Environmental Pay-For-Play

Wednesday, November 2, 2016
Image credit: 
demerzel21, iStock

There is general acceptance that in the United States and the developed world, the environment has improved dramatically. We have cleaner air and water, and more open space; we have successfully reintroduced species such as the wolf into the wild; and we have expanded the number of bike trails, wild bird habitats, and other natural resources. It is ironic, however, that the very economic growth that supports the demand for, and the supply of, environmental quality is being threatened by the costs of excessive environmental regulation. The latter is now one of the largest sources of regulatory cost in the American economy and it is growing. But environmental regulation undermines private property rights, markets, economic growth, and individual liberty. In so doing, it may ultimately result in reduced environmental quality for future generations.

The concept of market failure lies behind the contemporary environmental regulation that weakens private property rights and, hence, undermines markets and the economic growth upon which environmental quality relies. Environmental advocates employ a far too broad notion of market failure in order to justify costly government regulation.  Traditionally, market failure is said to occur when there are monopolies, inviting government price controls, regulation of production, or subsidies of new entrants. Paradoxically, however, most empirical investigations reveal that monopolies arise and are sustained primarily by government protection, and not by market failure.

A second alleged source of market failure is when there is incomplete information for consumers and producers. Limited information generated from the private sector is used to justify government intervention. But the unanswered question is, under what circumstances will politicians, bureaucrats, interest groups, and consultants (both academic and industry) have better information than that provided by the market? What are the incentives for government officials to provide such information efficiently, especially if favored constituents might be helped by information control? Indeed, information restrictions are far more likely via government action than by private property rights holders and participants in markets. Moreover, there are few remedies to consumers or producers when governments intervene coercively to provide information via restrictive licensing or other entry controls. Such licensing instils government-backed monopolies or oligopolies, market settings that are unlikely to generate useful information or to invite additional parties who could supply valuable knowledge to consumers and producers.

The third suggested source of market failure--the one most associated with environmental regulation--is said to occur when private property rights do not fully internalize the costs and benefits of individual decisions, creating externalities.

The term externality invites government action because it emphasizes third-party effects on others from private actions. Mitigation by the state seems fair and appropriate. In fact, the alternative of strengthening private property rights to overcome any environmental externalities appears to be the politically incorrect solution. The early welfare economics literature--the intellectual basis for contemporary textbook discussions of market failure and for government environmental action--did not consider the strengthening of property rights as the solution. In that literature, there is skepticism and distrust of private property rights and support for policies defined by presumably benign, elite decision makers. There is no recognition that property rights will always be incomplete so that some divergence between private and social benefits and costs necessarily will exist. In the same way, government policies will always be, at most, second best. For these reasons it is often not the case that government action will improve overall welfare.

Indeed, the literature, and subsequent environmental policies based on it, do not reveal a careful comparison of the alternatives of stronger property rights and private action. Rather, the dominant distrust or dismissal of private property rights reflects a worldview. The coalition among politicians, bureaucrats, and advocacy consultants is a powerful proponent of government restrictions on private property rights and markets under the guise of market failure. The hostility to property rights and markets is rooted in a fear that they would leave far less latitude for political intervention and rewards to favored constituents.

Accordingly, the standard response to environmental concerns regarding clean air or water or pristine landscape is to constrain entry or production to a social ideal through regulation, taxes, or subsidies that ostensibly align private costs and benefits with social ones. But why should government officials be thought to have better information to design taxes, subsidies, or regulatory restrictions than that generated by competitive markets? Indeed, information for government policy comes from environmental lobby groups, related advocacy consultants, and often from regulatory agencies, such as the EPA, Fish and Wildlife Service, or NOAA. None of these are disinterested parties; and it is not obvious that the information they provide, and ensuing government actions, will be broadly beneficial.  There is little empirical evidence that many government regulations have achieved environmental quality in a cost-effective manner.   High social costs and the lack of clearly linked positive outcomes imply that the alternative of strengthening private rights could be far more successful.

Another idea for correcting externalities is to make the polluter pay. This is the dominant approach in environmental regulation in the United States. The logic also seems fair and politically attractive. But polluter pays rules could lower social welfare relative to a policy that strengthened private property rights and allowed for exchange to achieve an environmental or natural-resource objective. A bargaining approach—along the lines suggested by Nobel laureate Ronald Coase in his paper, the “Problem of Social Cost,” based on private property rights and trade--could be more effective than taxing or regulating producers. It introduces a useful beneficiary pays rule.

To illustrate the difference between polluter pays and beneficiary pays rules, consider the problem of how to expand natural habitat. The standard approach is to mandate restricted land use and impose the costs on the landowner. It is clear why open-space advocates would prefer not to pay for the benefits they desire, but it is also clear why landowners would resist and perhaps undermine achieving the objective. The alternative approach is to have those desiring to maintain a natural habitat to purchase and retire the land associated with it. In this case, the beneficiaries are paying for any benefits obtained and the landowner is compensated. The process can be quick, smooth, and noncontroversial—and the environmental objective is met.

Similar logic holds for those who seek to establish minimum stream flows in the semi-arid West.  Advocates would buy water rights from existing users and release the water in stream. Reliance upon beneficiary pays rules strengthens private property, relies on markets, and adheres to a proportional sharing of benefits and costs in achieving environmental quality. Empirical research reveals that proportionate distributions of benefits and costs are critical in achieving lasting outcomes. When there is an imbalance, the parties that receive excess benefits naturally seek more environmental protection because they do not have to pay for it and the parties that bear excess costs seek less protection because they are forced to pay for it. .  A battle naturally ensues. Under beneficiary pays, incentives are aligned so that the polluter is encouraged to be a voluntary part of the solution, rather than the enemy.

A final motivation for environmental regulation—one that may be the most damaging for the protection of private property rights, markets, economic growth, and individual liberty--is the notion of public goods. In economics, a pure public good is one that is non-rivalrous or not boundable in consumption. No one can be excluded from access and use of the environmental good, regardless of whether or not they pay. By definition, private property rights are not feasible here.

Pure governmental public goods—such as the provision of standard weights and measures, a money supply, and national defense—default to government provision, but at the same time can promote private property rights and markets elsewhere in society. The term public goods, however, is used elastically by environmental advocates to justify a variety of  government interventions into the economy, weakening private property rights, and lowering overall economic growth and performance. For instance, mandated reductions in emissions of poisonous gases into the atmosphere can be consistent with public goods provisions. The benefits are broadly spread across a vulnerable population, highly valued, and are non-rivalrous or excludable—everyone profits. By contrast, the expansion of zoning rules to mandate certain types of land use reflects the delivery of private environmental values at the behest of influential constituencies, while assigning costs to the landowner. This is not an example of a public goods provision. Further, consider endangered-species habitat restrictions. These constrain private landowners and their productive activities. But who values these restrictions—broad members of society or specific interest groups? The evidence is that narrow groups have their private preferences achieved without bearing commensurate costs. The private landowners who bear the costs resent, indeed often undermine, the objectives of the law.

Assertions of market failure and environmental externalities, as well as arguments for a polluter pays rule in public goods provisions, are used by advocates to advance the regulatory role of government and to restrict private property rights. As these rights are constrained, individual decision-making is hampered and the vibrancy of markets for promoting innovation and asset-allocation to advance social welfare and liberty are diminished. Individual property rights, and the freedom and economic growth they support, are replaced by political mandates valued by elites. As these environmental restrictions accumulate, the economy becomes less productive and generates less income, wealth, and employment. These losses, in turn, reduce the ability of the economy to support environmental quality as well as the ability and desire of citizens to pay for it.