset.
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Transaction Costs

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The efficient use of the lake depended on
negotiations and agreement between the two
interested firms.
Negotiating costs, together with the costs of
policing the agreement, could be expected to
be fairly modest.


Suppose Firm A is replaced with a community of
50,000 people.
Suppose that instead of one polluting firm there
are 1,000 polluting firms.
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Absence of Markets
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For private property institutions to ensure that
an environmental asset is put to its best use,
the process also must work in such a way
that the owner is able to capture the full
social value of the resource in that use.
Suppose you own a small island in the
Florida Keys. There are two possible uses:
Develop a resort hotel or devote it to a wildlife
refuge.
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Free Riders

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One role for public authorities might be to
create the demand side for such a market.
Paying landowners an amount equal to the
wider ecological value of the land, provided
these ecological values were not impaired by
the landholders' use of the land.

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Conservation Easements
Endangered Species Act?
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Markets for Green Goods
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Many people are willing to pay a little extra
for improvements in environmental quality.
Firms that respond to this demand can hope
to gain market share and increased profits.

E.g., Toyota Prius.
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Voluntary Action


By voluntary action we mean cases where
individuals (including individual firms) engage
in pollution-control behavior in the absence of
any formal, legal obligation to do so.
There are many who feel that programs
based on voluntary restraint can be used
quite effectively.

One of the key issues is establishing the initial
conditions that will motivate voluntary pollution
reductions.
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Moral Suasion

A classic case of moral
suasion is the Smokey Bear
(and now Woodsy Owl)
effort of the National Forest
Service, a publicity
campaign aimed at getting
people to be more sensitive
about littering in the woods
and about avoiding things
that would raise the risk of
forest fires.
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Civic Virtue

In the early days of
recycling,
communities often
mounted voluntary
efforts, where appeals
were made on the
basis of civic virtue.
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Informal Community Pressure

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Communities can put informal pressure on
polluters to reduce their emissions.
It is informal because it is not exercised
through statutory or legal means, and it is
pressure because it attempts to inflict costs
on those who are responsible for excessive
pollution.
The costs in this case are in terms of such
things as loss of reputation and sales.
32
Duke Faculty

Michael Munger
reports that
professors at Duke
University feel peer
pressure to purchase
hybrids, like the
Toyota Prius.
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Summary

In theory, the threat of liability can lead potential
polluters to internalize what would ordinarily be
external costs.


By weighing relative compensation and abatement
costs, polluters would be brought to efficient emission
levels.
While liability doctrines may work well in simple cases
of pollution where few people are involved and causeand-effect linkages are clear, they are unlikely to work
reliably in the large-scale, technically complicated
environmental problems of contemporary societies.
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Summary Cont’d

The institution of private property rights.


Environmental externalities are problems only
because ownership of environmental assets is
often not clearly defined.
By establishing clear property rights, owners and
others who would like to use environmental assets
for various purposes can negotiate agreements
that balance the relative costs of different
alternatives.
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