Property rights in everything

This passage from the Millennium Ecosystem Assessment hints at a solution to the problems of environmental degradation:

The degradation of ecosystem services represents loss of a capital asset. Both renewable resources such as ecosystem services and nonrenewable resources such as mineral deposits, some soil nutrients, and fossil fuels are capital assets…Moreover, many ecosystem services (such as fresh water in aquifers and the use of the atmosphere as a sink for pollutants) are available freely to those who use them, and so again their degradation is not reflected in standard economic measures. When estimates of the economic losses associated with the depletion of natural assets are factored into measurements of the total wealth of nations, they significantly change the balance sheet of countries with economies significantly dependent on natural resources.

This raises the question: why don’t we treat ecosystems as capital assets – as tradable things that appear on private individuals’ balance sheets? If we did, many of the problems environmentalists complain about would disappear.

Environmental degradation is, largely, an old and familiar economic problem – the tragedy of the commons. If no-one owns an asset, no-one has a financial interest in conserving it, whilst many people have an interest in depleting it. The upshot is that the resource quickly gets destroyed.

The solution to this is in principle simple – to give someone ownership rights over the resource. This person then has a vested interest in maximizing its value. If someone wants to deplete the resource, they will have to compensate him for doing so. Only if the benefits of depletion outweigh the costs will depletion then happen.

Well-defined property rights, then, are the solution to environmental depletion.

Take, for example, seal-hunting in north-east Canada. The Canadian government could, in theory, declare that seals are the property of the Canadian tax-payer. Hunters would then have to compensate tax-payers for each seal they killed. Environmentalists could also put in bids to buy the seals and save their lives. The upshot would, in theory, be an optimum level of seal-hunting. Hunting would occur only to the extent that seal hunters could outbid environmentalists.

Already, there are property rights and markets in some environmental resources. For example, there is a scarce and tradable right to make carbon emissions. In the US, there is wetland banking, whereby anyone wanting to substantially alter a wetland can do so only by purchasing wetland credits. And in southern Africa private ownership of wildlife has helped protect and increase several species – more so than have simple bans on big game hunting. One study, written a few years ago, said:

The evidence seems overwhelming that the existence of effective private property rights to wildlife is advancing the goal of the conservation of the wildlife and the maintenance of biodiversity in Zimbabwe and other southern African countries.

The question, then, is: why aren’t property rights and markets in ecosystems better developed? This superb paper (pdf) discusses the issues in depth. Some of the obstacles to establishing property rights are:

1. Governments can violate property rights. Zimbabwe’s land reforms, for example, destroyed many of the private ranches that had preserved wildlife so well.

2. There's a free rider problem. We can’t stop someone enjoying the benefits of a stable climate.

3. Many of the costs of environmental degradation fall upon people who are not yet born. How can we give these ownership rights? And if we can’t, how can we ensure that living owners protect the interests of future generations?

4. There’s huge uncertainty about the exact costs of reducing biodiversity. If no-one knows costs, how can the prices of rights to infringe on the environment possibly internalize the damage done?

5. Who do we assign property rights to? The Coase theorem says it doesn’t matter, at least from the point of view of efficiency. As long as the rights are well-defined and protected, they will be bought by the person to whom they are most valuable.

Sadly, though, this is not good enough. The assignment of property rights certainly affects wealth distribution, even if it doesn’t affect efficiency. And it might affect efficiency too. The endowment effect tells us that when people have something, they automatically value it more highly than if they don’t. So if rights are assigned arbitrarily, they won’t necessarily be bought by their most effective owner. Worse still, once people know a valuable asset is up for grabs, they’ll compete for it by lobbying governments or bribing officials. The costs of such rent-seeking can outweigh the benefits of assigning the property right.

Can we solve these problems? I don’t know. But I do know three things. First, we’ll never solve them if we don’t try. Second, other ways of protecting the environment, through regulations and taxes, also have problems. And third, many of the world’s problems are the result not of the presence of markets, but of their absence.

Comments

[dearieme]

I was a v minor tragedian in my youth: fish stocks. Land is easier: if you'd like to learn something about how British commons were really organised, read Oliver Rackham's "History of the Countryside". Actually, read it anyway; it's one of the best histories I've ever read.
It shows that what you know about history is like what you know about Mozart: almost all wrong.