Market mechanisms are your friend
In the July-August issue of Sierra Magazine was an essay called The Common Good, a broadside against the market system and the field of economics generally. It didn’t sit well with Jason Scorse, Assistant Professor of International Policy Studies at the Monterey Institute of International Studies. He wrote an article in response and sent it to Sierra; they passed on it. (Read the background in this post on the Environmental Economics blog.) I offered to run an abbreviated version of the essay. Part one follows; I’ll publish the second half tomorrow.
Economics is largely the study of incentives, resource distribution, and how institutional arrangements affect behaviors and outcomes — and therefore, economics is largely the study of trade-offs. Above all, economics is based on simple principles of how people generally act in the real world, not necessarily how we would like them to act.
Let us begin with the primary problem surrounding open-access resources. Open-access resources are those for which there are no clear and enforceable property rights and to which it is very difficult to limit access. The world’s ocean fisheries and much of the world’s largest forests are prime examples. Unless there is some type of agreement by the parties who access the resources to better manage and preserve them, rational individuals acting in their own self-interest will exploit them (catching fish or cutting down trees) until the resources are exhausted. In this way they obtain all the benefits from their efforts while the costs (the ultimate degradation of the resources) are dispersed among the entire population. When large numbers of parties are involved and the geographic area is large, cooperative management is unlikely to occur. This basic logic underlies why 90% of the world’s ocean fisheries have either collapsed or are near collapse, and why the Amazon rainforest continues to be cut down at unprecedented rates.
So what are the solutions?
There is a role for government intervention in these circumstances to help assign and enforce property rights so that environmental preservation can be achieved. For example, systems of property rights in fisheries that limit the fish catch at scientifically-determined levels and insure long-term profits for fishermen assigned shares to these rights. This has been done with some success in New Zealand, Iceland, Australia, and Canada. Property rights to forest resources can also create incentives for forest owners to better manage their forests, since they will be able to reap the rewards from any investments in conservation. Some environmentalists like to point out that common ownership regimes that predated market-based economies are also legitimate ways to manage environmental resources. While this is true, all of these arrangements involve "in" and "out" groups, and punishment for violation of the rules is often severe (sometimes even death). Many of these more "traditional" regimes also typically break down under population pressures or with the advent of modern technology; therefore, at best, they are imperfect and temporary solutions.
The issues surrounding forestry resources are particularly complex and deserve to be examined in more detail. Although some of the most extreme forms of clear-cutting in the U.S. occur in the National Forests (where logging is heavily subsidized and therefore the market is not functioning efficiently), clear-cutting also occurs on private lands with clear property rights. Although forest land has numerous benefits to society (the provision of fresh air, beauty, recreation, biodiversity, watershed protection, and intrinsic value), timber companies are likely to ignore these when thinking about how to earn the most profit.
How do we get the market to recognize these values and take them into account? One option is to develop forestry regulations that mandate certain types of practices, e.g., no logging in riparian zones, limits on the size of clear-cuts, no cutting in areas with endangered species, etc. Another is to make some estimate of the environmental costs of logging and apply a tax on timber production so that timber companies internalize these costs in their decisions (which too will result in lower levels of logging). Another option is to focus on the consumer side and create markets for sustainable timber products (the Forest Stewardship Council is doing just this). Yet another is for those who value the environmental benefits of forests to purchase the land from the timber companies. A dramatic example of such a transaction was the City of New York’s decision to purchase the watershed for the city’s drinking supply in upstate New York in 1997 (property rights don’t always have to be privately owned). City officials realized that instead of building a new water purification plant, the city could save money by protecting the watershed from development, because the forest acts as a natural water purifier.
What these solutions have in common is that they are based on clear and enforceable property rights. In the absence of such rights attempts to promote environmental values will often be hindered, because long-term solutions require legally identifiable parties that can both derive benefits from ownership and suffer repercussions for violation of ownership rules. To put it another way: Markets and property rights are two sides of the same coin, since parties can’t rightfully trade what is not theirs.