PROPERTY RIGHTS

Lecture 9: Property Rights, Natural Resources, and the Environment

Authors: Richard L. Stroup and Charles N. Steele

•  When property rights are undefined or unenforced: transaction costs and pollution.
•  The problem of the commons
•  When property rights become defined and enforced: trade increases welfare.
•  Changing knowledge and preferences: property rights and innovation.

Introduction

This lecture examines how the economics of property rights can be used to understand environmental and resource issues. It is sometimes supposed that capitalism necessarily implies environmental degradation and the depletion of natural resources. However, the dismal environmental legacy of the centrally planned economies, together with the improving environmental records of nations relying primarily on market system, show otherwise. Similarly, it is sometimes thought that environmental problems are necessary consequences of technological progress. However, the economics of property rights suggests that environmental problems and resource problems are generally problems of poorly defined rights, i.e., high transaction costs. The same 3D property rights that reduce waste and better provide other goods and services should serve to protect environmental resources and better provide environmental goods. This analysis further suggests that the solutions to environmental problems require addressing the structure of property rights.

We begin by exploring the central issue in environmental problems, the problem of open access common property. We then discuss the links between property rights and environmental degradation and propose property rights solutions to environmental and resource problems.

When property rights are undefined or not enforced: transaction costs and pollution .

Environmental problems generally fall into two categories: 1) pollution and 2) overuse (or exhaustion) of resources. As will be seen, both pollution and overuse of resources become problems when property rights are inadequately defined. The ecologist Garret Hardin argued that all environmental problems are, at the core, problems of open access common property, i.e., lack of well defined, exclusive property rights (Hardin, 1968). Our analysis agrees. Here's why.

Pollutants are undesired byproducts of human activities such as production. 1 Disposal of pollutants, like any other aspect of production, is done in the way that generates the least cost for the party generating it. Pollution becomes a problem when this disposal fails to take into consideration other parties and begins inflicting harm on them. But why should this ever occur?

Suppose a firm produces valuable goods and unwanted pollution. It sells the goods and dumps the pollution into the atmosphere. If some parties are harmed by this pollution, then they can demand that the polluter cease inflicting this harm, as long as they hold the right to not be harmed. Alternatively, if the factory has the right to use the atmosphere to dump pollution, then the injured parties can simply pay the factory to cease the harm. If it should happen that the value of the production and the cost of control are so great that the harm from the pollution is minor compared to the cost of control, then the firm will not necessarily reduce its activity. With good information and 3D property rights (along with low transaction costs), the firm and the injured parties have a strong incentive to take into account the damages caused by the pollution and the costs (in terms of production and abatement) of reducing it. In that case, they will be able to agree on how much production and pollution will be reduced, so that the total value of production, net of all costs, is maximized. At this point, the total net gains are maximized. At that point it would not benefit the injured parties to pay for further reduction, nor for the factory to pay for the right to inflict more damage.

Therefore, pollution problems should not exist. All parties involved have incentive to bargain to eliminate them. 2 Of course, there is an obvious problem with this Asolution.@ It supposes that property rights are perfectly defined and completely transferable, i.e., that transacting is costless. We have seen that property rights are never perfectly defined, and hence transacting is costly. In the case of rights over use of the atmosphere, rights are very poorly defined indeed. The atmosphere is an example of common property, access to which is open to all. Partitioning the atmosphere and defining exclusive rights over it is, at least at present, essentially impossible. 3

Similarly, consider the problem of exhaustion of a resource. 4 Simple analysis of benefits and costs might suggest that the resource should be used. For example, if a particular barrel of fuel is used to power an engine, the alternative benefits of preserving that fuel for future use are forgone. The benefits of using the fuel may be greater than the expected future benefits from preserving the fuel B hence it is reasonable that it should be used. Many unrenewable resources in fact are becoming cheaper even as more is used, because technology reduces the cost of its production, or the production of good substitutes. The benefits from exhausting a particular resource, e.g. a mineral deposit, a pool of oil, or a stock of fish, might be greater than saving them for the future. Again, in such a case it could logically make sense that they should be used. In these cases use of the resources would be a solution, not a problem.

But realistically, two characteristics of markets will almost certainly prevent a resource from being exhausted. The first is that both minerals and most species grow more costly to produce or harvest as they become more scarce (the resources available at lowest cost are mined or taken first), and market participants are cost -sensitive. The last barrel of oil will never be taken--not even the last billion barrels--because high quality, low cost sources would be long gone with that little left, and taking more would be prohibitively expensive. The same is true of fish in the ocean.

A second factor is that when anything looks as though it will become exceedingly rare, and if it might be valuable later, then collectors, or those simply concerned, or even speculators are likely to save and protect the remaining examples of the rare species or the rare resource of any kind. Use of the resource may be come rare or even nonexistent due to cost, but total exhaustion seems unlikely in a world of well-financed collectors, non-profit groups of every description, and speculators.

Resource exhaustion does become a problem if future benefits from the resource, or other benefits from alternative uses of the resource, are not available to those who would take their value into account. In this case, the exhaustion of the resource means that more valued opportunities requiring the resource will be lost. But this is unlikely to occur in a world with property rights. The existence of more valuable uses means that there is a profitable opportunity. Some entrepreneur could purchase the resource in question and profit by devoting it to the more valuable use, including preserving the resource for the future. In fact, this is exactly what happens in many cases. Where property rights are well-protected, lumber firms develop increased stocks of trees, oil and mining companies refrain from developing some known deposits, and conservation organizations purchase lands to preserve natural settings. When rights are not well protected, however, then conservation for more highly valued uses becomes difficult. The problem is that exclusivity of rights is lacking; hence bargaining to a better outcome may be prohibitively costly, or simply impossible.

For example, it is said by some that the rainforest of the Amazon basin is important for keeping the levels of carbon dioxide in the atmosphere from growing too high (the rainforest absorbs carbon dioxide as it grows). To the extent that this is true, cutting or burning this forest to the point where the atmosphere begins to be threatened is a poor idea, and would constitute an environmental problem. However, property rights to the atmosphere are poorly defined, as are contributions to the atmosphere of any particular piece of rainforest. Hence owners have little incentive to take such nebulous benefits B nebulous from their perspective B into account. (The problem is further compounded by property rights rules and similar institutions in Brazil that encourage the destruction of rainforest B clearing the land is one way of better establishing one's claim to it.) Once again, the problem can be traced to poorly defined property rights, or prohibitively high transaction costs. And again, the problem is one of common property with open access. In this case the owners of the property in question ignore the forgone benefits, because were they to produce these benefits they could not exclude others, i.e., the benefits would be open-access common property.

Common property with open access is equivalent to poorly defined property rights. As we saw in Lecture 2, it is costly to establish and protect property rights; therefore they are never perfectly defined. Environmental problems are therefore most likely to arise in connection with resources and assets over which it is extremely difficult to define property rights B e.g., the atmosphere, stocks of fish in the ocean, flows of subsurface water, etc. It is important to understand the economics of open access commons. This is the subject of the next section.

The problem of the commons

Garrett Hardin's seminal article on environmental problems (1968) was titled �The Tragedy of the Commons.� The �commons� refers to the English village commons. Each village in England had a commons, which was pastureland that any member of the village was entitled to use. Individuals kept livestock on both private land and on the commons as well. It was frequently observed that common property was overgrazed to the point of damage, while private land was not. Why?

When individuals graze livestock on private land, they take into account the amount of vegetation destroyed by grazing. In order to ensure good grazing in future years, they remove livestock from the land before the animals begin to inflict damage and jeopardize future growth. This is so whether they own the land, or simply rent grazing rights from an owner who protects the value of his property by specifying what renters can do on it. The individuals involved stand to gain by preserving a privately owned resource for future use. They lose wealth if they fail to take into account potential negative effects of their activities, and curtail them before the harm of more activity is greater than the benefit.

However, the incentive structure for common property with access open to all is quite different. The same individuals have no strong incentive to try to preserve the vegetation for future use in this case. Suppose Mr. A is one of many persons using the commons for grazing. If Mr. A decides to remove his livestock to preserve the grass, he is unable to exclude others from letting their livestock eat the remaining grass. He might try to convince B, C, and D to withdraw their stock as well, but this simply permits F through Z to benefit from the remaining grass. Hence, A might just as well leave his sheep and cattle on the commons. Since each villager is faced with the same dilemma, each participates in the overuse of the commons, even when each takes care not to overgraze on private land. Hence, the tragedy: The commons is overused to the point of destruction, through no one's particular fault or desire.

Of course, it is possible that A might convince the other members of the village to agree to limits on use of the commons, i.e., to restrict access, rather than permit open access. This is a step towards defining exclusive property rights over the commons. If the restrictions are well designed, they may be sufficient to prevent overuse, and also provide incentives for each village member to follow them. Properly designed, such rules will be constraints that act very much the same as exclusive private property rights B and in fact, they are a form of private property right, giving each party a well-defined, limited right of use. We see today in the case of ocean fishing an increasing number of solutions of this sort. In a number of fisheries around the world, harvest rights are allocated among fishers and transferable among them to encourage more efficient harvest. (Leal 1996 ). But the costs of negotiating such a solution increase with the numbers of people involved. (Recall Lecture 7 on mutual ownership of property.)

Within a small village these costs are probably not trivial, and when one considers that common properties, such as the atmosphere, transcend national boundaries, such as the atmosphere, the transaction costs implied can be extremely high indeed. It has already been argued that environmental and resource problems are problems of open access commons. Air pollution, water pollution, overuse of fishery stocks, deforestation, noise and light �pollution,� human-caused extinctions of species B all of these can be seen as tragedies of the commons. Hardin argued that overpopulation itself is an example B individuals bring excess numbers of children into the world because they treat it as open-access common property. (It should be noted that this last analysis is questionable. There is evidence to suggest that individuals take available resources into account in determining family size. Since individuals certainly can be excluded from resources such as food, shelter and clothing, they have incentive to limit family size, and do so.)

What are the characteristics of a solution to the commons problem? In the case of an actual village commons, one solution might be simply to privatize the land, divide it into plots, and distribute it among the villagers.

An alternative solution would be to restrict grazing rights in some way. This attenuation of existing rights could benefit all; the commons is preserved as common property, and all villagers derive a stream of benefits from it, rather than destroying these benefits. Because such a solution benefits all, it will be easier to implement and enforce--as each villager becomes a real stakeholder and thus a natural part of the enforcement team--than one which penalizes some and benefits others. Such a solution recognizes that the property rights of each individual are poorly defined and moves to strengthen these. The rights are attenuated B a limit is imposed on each villager B but also strengthened B each villager is assigned a well-defined right to graze up to a point. Rather than establishing property rights via privatization, such a rule establishes rights via regulation, regulation that tries to duplicate the effects of private property rights.

The exact form that such a rule might take varies. It might arise from negotiation among members of the relevant group. In such an instance the commons becomes a sort of club good, an example of mutually owned property as discussed in Lecture 7. Community- based arrangements for managing fisheries are an example of this. Or such a rule might be developed by means of statute law, by simply imposing rules. The degree to which such legally-defined rules approximate the effects of private property vary considerably. Also, common law might develop rules that help to define property rights. These alternatives are examined in the next section.

When property rights become defined and enforced: trade increases welfare.

The basic problem in the tragedy of the commons is twofold. First, in the absence of a means of commitment, it is in each individual's private interest to overuse the commons. Second, high transaction costs make it difficult or impossible to develop enforceable contracts that would limit the overuse. This second feature is important for understanding possible solutions to environmental problems.

In some instances, negotiation of rules among users can turn an open-access commons into the equivalent of mutually owned property B i.e., common property that is not open access. Users of the commons have a mutual interest in preserving it from overuse; hence they have incentive to develop such rules. Whether or not they will be able to do so depends on factors such as the costs of negotiating an agreement and the costs of enforcing it.

The cost of negotiating will tend to be lower for groups of people that are smaller and more homogeneous. As group size increases, and differences among members increase, so do the costs of negotiating. Developing an agreement among members of a small village, who have common language, culture, lifestyle, and governmental system, will be much simpler than negotiating an agreement among, say, people of several different countries, where the costs might well be prohibitive.

Enforcement costs are also important. These costs similarly depend on the group in question. They depend too upon whether or not outsiders might also attempt to use the commons, and on the nature of the common property itself. Commonly owned land will be easy to police compared to, say, a commonly owned section of ocean, or a fishery, or the atmosphere over a piece of land.

The primary benefit of negotiated rules is that they restrict access and prevent overuse and abuse of the resource. As with private property, the owners have an incentive to care for the resource, since although they share the full costs of overuse, each share is more valuable when as a group they have the ability to control the amount of use. Such a solution appears to be more likely with relatively small, homogeneous groups, because the costs of negotiating and monitoring increase with group size and diversity. Hence, it is less likely that such a solution is workable for problems at a national or international level. However, for local problems, this sort of solution has the added benefit of keeping control in the hands of local individuals, who tend to have better knowledge of local conditions, as well as stronger incentives and greater ability to correct local problems, than do far-removed decision makers in national government.

Donald Leal describes numerous cases in which this kind of approach has been used successfully in managing ocean fisheries (Leal, 1996). A fishery B a particular stock of fish B is common property. If the fishery is open access, such that anyone can fish for it, it is likely to be depleted to the point that reproduction is harmed and the stock dwindles. Also, competition to catch open-access fish will lead to overcapitalization B developing more and bigger boats and equipment than needed to catch a given quantity of fish, since the goal is to be first to catch the fish when access is open. Leal documents successful instances of fishermen's groups in the United States, Canada, Scotland, United Kingdom, Norway, Brazil, and Turkey developing and enforcing restrictions that restrict access to fisheries. In each case, the result is an end to overfishing, a stable fish population, and higher incomes for fishermen. In some instances (Canada, U.S., and Brazil) these restrictions are (or were) purely private arrangements. In others, they were developed with support from government and law. In one case in Brazil, the national government actually intervened and re-established open access (for wealthy individuals who further received subsidies to develop large fishing operations!). This ultimately destroyed the fishery.

Another possible solution to the problem of the commons is to develop and enforce laws regulating use. Environmental regulations are sometimes thought to be the only solution to problems of pollution, particularly in cases such as the atmosphere, where property rights can be extremely difficult to establish. As will be seen shortly, statute law and regulation are not the only possibilities in these cases. Furthermore, the effectiveness of regulation can vary immensely, depending on the characteristics of the regulation.

Some regulations simply restrict or prohibit certain activities, with little or no regard for consequences, and no ability to adapt to changing circumstances. For example, a law might specify the maximum amounts of pollutants any factory might put into the air, without regard for other relevant matters, such as the harm actually done (which might vary by factory location) or the value of the output that might be lost (possibly sacrificing a great deal of value to avert a small amount of harm) or alternative remedies (e.g., if harm is caused to an identifiable nearby party, it might be less expensive to simply compensate that party). Regulation of this sort tends to appear as a sort of central planning. Government officials determine the extent to which common property will be used. As with central planning in general, there is no systematic means for government officials to accurately weigh benefits and costs. And as with all government activity, there is the chance that rent-seeking will dominate the governmental decision-making process. However, such regulation does define rights over the commons. The problem is that the definitions tend to be relatively arbitrary, inflexible (and hence not transferable so as to maximize wealth and minimize net harm), and subject to political interference.

Such regulation can even be counterproductive. In some cases it creates incentives that increase the environmental harm. An environmentalist from New Zealand recounted to one of the authors of this lecture how a law was passed in New Zealand to ban logging of rare hardwood trees, which are prized for their wood. These trees tended to be located in private lands that were used for grazing cattle. Because the trees were quite valuable, landowners took measures to protect the trees from cattle, since cattle would trample the ground around trees, harming or killing them. When the law banning harvest of the trees was passed, landowners lost the incentive to protect the trees, and the destruction of the trees accelerated.

Similarly, in the United States the Endangered Species Act (ESA) is a law enacted to give protection to animals and plants deemed in danger of extinction. One provision of the law places restrictions on the use of land where endangered species are found. In the case of private land containing endangered species, a private landowner essentially loses rights to any activity the government deems harmful to the species. As a result, landowners do not want endangered species to be found on their land. If they fear that some endangered species might be on their land, they frequently take measures to destroy the habitat, so that they will not lose most of their rights to the land. In such cases the ESA is working in exactly the wrong way, if the goal is to protect endangered species. The law destroys incentives to provide habitat and imposes what can be an enormous burden on individuals who have land containing endangered species. The landowner is expected to bear the full costs of providing a public good B protection for the species. Since these costs are not borne by the public nor by environmentalists, environmental advocates do not hesitate to argue for increasingly draconian restrictions.

However, statute law and regulatory solutions may be designed with characteristics that are closer to 3D property rights. Laws can create incentives and opportunities for private decision makers to maximize net value in using the commons. For example, one possible solution to air pollution problems is to establish a system of tradable emission permits. Under such a system, the government decides upon a total amount of some pollutant that may be emitted into the air. This limit is presumably set at a level that avoids harm from the pollutant. The government next creates permits that allow the holder of a permit to emit a specified fraction of the total limit. In essence, these permits specify a property right to issue a certain limited amount of pollution, and no more. The permits create, by fiat, limited rights over use of the commons.

These permits are then distributed, perhaps by auction, or by giving them to currently operating factories, or some other method. The crucial feature is that owners of permits can trade them. This means that the rights to emit pollutants will be held by those who value them the most. The factories that produce the most net value of output, per unit of pollution, will obtain the permits. Or if a citizens' group believes that a lower total amount of pollution is preferable and is willing to pay the costs of reduction, this group may purchase the permits and simply not exercise the right to pollute. Alternatively, a group of neighbors downwind from a polluter may buy them from that polluter, contract with the polluter not to buy more of them, and sell the permits for use elsewhere. In this case, the neighbors may have to pay more than the market price--set by the most efficient controllers among the polluters--and then sell at the market price. Permits such as this are used in some states in the U.S. with success. (In some cases citizens' groups have indeed purchased and retired the permits.) Tradable pollution permits have also been proposed as a method of allocating international greenhouse gas limits across nations.

Richard Stroup (1995) outlines benefits from this approach. Such a regulatory system avoids some of the problems of a regulatory approach that sets a per factory pollution limit. First, this method sets a total limit. In general, this may be the correct variable to target, rather than individual behavior. Second, having set this limit, the method provides a mechanism for individual decision makers to minimize the costs of the solution. Total wealth in society will be greater if each gram of sulfur dioxide put into the air is accompanied by output with $10,000 net value instead of $1000 net value. If the permits are tradable, the most highly valued uses will be the ones ultimately pursued. Furthermore, the method does not require regulators to determine the least-cost method of keeping within the targets. Individuals trading within markets will find the least-cost methods, which may include technological solutions such as abatement equipment and reallocating rights to buyers with higher valuations.

At the same time, this kind of solution does have problems. First, it presumes that government officials and scientists are both able and willing to establish limits that are roughly correct. The ability may be questionable B the lack of knowledge is a fundamental problem in environmental issues. A standard that is too stringent may needlessly reduce economic output, for little or no corresponding benefit. Unfortunately, a tough standard may benefit regulatory agencies, which gain political constituencies by appearing to be tough on pollution. Voters do not realize that any penalty like this reduces the supply of goods produced, raising the price of the goods, and forcing consumers to share in the cost of pollution control. The voters gain when the gains to cleanup are large, but when the benefits of cleanup are small, they may suffer net harms from these tighter standards. For the regulator, political support means power and greater budgets; hence regulators have some incentive to set unnecessarily tough standards. Stroup (1995) cites evidence that the U.S. Environmental Protection Agency systematically overestimates pollution risks, by enormous margins. The subsequent regulations reduce economic productivity, with little real benefit in return. Stephen Breyer, now a U. S. Supreme Court justice (Breyer 1993), provides a more detailed explanation of these regulatory problems.

Second, the rights involved may be less than secure; since they are established by government fiat, they can be changed by government fiat. The U.S. Clean Air Act Amendments of 1990 specifies that the tradable pollution rights are not property rights. They can be removed without compensation at any time. If potential purchasers of permits fear that government will either arbitrarily increase the limit or decrease it (in the first case reducing the value of a permit, in the second case nullifying a permit entirely) their willingness to invest in permits will be reduced. Additionally, the method requires costly enforcement activities. The pollution output of participants must be measured, and monitoring must occur to prevent non-participants from polluting. Still, such a method suggests how regulatory solutions might establish property rights by fiat in cases where rights are otherwise extremely difficult to define. Leal (1996) outlines a case in which the government of the United Kingdom established quotas for certain ocean fisheries, and then allowed an organization of fishermen to assign quotas and manage the fisheries, with good results.

There is still another sort of solution that can be used. Common law B the law developed from legal rulings in English and American courts B typically protects individual rights from infringements by others. Roger Meiners and Bruce Yandle have shown that in the United States and Britain the common law concerning nuisance and trespass has been used successfully to stop air and water pollution (Meiners and Yandle, 1998). Nuisance refers to interference with others' use rights (either private or public rights). Trespass refers to invasion of another's property. Meiners and Yandle document numerous cases where common law was used to protect individuals from harm done from air pollution and pollution of surface and sub-surface water. Under common law, individuals who can show they have been harmed (that is their property rights have been violated) can obtain compensation, punitive damages, and injunctions (legal requirements that the offending activities be halted) when victimized by pollution. Meiners and Yandle also show that the law evolved with increasing sophistication, as scientific understanding of pollution problems increased. The common law solution works by protecting established property rights. Individuals with rights to their lives, health, and property can take legal action when these are harmed (or in some cases, merely threatened by unreasonable risk) by inappropriate use of the commons.

There are several advantages to such an approach. First, the method reinforces property rights, rather than weakening them. This helps to preserve the beneficial social characteristics of a system of private property rights. Second, the common law method generally requires that actual harm be evident B either inflicted or likely to be inflicted. Hence, it does not impose restrictions on activities that are not harmful (but may be distasteful) the way that a regulatory approach can. Third, it provides incentives for parties involved to negotiate a least-cost solution to a problem. Fourth, it does not require regulators or lawmakers to know anything about potential problems. Instead, it makes use of the knowledge of those directly affected.

Meiners and Yandle point out that despite these desirable characteristics, common law solutions to environmental problems have been displaced by regulatory ones in the United States. In many cases, this seems to have been done for political reasons, since politicians and regulators can gain increased power by politicizing environmental decision making. Meiners and Yandle also document that, in some cases, replacing common law protections with regulations actually reduced protection against pollution standards. Elizabeth Brubaker (Brubaker 1995) has made the same case, very fully documented, for the Canadian replacement of common law protections by statute law and bureaucratic enforcement. She provides evidence that the Canadian environment has suffered as a result.

In addition to being less desirable for those who wield political power, the common law has some weaknesses that make it difficult to apply in certain kinds of situations. The common law approach requires a plaintiff to show that a harm has been inflicted. For some kinds of harms, this is simple B one need only document a crop damaged by pollution, for example. But some kinds of harms may be difficult to show. It is currently impossible to show how a cancer was contracted, for example, and therefore to show that it was caused by any particular instance of pollution. Also, the common law approach requires that the defendant be shown to have caused the violation of rights. But it is frequently impossible at present to identify the source of pollutants dumped into the air or water. In these kinds of situations, the solution may be a properly designed regulatory response.

Therein lies the problem, however. The situations in which the common law solution is least likely to work, due to knowledge problems, are also the ones in which it will be most difficult to develop an optimal regulation. Regulatory and statute law responses will likely be developed in such situations, but there is no systematic way to assure that these approaches will increase overall well-being. Such responses are more likely to work well when they define transferable rights that can be allocated to minimize costs, and that allow response to changing conditions and knowledge.

Changing knowledge and preferences: property rights and innovation.

There are other possible solutions to environmental problems. Technological innovation reduces the amount of input needed to produce output, and also increases the substitutability of inputs. Hence, natural resources have, in general, become less scarce, rather than more scarce, as evidenced by declining relative prices over time (Simon, 1996) Also, better technologies are reducing byproducts such as pollution B by developing improved abatement equipment, and by developing uses for byproducts that were previously considered useless waste. Evidence suggests that the rate of technological improvement is increasing, rather than slowing.

Similarly, innovations in organizational and institutional design can reduce environmental problems. In the western United States, environmental groups have begun compensating owners of cattle and sheep for any livestock killed by grizzly bears or wolves, to reduce the opposition to having free-ranging populations of these animals.

Any environmental problem beyond simple scarcity (we can't have all we want of any good, without giving up others) that cannot be capable of net improvement for all parties is, at the core, a failure of some sort of transactions to be undertaken. That is, it is a failure of decision makers to take some effects of human actions into account because they are kept from sharing in the net benefits by high costs of transacting the relevant trades. Any entrepreneur who can discover a solution has found a profitable opportunity B whether the profit be measured in money or, for environmental groups, in environmental amenities.

One important consideration in analyzing an environmental solution is the likely effects on subsequent innovations and new solutions. Privately negotiated solutions and common law solutions allow participants to gain from being responsive to changes in knowledge, changes in preferences, changes in technology, and the like. Thus they can develop solutions that are the least costly, given the latest information, technology, etc. And they can readily adapt again to meet subsequent changes. Regulatory solutions tend not to be so responsive. Because they are imposed by decision makers in government, and usually by higher levels of government, they tend to be relatively unresponsive to changes in technology, economic conditions, etc. This is because there is no systematic means for new information to be imparted to government decision makers. Nor is there a way that government decision makers can gain personally by seeking out the latest information unless politically effective interest groups are offering them political gains to do so. Under private negotiation and common law solutions in a market setting, on the other hand, prices communicate new information, and each individual participant has a strong incentive to seek out any relevant information not communicated by prices (see Lecture 3).

Regulatory responses, therefore, tend to be less responsive to new developments, and as time progresses, may actually discourage innovations that could solve a given problem with less cost. This undesirable feature of regulation has led some to recommend that regulations contain �sunset� provisions. That is, a regulation should expire at some particular date unless a determination is made that it should be renewed. Another recommendation is that regulations be reviewed from time to time, and abolished if evidence warrants this. However, given that regulations are frequently the result of political competitions among competing groups, and each regulation advantages some even as it disadvantages others and may cause net harm, it is not clear that such provisions will systematically help to ensure that least-cost solutions to commons problems are found. A better remedy might be to simply design regulations that help to develop tradable property rights that will generate least-cost solutions and permit innovations. But this raises again the unsolved question: how to constrain political decision makers to systematically make the �right� decisions.

----------------------------

REFERENCES

Breyer, Stephen, Breaking the Vicious Circle, ( Cambridge: Harvard University Press, 1993).

Brubaker, Elizabeth, Property Rights in Defence of Nature , (Toronto: Earthscan Publications, 1995)

Coase, R. 1960. �The Problem of Social Cost.� Journal of Law and Economics 3(1): pp. 1-44.

Hardin, G. 1968. AThe Tragedy of the Commons.@ Science 162: pp. 1243-1248.

Leal, D. 1996. ACommunity Run Fisheries: Avoiding the Tragedy of the Commons. PERC Policy Series PS-7. Available at http://www.perc.org/publications/library4.php?s=2 Accessed 14 February 2004.

Meiners, R. and B. Yandle. 1998. �The Common Law: How it Protects the Environment.� PERC Policy Series PS-13. Available at http://www.perc.org/publications/library4.php?s=2 Accessed 14 February 2004.

Simon, J. 1996. The Ultimate Resource 2 . Princeton University Press.

Stroup, R. 1995. �Economic Incentives in U.S. Environmental Policy: Uses and Limits.� Paper presented at a conference sponsored by the Center for European Policy Studies (Brussels), �Applying Economic Instruments in EU Environmental Policy: Challenges, Experiences and Prospects,� Brussels, Dec. 4-5.

-------------------------------

1 Pollution is typically thought of as associated with economic production, but all human activity B even respiration B generates pollutants. So also do all activities of living plants and animals generate waste products.

2 This is the A Coase Theorem. @ Ronald Coase developed this analysis to demonstrate the crucial importance of transaction costs (Coase, 1960).

3 If property is damaged by air pollution, another property rights solution may be to sue for damages and/or seek a court order (injunction) to stop the damaging pollution. A drawback is that the complainant must present proof of harm that violates his rights, and proof that a particular defendant is the source of the rights violation.

4 Since we are considering the complete exhaustion of a resource, it does not matter whether it is renewable or non-renewable.