Property rights, externalities, and
environmental problems
Chapter 4
property rights
• bundle of entitlements defining owner’s
rights, privileges, limitations for using the
resource
• how do environmental problems arise from
different property rights structures
• note: capitalism / pursuit of profits is not the
source of all environmental problems
efficient property right structures
1. exclusivity
•
all benefits and costs accrue to owner
2. transferability
•
voluntary exchange
3. enforceability
•
secure from involuntary seizure
consumer’s choice
producer’s choice
market equilibrium
in a system of well-defined property rights, consumers and producers act in
own self interest, resulting in an efficient outcome (invisible hand)
externalities as market failure
• exclusivity is chief characteristic in efficient property
rights structure: often violated
• agent sometimes does not bear all of the consequences of
action
• 2 firms located by a river
• steel (waste)
• resort hotel (recreation)
• externality: welfare of agent depends not only on own
activities but activities under other’s control
the market for steel
if no outside regulation,
can expect 5 results
1.
output of steel too great
2.
too much pollution produced
3.
price of steel too low
4.
no incentives to search for ways to yield less pollution
per unit steel
5.
recycling and reuse of polluting substances discouraged
since release into river is so inefficiently cheap
types of externalities
• external diseconomy (affected is damaged)
• external economy (affected is benefited)
• pecuniary externality
• external effect transmitted through higher prices
• new firm moves into area and drives up rental price of
land: negative effect on those paying rent in the area
• but no market failure because higher rents are reflecting
scarcity of land
incentives and property rights
•
•
•
•
what else besides private property?
state property (govt owned)
common property (joint ownership)
res nullius / open-access (no ownership)
• all create different incentives for resource
use
state ownership
• former communist countries
• parks and forests
• efficiency depends on incentives of
bureaucrats
common property
• managed commonly rather than privately
• grazing rights / fishing rights
• entitlements may be formal or informal
(tradition / custom)
• unsuccessful management more common
than successful
• Elinor Ostrom, Governing the Commons
1990
res nullius / open-access
• fishing / grazing rights / whales vs. chickens
• tragedy of the commons
• common-pool resources
• nonexclusivity (exploited by anyone)
• divisibility / rival (your use diminishes my use)
bison harvesting
two characteristics of open-access
1. resource will be overexploited
2. profit (scarcity rent) will be dissipated
•
unlimited access destroys incentive to
conserve
public goods as market failure
• public good
• nonexcludable (even if do not pay cannot be
excluded from enjoying it)
• indivisible / nonrival (my enjoyment does not
lessen your enjoyment)
• national defense / air / information /
diversity
• free-rider problem
person a’s contribution to diversity
person b’s contribution to diversity
market demand for diversity:
sum it vertically!
efficient provision of public goods
free-rider problem
• inefficiency results because each person able to free-ride
on another’s contribution
• due to indivisibility and nonexcludability, consumers reap
the benefits of any diversity purchased by others
• diminishes incentives to contribute
• if contributions are not large enough to finance public
good, it will be undersupplied
• this is why we see gov’t control of many PG’s (compel you
to pay through taxation)
information revelation problems
• efficient allocation requires charging different
prices for each consumer
• but how does government / producer know how
much individuals willing to pay?
• consumers do not reveal strength of their
preference for the good
• hard to know what to charge
imperfect market structures
• monopolies / oligopolies big player in
environmental problems
• oil-exporting countries and cartels
• cartel: restrict production / increase prices
• allows group to act as monopolist
monopoly and inefficiency
Efficient: OB, charge price OG, net benefits HIC
Equilibrium: OA, charge price OF
Producers lose JDC (pure loss) but gain FEJG
Consumers lose FECJG (FEJG transfer to producer, but EJC pure loss)
Total society loss: EDC (dead weight loss)
government failure
• rent-seeking: use of resources in lobbying and
other activities directed at securing protective
legislation
• fossil fuel subsidies
• increases net benefits to special interest group, but
may lower benefits to society
• voter ignorance: economically rational to remain
ignorant
• high cost of information
• low probability of single decisive vote
how to correct these failures
(property rights / market / govt)?
1. bargaining (private negotiation or courts)
2. regulation (price/ tax or quantity/ limits)
private resolution
through negotiation
• resort could bribe steel company
• resort could offer to pay amount equal to
damages it would otherwise incur for every
level of output the steel company would
reduce
• what level of output would steel company
choose?
again, the market for steel
resort bribes the steel maker
resort offers CD if produce at Q*
if refuse, steel producer surplus is ABD
if accept, steel producer surplus is AB, but also get value of bribe (CD), so total is ABCD
better off by C if accept bribe
the courts:
property and liability rules
• who should start negotiation? what if steel
company refuses bribe?
• court system can respond to environmental
conflicts by imposing property / liability
rules
• specify who gets what and rules
• does it matter who gets what?
Coase Theorem
• Ronald Coase (1960) argued:
• as long as negotiation costs are negligible
and parties can negotiate freely, court can
allocate entitlement to either party and an
efficient allocation will result
steel vs. resort
• if steel company has right, in resort’s
interest to bribe
• if resort has property right, steel company
should bribe resort for right to pollute
• either way, Q* would be chosen
rancher & farmer
• Cattle occasionally leave pasture for
farmer’s property, damaging his crops
• If rancher ↑ herd by 1 unit, receives profits
of $3, but farmer suffers loss $10
• Will rancher pursue private benefit and add
the cow?
rancher & farmer cont.
• No! The rancher and the farmer will
negotiate, because an agreement will make
them both better off
• Farmer WTP rancher < 10 to forgo adding
cow
• Rancher WTA > 3 to forgo adding cow
• Clearly, room for agreement
practical flaws with Coase thm
• incentives for polluting
• if steel company has property right, when other
firms see them receiving bribes might be
encouraged to increase pollution to earn bribes
• negotiation difficult if many parties
involved
• high transaction costs (court time, lawyers
fees,…)
Pigouvian taxes
• Use taxes to correct divergence between
MPC and MSC
• Set Pigouvian tax = divergence (measured
at Q*) – this raises firm’s private costs,
forcing MPC=MSC
• “Internalizing the externality”
the market for steel