Markets, Environmentalism, & Preservationism

Markets, Environmentalism, & Preservationism Andrew Morriss Property & Environment Research Center, Bozeman, MT College of Law University of Illinois at Urbana-Champaign

Preservationism vs. Conservationism • Conservationism: scarce and precious resources should be conserved / “wise use.” • Preservationism: nature has a moral status independent of its utility for mankind / “let it be.”

Guy Grant’s dilemma • To make money on his ranch, he sold licenses to hunt zebra. • Zebra population grew from 25 to 1000+. • Sport zebra hunting banned / trade in zebra products banned. • Had to reduce zebra population to increase cattle population. • “More zebra get shot because of the ban on hunting them for sport.”

Markets solutions to environmental problems • ITQs & fisheries • Hunting leases & paper companies • Ducks Unlimited & prairie potholes • Water markets

What causes environmental problems? Unpriced disposal of wastes in common resources Firms dumping wastes into the air and water; using a common resource as a free disposal mechanism. Individuals behaving badly, using common resources as a free disposal mechanism.

Waste = Opportunity Gasoline originally a waste product, often discarded directly into streams. By 1910, gasoline production exceeded kerosene production.

Environmental problems result from • Lack of demand for environmental goods & services. • Poorly specified or absent property rights. • Failure of the legal system to apply standard tort, property and contract law. • The absence of markets.

Demand: Economic growth & the environment • Does economic growth = more pollution? • Growth => economic activity => pollution • but . . . • Growth => economic activity => higher incomes. • Higher incomes may lead to changed tastes. • Higher incomes allow buying more environmental quality. • Richer = Greener.

Environmental Kuznets Curve • Environmental quality improves as incomes and levels of consumption rise (cross-country and within-country data). • Most evidence for local air pollutants (NOx, SO2, PM).

EKC Implications • Some environmental degradation inevitable, especially during early stages of economic development. • Above ~$5,000 per capita GDP, economic growth helps to undo the earlier damage. • Policies that stimulate growth are also good for the environment if they raise income above threshold. • Key point: there “is no evidence that environmental quality deteriorates steadily with economic growth.” (Grossman & Krueger, QJE, 1995).

Richer Is Greener / Wealthier Is Healthier • GDP growth creates the conditions for environmental improvement by: • raising the demand for improved environmental quality; and • making the resources available for supplying it. • Policies, institutions, and the completeness and functioning of markets matter in translating wealth into demand and supply of environmental quality. • For growth to be green, we need markets, property rights, & a good legal system.

Pillars of the FME approach • Incentives matter. • Focus on incentives created by property rights & regulations. • For property rights to create good incentives, we need “3-D” property rights: • Definable – can I describe it? • Defensible – can I sue people who damage it? • Defeasible – can I transfer it to someone else? • Focus analysis on: • Transactions costs. • Entrepreneurs. • Decentralized decision-making.

Incentives Matter • When things cost more, people want less of them. • When things cost less, people want more of them. • If I own something (residual claimant), I am more likely to either preserve its value myself (or sell it to someone else who will) than if I don’t own it.

Incentives Matter • Does the price of a good reflect its cost? • If a good is subsidized, users will buy more of it than they would in the absence of the subsidy. • If a good is taxed, users will buy less of it than they would in the absence of the tax.

Central Utah Project Water Costs • Why is water being sold below cost to farmers from the CUP? • Why is water being used wastefully? • Price of water is “wrong” – does not reflect costs. • Price of water is set in political process, not in the market.

Property Rights + Markets Get Incentives Right • Red-cockaded woodpeckers, a nonmigratory, territorial woodpecker. • RCWs reside primarily in southern pine ecosystems ranging from Texas to Florida to Virginia. • Endangered status since 1970. • ~20% inhabit private lands, esp. in North Carolina • Nest in pines 40+ years old. Dean Lueck & Jeffrey A. Michael, Preemptive Habitat Destruction under the Endangered Species Act, 46 Journal of Law & Economics 27-60 (2003).

ESA Protection ESA Protection . . . or not • In the late 1980s, the owner of any timberland on which RCWs were nesting was not allowed to harvest timber within a 60- to 300-acre area around the nest. • Cost: up to $200,000 in lost timber profits. • If within 15 miles of a RCW colony at risk of getting RCW colonies. • If log trees before they reach the age preferred by the RCW, avoid colonization.

Lueck & Michael study • Controlled for the value of the standing timber, the productivity of the land, and the species of pines involved. • For properties located within 15 miles of existing RCW colonies, harvesting decisions affected. • 15% more likely to harvest land if within 15 miles of heavily populated land. • Harvest trees when they are younger. • Consistent with about 10 percent of landowners reducing their rotation periods from 70 years to 40 years.

Predicted Age of Harvested Treesby number of RCW colonies w/in 25 mile radius

RCW credits turn woodpeckers to a + • Southlands Forest Preserve • 5300 acres • Began with 3 males; now 31+ RCWs. • Managed land for habitat, imported RCWs. • Earned RCW credits worth $150k-250k. • Potential for $1.8m+ revenue.

Transactions Costs / Coasian Analysis • Ronald Coase, The Problem of Social Cost, 3J. Law & Econ. 1-44 (1960). • Response to A.C. Pigou’s Economics of Welfare. • Pigovian framework: • Identify externality. • Correct it by imposing appropriate tax, subsidy, etc.

Coase Theorem • In the absence of transactions costs, parties will bargain their way to an efficient allocation of resources. • Existence of transactions costs that prevent such bargaining is therefore the key for analysis. • 3-D property rights (definable, defeasible, defendable). • Efficient markets for transfer of rights.

Property Rights / Market Solutions • Compared to other institutions: • Produces information. • Allows diverse preferences to be satisfied. • Encourages cooperation and minimizes conflict. • Fragments power.

The value of diverse solutions: Raptor control Raptor control efforts dramatically reduced hawk populations in the early 20th century. Hawks seen as vermin because preyed on chickens. Bounties paid for killing raptors. 1,000s killed per day in organized hunts.

Hawk Mountain • Rosalie Edge leased hawk breeding territory and barred hunting. • Example of how land ownership can protect the environment against the collective “wisdom”.

Aligning incentives “Conservation will ultimately boil down to rewarding the private landowner who conserves the public interest.”Aldo Leopold “The the environmental movement will have to rely more and more on market solutions if we wish to conserve our precious natural resources.” Leigh Perkins, The Orvis Company, A Sportsman’s Life

Preservationism v. Conservationism • Where market solutions work and preservationism does not, is it moral to choose preservationism? • Cynthia Moss: better for elephants to go extinct than for individual elephants to be killed for population control. • Schmidtz: “If elephants had a voice in the matter, perhaps they would thank Moss for her stand. Perhaps not.”

For more information Property & Environment Research Center – www.perc.org • Terry L. Anderson & Donald Leal, Free Market Environmentalism (Palgrave Macmillan, rev. ed. 2001) • Email me: morriss@illinois.edu

Markets, Environmentalism, & Preservationism