Typically, environmental policy has been “premised on the assumption that markets are responsible for resource misallocation and environmental degradation and that centralized, political processes can correct these problems” (Anderson and Leal 1991). This problem is generally attributed to the decision making of private firms and individuals, who do not take into account the full costs and benefits, since these unintended consequences are external to their transactions. Since externalities are pervasive, causing widespread market failure, the government must step in to correct these failures in the hopes of achieving a socially efficient allocation of environmental goods.
In their book, “Free Market Environmentalism”, authors Terry Anderson and Donald Leal advocate for a decentralized approach to environmental problems, at the heart of which is a “system of well-defined property rights” (Anderson and Leal 1991). Rather than conceptualizing the cause of most environmental problems as “market failure”, the advocates of free market environmentalism (henceforth called FME) blame “the absence of markets – more specifically, the absence of private ownership, the foundation of markets” (Anderson and Leal 1992). The rationale is that a “discipline is imposed on resource users because their wealth is at stake if bad decisions are made” and “the further a decision maker is removed from this discipline – as he is when there is political control – the less likely it is that good resource stewardship will result” (Anderson and Leal 1991). Since property rights are transferable, “owners must not only consider their own values, they must also consider what others are willing to pay” (Anderson and Leal 1991). The role of government then becomes one of enforcing these property rights through strict liability rules and adjudicating disputed property rights in courts since, “it is when rights are unclear and not well-defined that over-exploitation occurs” (Anderson and Leal 1991). For example, air pollution is a bigger problem than land pollution because property rights to the air are difficult to define.
Anderson and Leal present many examples where government intervention has failed to alleviate environmental problems, accounting for this “government failure” with two reasons. The first is that incentives affect the policymaker’s decisions, regardless of what their intentions are since “policymakers are rewarded for responding to political pressure groups” and unorganized interests may therefore not be taken into account, since votes matter more than efficiency to politicians (Anderson and Leal 1992). But since environmental groups do not consider the opportunity costs when they formulate their demands, and the bureaucratic manager has no incentive to consider them either since he does not own the land, “too much” of the environmental good may be supplied (Anderson and Leal 1991). In this case, the political process actually externalizes costs. The second reason is that since information is diffuse rather than concentrated and good management cannot take place from afar, property owners are in a better position to “obtain time- and place- specific information about their resource endowments” than bureaucrats (Anderson and Leal 1991). Policymakers also lack the incentive to ensure this information is up to date and poor information may result in poor decisions.
If the government were to step aside and not intervene in private transactions, how might a polluter and a pollutee arrive at a socially efficient result? Ronald Coase was the first to consider this question and indicated the reciprocal nature of the problem: for the polluter to avoid harming the pollutee would inflict harm upon the polluter, since he would be unable to put his property to economically valuable use (Coase 1960). When both parties are faced with potential harms, the values of those harms can be weighed against each other in the market and transactions will be proposed in which both parties will be made better off than they were initially. For example, suppose that a paper mill operator by a lake values running the mill at $10, while fishery values the unpolluted water at $8. Even if the fishery owned the lake and could dictate that there be no pollution by enjoining the paper mill, the fishery would accept $9 from the paper mill owner to allow the mill to continue to pollute. The proposal will be accepted because both parties are better off by $1 than if it had been refused. In another case, the owner of the paper mill might be the one to hold the property right to the lake, but he would still accept a bargain in which he would reduce the mill’s emissions in exchange for payment from the fishery. In either case, a socially efficient equilibrium can be reached because it does not matter who possesses the property right – bargains of mutual interest will still take place.
The above cases, however, assume that there are no transaction costs, when realistically, it can be quite costly to “discover who it is that one wishes to deal with, to inform people that one wishes to deal and on what terms, to conduct negotiations leading up to a bargain, to draw up the contract…and so on” (Coase 1960). Furthermore, in many situations there are likely to be a large number of pollutees and/or polluters involved, such that it becomes far too costly for any negotiation to take place (Field and Olewiler 2005). Air and water quality problems are usually of the sort where it is not simply a matter of there being just one pollutee and one polluter involved. Coase admits that in those types of environmental problems where the market transactions are too costly, “the government may impose regulations which state what people must or must not do and which have to be obeyed (Coase 1960)”. But aren’t these precisely the sort of problems that come to mind when we think about the current environmental dilemma? If governmental regulation is required to properly deal with the most pertinent environmental problems of today, then the decentralized approach of FME will have to be more limited in its application than its supporters will admit.
If FME requires “strict liability rules” then there will be still more transaction costs involved when a private owner’s property rights have been violated and a legal battle is brought to the courts, since there will be “legal costs associated with gathering evidence, presenting a case, challenging opponents, awarding and collecting damages, and so on” (Field and Olewiler 2005). And like with the transaction costs required in private bargaining, legal costs will also increase greatly with an increase in the number of defendants and plaintiffs involved. However, even in those cases where few parties are involved, it may be naive to rely on the courts to force firms to internalize their environmental damage, such as if a poor household is pitted against a polluting firm with access to “a vast army of well-paid corporate lawyers” (Smith 1995). If it were not already challenging enough for the pollutees who may be at a disadvantage in terms of financial and legal resources, “defendants can easily defeat the plaintiff’s burden of proof by raising causation questions” (Blumm 1992). Burden of proof requires the pollutee to show “that the polluting material was a direct cause of their damage” and “that the material did in fact come from the specific defendant that appears in court” (Field and Olewiler 2005). Anderson and Leal believe that the “property rights approach is quite simple” in the case of automobile emissions: “with the privatization of highways and strict liability rules, the owner of the highway has an incentive to reduce emissions” (Anderson and Leal 1991). But it seems almost impossible that plaintiffs could establish a direct causal link to damages from the automobile emissions, for they could not prove that the pollutants in the ambient air is “traceable to this privatized highway as opposed to someone else's privatized highway as opposed to the remaining public roads” (Funk 1992). And due to the probabilistic nature of diseases associated with these emissions, a direct link between the exhaust emitted by the cars driven by the defendant’s highway and the health problems of the plaintiff would be impossible to demonstrate in court. Also, to take someone to court over an “increased risk of lung cancer” would be futile, since only direct harms have legal standing in court (Field and Olewiler 2005).
Anderson and Leal acknowledge, “the challenge to the property rights approach occurs when the polluter cannot be identified and the damages cannot be assessed” so they suggest a chemical “branding” of emissions so that it would be clear who is causing what damage (Anderson and Leal 1992). That such technology has not yet been developed does not deter the authors. Because of the “evolutionary nature of property rights”, external costs and benefits as perceived by others are instead seen as fertile ground for the imaginative “entrepreneur who can defend and enforce property rights” (Anderson and Leal 1991). If the owner of a lake can devise ways of charging fishermen, he can internalize costs and benefits and “gain incentives to maintain or improve the quality of his resource” (Anderson and Leal 1991). Simply asserting that technological progress will transform exceptions to the property rights approach into workable possibilities is a cop-out that does not address the aforementioned problems which are inherent to the approach altogether. It also presents a double standard in which de-centralized solutions are presented as always evolving, while centralized alternatives are seen as static, as if we are forever stuck in the dark ages of a command-and-control mentality (Smith 1995). But centralized approaches to environmental issues too have evolved beyond arbitrary command-and-control tactics and market-based strategies, such as a tradable pollution permits, which have been employed with signs of promise (Blumm 1992). Anderson and Leal, however, would reject these ‘impure’ approaches to property rights because they “still require a political determination of the level of pollution that will be allowed” (Anderson and Leal 1991).
Perhaps what is forgotten amidst all the technological optimism is that the fundamental properties of many environmental goods, like air and water quality, are such that they make well-specified property rights very difficult, if not impossible, to define. It is by the very nature of it being an open-access resource that the owner of the lake cannot exclude fishermen from using it, not that the technology to do so does not exist just yet. And it is for the same reason that the incentives to improve the quality of an environmental resource may be mitigated. Free-riding will tend to discourage expenditures on quality improvements once it is realized that others can enjoy the same benefits without having to pay anything (Field and Olewiler 2005).
If there are external benefits that cannot be internalized because they cannot be assigned a market price, this will tend to bias the cost-benefit analyses of firms toward emphasizing the costs to firms instead of the benefits to individuals and communities (Smith 1995). The aesthetic or intrinsic values ascribed to a forest by a local community are external to a private transaction in which the forest is condemned to be clear-cut. While this is the “efficient solution” from the perspective of a private bargain, it omits certain social values and therefore fails to reach a socially efficient equilibrium. And since it is difficult to put a price tag on biological diversity and the constituents of the biosphere that make possible its regeneration, its preservation may require government intervention.
Certain species may have no current economic value, and because of this, Anderson and Leal acknowledge that property owners will become indifferent to their survival (Anderson and Leal 1991). The authors lament government regulations that have cost thousands of jobs to save hundreds of the endangered Northern Spotted Owls and instead suggest that environmental groups either purchase the zones they want protected or out-bid timber companies for timber leases (Anderson and Leal 1992). They argue that these environmentalist groups “aren’t necessarily poor”, since if they were to combine their revenues, they would have $400 million, annually (Anderson and Leal 1991). But this seems to prove the converse of their point if this amount is compared to the wealth of the largest firms that the environmentalists may have to compete against in the market. Also, it would be very difficult to prioritize between all the species and regions and choose which ones to protect on that limited budget, especially since many more new threats of note to environmentalists would pervade the world if it became a world where the property-rights approach were dominant. It must be noted that “nearly all the remaining Northern Spotted Owl habitat is on federal lands where the last of the region's old growth forests endures. Almost all of the old growth forest on private lands has been logged because the market attributed no value to preservation of old growth forest” (Blumm 1992).
In spite of boasting the evolutionary legacy of private property rights, FME seems like a step backwards from an environmental policy approach. We must remember that, for the most part, ecological privatization is not anything new, but it had been curtailed by the sort of government intervention bemoaned by the authors precisely because of the failures inherent to this decentralized approach. Although the government is imperfect, merely pointing out these imperfections does not warrant reverting to a system in which the consequences of market failure go unchecked.
Anderson, Terry L., and Donald L. Leal. 1991. Free Market Environmentalism. Boulder: Westview Press.
Anderson, Terry L., and Donald L. Leal. 1992. “Free Market Versus Political Environmentalism.” Harvard Journal of Law & Public Policy, 15(2): 1-14.
Blumm, Michael C. 1992. “The Fallacies of Free Market Environmentalism.” Harvard Journal of Law & Public Policy, 15(2): 371-389.
Coase, R. H. 1960. “The Problem of Social Cost.” Journal of Law and Economics, 3: 1-44.
Field, Barry, and Nancy Olewiler. 2005. Environmental Economics. Toronto: McGraw- Hill Ryerson.
Funk, William. 1992. “Free market environmentalism: Wonder drug or snake oil?” Harvard Journal of Law & Public Policy, 15(2): 511-517.
Smith, Tony. 1995. “The Case against Free Market Environmentalism.” Journal of Agricultural and Environmental Ethics, 8(2): 126-144.