Externalities are usually defined with reference to inadequate property rights and then government action is usually recommended as a solution. However, the best and by far the cheapest solution to externalities is the imaginative establishment of private property rights rather than government intervention. We are going to go on to discuss international weighty questions like global warming later in this chapter but to illustrate the point lets take something closer to home : the view from your house or office. This is an externality at the moment because it is possible for someone of deprive you of it, and possibly decrease the value of your house without any compensation coming to you. Government intervention in the form of planning permission is usually justified with respect to cases like this. However the real need is more property rights.
Property rights could be established in the following way. When the site was initially developed then people could be given a property certificate giving them the right to the view- specifically detailed as the rest of the title is . If in the future a developer came along and decided he wanted to build in the way then he would also have to buy at least 51% of the rights to the view as well. Depending how much the people valued their view ,they would sell for more or less money, or not at all if the total utility of the view to these people was higher than the total utility expressed in the profit of developing the site. Of course view right holders might on some occasions vote for the development if it was something they were prepared to give up the view for, in which case the developer would have to buy less votes. .
It would be possible under a free government to set up an externality commission of the judiciary whereby people can file externalities and this area of the judiciary can design the appropriate property rights and distribute them. This is legitimately the function of the judiciary as they are merely laying out clearly their future policy as to enforcing such things. .We will discuss the role of the judiciary further in another chapter
Light houses are always sighted as an externality in the textbooks but they were always private in times past in history, they have not always been a public good. Like many areas of life including education and health, governments took over a fully functioning system of lighthouses. They didn't set them up themselves for the most part. Furthermore, it is quite possible for any passing ship to be automatically detected and charged if it comes within a certain distance but ships could choose to stay further out to sea and avoid lighthouses if they wished .Its only a question of the judiciary establishing a rule they will enforce .
The principle in externality law as in other areas must be that the law "does not concern itself with small things". We don't necessarily want people wanting property rights enforced for psychological damage done by seeing people on the streets unpleasantly dressed! Some externalities we live with because they are too small to deal with in the courts. .
Many instances where group actions is required are sometimes seen as requiring state intervention. For example the problems of cities subsiding into the sea in the Netherlands. The solution is sometimes group law suits (which are common in the US) if the problem is humanly caused. Or for everyone to come together and contract to fix the problem, as they do with roof problems in apartments with multiple tenants. If there were any who refused to pay their share it would be possible for the others to use the courts if it could be proved it was an urgent pressing need. In any event group actions are seldom a reason for state intervention.
THE ENVIRONMENT
Perhaps the largest and most discussed externality is the environment. This is an area of potentially great importance where we see the usual externality problem namely that people can individually create costs that everybody pays. This is the usual problem with lack of ownership- what nobody owns everyone spoils. Since nobody owns the environment everybody uses it to their maximum ability.
The classic historic incidence of this is known as "the Tragedy of the Commons" where in the middle ages there was certain land that was held by the whole village commonly and in many cases this led to it being over-grazed . Unlike their own land, no one had any incentive not to overuse common land , since their restraint was someone else's gain(1). The enclosures of this land by individuals led later to vast increases in agricultural productivity.
This same problem is causing problems with soil erosion in certain nomadic cultures where nobody actually owns the land. It also appears in council housing/ government housing where the common areas are often vandalised and otherwise wasted. Government here and everywhere, don't have the incentives or resources to constantly police these common areas. Nor need they for the problem doesn't exist with private property and its in the creation or extension of property rights that the solutions to most environmental problems lie.
Governments and the market
This as we will discover, is a far better solution than trusting the government to deal adequately with the problem. Governments have no way of determining costs and benefits accurately. Statistical aggregates don't help when there are thousands of little situations rather than one big one. With private property however, the price mechanism is an efficient and economic system for maxmising the benefits from everything that we use and steward..
Furthermore, governments have a time horizon of only 4 years , this being the maximum time to the next election which in itself make it a bad organ for dealing with environmental matters .Additionally, it only has interest for as long as the public has which means policies can come and go with the vagaries of public opinion. We need a more permanent solution than government action.
Added to that government action, we now know, almost always has effects beyond those intended which in most cases the costs of government action or regulation exceeds the benefits in virtually all cases (see especially the work of George Stigler).
Free enterprise is essentially a system for using resources efficiently whereas government activity is notoriously wasteful and this extends to its record on the environment. When the Soviet Union fell the pollution turned out to be far higher than that of the west. The Indonesian government owns 3/4 of the land and allows much of it to be burned creating major smog problems in other countries as well including Singapore, Malaysia, Thailand. The forest land is rented out at well below the rate a free market would pay and so is wasted. The state is the problem not the solution: Brazil's government subsidized the conversion of land from rainforest to farm land for a long time . The West also has its examples -the British power industry .When it was privatised -no one would take the nuclear power stations because its not economical (counting the decommissioning costs)- only a government would have built them in the first place . (4)
So if we are concerned about the environment the last thing we want to do is let governments take over!.
Problem, what problem?
On the other hand there are those who say nothing needs to be done at all. There is some case for this in the sense that many environmental scares turn out to be greatly exaggerated. Whatever happened to the ice age predicted in the 70s ? ;>) (1)
There are great uncertainties about the existence and effects of global warming also :it may be overestimated by effects of heat from cities as they expand to include the weather stations., sulphate pollution may reflect rays, more Co2 would increase plant life which would be good for a lot of people , ocean bodies might nullify any effect. Even if there is a change , climate has changed before : from 1100 -1300 vines grew as far north as York and from 1400-1850 freezing of the Thames was not uncommon. Furthermore, if weather models have difficulty predicting tomorrow's weather how are they supposed to predict 20 or 30 years ahead
We might also suspect that some environmental concerns may be justifications for politicians to hold onto power that experience is showing they should be releasing to individuals and companies. There are many motives for jumping on the band wagon.
However as skeptics , and we should all be slightly skeptical, are we saying that it is impossible that any significant change in climate could result from human activity. If we're not then we can benefit from a private property system since in this system if there was no catastrophe resulting then the costs would be fairly minimal.
Property Rights
What we need to do is make costs in the environment work the same way they do everywhere else in a fairly efficient fashion. If my actions in my garden cause my neighbours tree to fall down then I have to compensate him for that. It is possible to design a system so that the environment works the same way. Those who pollute pay for the costs of pollution (which if less than the returns from the polluting activity would still encourage the activity which ,despite the pollution, was making a net gain to overall human enjoyment of life !)
This can be effectively done by effectively privatising the atmosphere. Thus many companies would own a portion of the atmosphere and would be able to charge those that pollute it. When any costs arise that are as a result of damage to the atmosphere, the person damaged can claim damages from the atmosphere companies.
This applies to acid rain as much as Global Warming or any time that pollution from one place affects another. Now it isn't strictly necessary for intermediaries to be created to solve this problem - it is possible that foresters in Sweden could take industry in Britain to court for acid rain. However , there is the problem of large scale, and the problem of locating the culprit. How is any individual supposed to locate all the people who are responsible for the problem, now and in the past. Property rights may not be strictly necessary but they may be helpful in that it makes it easier to identify who is creating the costs. In a property rights situation, the atmosphere companies would be constantly analysing the atmosphere to see who was polluting and charging accordingly. So if damage resulted there would only be one company to go to for redress and not hundreds of small polluters.. More property rights are needed not only when its impossible to allocate costs but also when its difficult.
If someone is flooded as a result of global warming then who do you sue Consider the alternative, various sections of atmosphere are owned by various people. If someone polluted one area then the atmosphere owner will presumably want some compensation some of which he will probably pass on to other atmosphere owners whose areas of atmosphere are also polluted. In the event of a flood, the flooded, if they can present convincing scientific evidence that the atmosphere was to blame , can sue all or some of the atmosphere owners. This is significant particularly since those who buy the atmosphere might well be the people who want to pollute it. This means accurate costs and benefits are determined rather than the inaccuracy of the government process which would impose too high costs on polluters or the victims of pollution rather than the market which will redistribute the costs and benefits to maximise the well-being of the community through the price mechanism.
Other Problems solved
Over cities, groups of citizens may buy up the atmosphere in order to clean it up or industry might buy it in order to pollute it and compensate victims accordingly.
This would also solve the problem of Third World countries being expected to pay for first world concerns. Under this system first world people could buy up sections of the atmosphere above third world countries in order to stop the pollution and the returns from such sales would compensate the countries for their drop in polluting industries. The same applies to sections of the forest if private property rights were properly created and enforced there.
PRIVATE MANAGEMENT OF THE ATMOSPHERE Atmosphere companies having taken the premiums would then constitute a strong vested interest in minimising the costs. They would do this in the most efficient manner available. Niskanen pointed out that less extreme and less costly methods, such as reforestation (possibly for timber ) and spreading trace quantities of iron in the oceans to aid absorption of carbon dioxide, may well be sufficient to offset the effects of increased carbon emissions.(2)
Quite possibly the companies would find ways to manage the atmosphere so that the effects were reduced or CO2 could be removed . Possible fixes include mirrors in space, dust in the upper atmosphere,( Volcanic dust lowered temperatures by 1/4 of a degree globally for 2 years after Mt Pinatubu in 1991) or adding cloud condensation nuclei to the atmosphere.
In the event of claims, globally those who had had less emissions over the last 30 years would pay out a lower fraction than those who had allowed more, if any problem was actually to emerge that is. Some companies would have expected less of a problem and allowed more pollution for a given price, they would pay out more in claims as a % of the total cost. Other companies would have expected more of a problem than actually occurred and they would pay out less in claims since the pollution in their areas would be less. On the other hand they might have lost business to other areas as a result of too high prices earlier on .
The system would certainly result in more honest research. Under the current system most of the Ecology researchers I know only get contracts for pro-Global Warming research ideas and many of them are certainly a little more skeptical about it than the press seems to be. Governments are seldom interested in truth unless its useful (they have no incentive to be) and affected industries have a similar departure of interest from abstract searching for truth.. Under this system we create a group who are actually interested in the way things actually are and that should result in more clarity about the nature of the problem.
Furthermore the World Bank recons that even a far less extensive scheme than I propose, namely the trading of global warming rights world wide would lead to reductions in costs of $50 billion per annum by 2040 (10) Solutions through private rights elsewhere.
Private property rights have solved ecological problems in the past. Creating property rights in a species of endangered animals such as in Zimbabwe and Botswana means growing populations since people now have an incentive to farm the animals - like elephants for their tusks, bans on the other hand produce depletion as in Kenya as nobody had an incentive to keep the animals alive. Similarly because water rights are private in the States people pay farmers to reduce wastage in irrigation channels and the sell the water to the cities at half the usual cost.
In the same way ,forests in Sweden ( of all places) are privately owned and not owned by logging companies , as a result they resist logging unless its done exceedingly carefully. The government on the other hand wants to promote logging to increase timber exports , jobs , taxes etc and mulls over how to force forest owners to log through taxation (3)
If we accept then that creating such rights in the atmosphere would do much to protect it, wouldn't this hurt industry even more than the regulations that are currently seen as the way forward? On the contrary, since this is a market driven system it will allocate the costs as efficiently as existing information makes possible. Electricity projects starting up would decide where to locate on the basis of 20 or 30 year contracts with the atmosphere company. Competition between atmosphere owners would insure that prices were kept as low as possible to cover the likely future damage. Each atmosphere owner would wish to attract the high premiums payable by large polluters but would not make them so low that the expected future value of the premiums when they were claimed would be insufficient to meet their expected liability.
Compound interest and claims
The big advantage we have is that any costs paid now to pollute have got years to grow before the first claims are paid out. Meaning those who own the atmosphere would be able to invest the premiums to gain returns in the meantime.
If the risks turn out to be less than expected then the companies can reduce their reserves and distribute the profits to their shareholders. Alternatively they could pay back those who initially paid the premiums. Contracts could be made this way between power stations and atmosphere companies where premiums were paid in such a way that more could be taken later or that premiums would be refunded with interest if certain conditions were met. Alternatively they could pay back those who initially paid the premiums. Contracts could be made this way between power stations and atmosphere companies where premiums were paid in such a way that more could be taken later or that premiums would be refunded with interest if certain conditions were met. It would be best if it were legal for companies to be allowed to bypass the atmosphere companies, if the companies felt the atmosphere companies contracts were insufficiently fair. So the company would need to be able to demonstrate that it had put as much money as the atmosphere company would have taken , into some kind of trust which it was unable to touch until the future. This would stop the atmosphere companies intentionally overestimating the effects of global warming and refusing to write contracts that refunded the real value of the excess in the future. Yet it would make sure the money was put aside to be used in the event of Global Warming effects taking place. Refunded premiums may be more likely than we think, some kinds of pollution are a decreasing problem as the world gets richer : energy use per person in the US has been falling since the 70s, air pollution in 9 western economies has declined by 12-33% in the same time , helpful technologies have emerged such as microbes that can eat anything including the Gulf war oil slicks which are now completely gone and the bacteria that have been found that can eat DDT ( which we were told would pollute the world for ever ).In population too there are encouraging signs since 'Everywhere, birth rates drop with prosperity." (5) (6)
Fraud problems ? What if people collected costs and then had no money to pay the bills. Firstly, they would go bankrupt and a new company would buy in for a cheap price, both the authority to collect premiums for the future and the liabilities for the current problems . But before that stage individuals could perhaps sue the companies if they weren't keeping adequate reserves for the risks they had based their premiums on, since this would in effect be fraud. Its would be like a life insurance company spending all its premiums and not having enough to pay out in the event of any claims, another situation where liability to suits from the public is the best form of monitoring
So what then are some of the possible problems from Global Warming and other environmental issues and how would private ownership address them.? The former could it is thought create possible effects on low lying countries like Bangladesh , Netherlands, and possibly on the Nile. In the event that such effects were proved to be the result of Global Warming then there would be a claim against the companies in proportion to the emissions of the relevant substances in their areas ( a good incentive for them to keep checks on each other) . This would probably take the form of a class action lawsuit, done on a group basis rather than hundreds of small ones. Alternatively, previous conditions may lead countries to take pre-emptive measures i.e. sea barriers which they could bill to the atmosphere companies if they were proved to be responsible. The atmosphere companies themselves may become pro active in the stopping of such things happening in order to minimise their claims.
They might have also to take into account the costs of displaced people and of the cost of droughts and floods., all potentially massive cost. None of this may materialise, of course, but if it did it would be wrong for polluters to knowing impose these costs on other people and not pay for them. It may be of course that even with these massive costs, that spread over millions of electricity bills and with the proceeds being invested for 30 or 40 years before the troubles come, that it is still in our interests to emit chemicals now and reimburse people afterwards. As long as they will be fully reimbursed then that's OK but what is unacceptable is for some to take risks are the other peoples expense.
Non- Global warming environmental problems include water supplies being used faster than replenished, even today only 4% of the Colorado reached the sea ! The solution here is only a case of the price of water rising ,causing people to reduce their use, there is no externality. Furthermore this is not a problem for ordinary people who use only 10% of the water used but for agriculture which uses 66% and industry which uses 24% . In agriculture as water prices rise there is an incentive to switch from highly inefficient ditches to more efficient piping systems that take the water direct to the plants. In other words water shortages in a private system have their own correcting mechanisms.
Soil erosion is another problem mostly caused by inadequate property rights or inadequate enforcement, this is especially true in mostly government controlled rainforests . Since 1950 1/5th of the rainforest and of the topsoil is gone and 10s of 1000s of plant and animal species. Private property rights are necessary to enforce this. Another problem is that of greater amounts of livestock in Africa which of course is a good trend in a continent experiencing frequent famines. But this has led to overgrazing , for the familiar historic reason , because of inadequate property rights and inadequate enforcement.
Overextraction of ground water causing subsidence is another notable problem.. But this is simply a case of those affected by the subsidence being compensated by those extracting the ground water without regard for subsidence issues.. This is harder when the latter is the un-sueable government which is another good reason why the government shouldn't be involved. in such activities.
Population is a non problem despite much hype. Although it has doubled since the 60s , world economic activity times is 4 times higher. Where population pressure is a local problem its because of lack of worker productivity. If the Indian citizen was as productive as the citizen of Hong Kong they would soon find their population a major asset not a liability. Since its mainly government ownership and regulation that reduces productivity we should see this reduce in the years of privatisation and deregulation ahead. We haven't got overpopulation just underproduction. This is another reason why less economic growth is never going to be an answer to environmental problems , we need more in order for people to feed themselves by the fruits of their productivity.
Rivers have similar needs of property right extension for example deforestation in the Himalayas (50% gone) causes silting up in the Ganges. If it was clear who owned the river and the trees then matters could be speedily resolved. In the case of the river, privatisation is easier than for the atmosphere since rivers produce income from other sources than pollution and thus have a more stable economic base.
Notice that with any system of property rights it is far easier for those with environmental concerns to have an effect. All they have to do is buy up a section of river and not pollute it. Or buy a section of atmosphere and not allow it to be polluted further (honouring previous contracts of course). Or buy up bits of rainforest with a particular rich supply of bio diversity. Selling polluted lakes to "developers" might also be a better way to clean them up than trying to get money out the government . Citizens of a city concerned about pollution could buy shares in the atmosphere company and make moves to reduce the pollution. The individual has far more power in a private system than by the inefficient mechanism of representative government.
One way to privatise the system is to give shares to each citizen of the country. This means that they could if they desired vote for more pollution or less. Voucher privatisations in Eastern Europe have shown this isn't particularly good for the management of the company so perhaps a combination of this and private ownership would be preferred, however it is a good way to create political support for the privatisation. In the city for example, citizens selling their shares to polluters for cash are at least expressing to some degree their preference between clean air and economic benefits of the polluters. Additionally this would be a mechanism whereby people could buy shares and improve the atmosphere. Obviously there is to some degree a free rider effect as those who sold their shares or didn't buy them would also benefit from better air. But minor externalities are tolerable and this is the case with many things people do for the public good. For example: everyone benefits when justices of the peace serve for virtually nothing, everyone benefits when people choose to work for churches or charities for low wages when they could command higher ones elsewhere.
There may even be some free riders gaining from Global Warming ! Carbon Dioxide has effects on plants that are sometimes good. I can't see any mechanism how people owning atmosphere could take C02 away if people wouldn't pay for it ! But this would only be an issue if the people putting it in were bearing costs to do so. So some might actually gain from the effect- more tourism in Scotland perhaps? It is not our desire to reduce all possible externalities, especially not good ones., but to deal with ones of serious negative significance that would otherwise create demands for state intervention the huge costs of which we wish to avoid at all costs.
On implementation some atmosphere companies might decide to contract with electricity companies and other polluters to reduce their emissions in return for decreased premiums, others might decide to sustain the same levels for higher premiums..
In cases of pollution by many small users its possible that the atmosphere companies might need to adopt a costing scheme for cars and domestic households but it would be considerably easier if they could deal direct with fuel providers who could then add it onto the price. It would always be possible to contest prices in the courts in such cases to establish if this was a reasonable price to pay for the future risk or alternatively purchasers might be given a financial certificate like a bond which would be cashable 30 or 40 years later if the dangers didn't materialise. Different contracts would be developed to deal with the expectations and risk profiles of the various parties in the transactions. One thing is certain however, that a system of atmosphere companies in a competitive environment is a far better way to control both the potential costs of the environment and the actual costs of the alternative regulatory way that governments seem committed to at present. Appendix In 1952 the London fog killed 4000 people
Venus with CO2 atmosphere is 450 degrees , Mars with no atmosphere is deep freeze, Co2 on earth 350 parts per million
CFCs 16,000 times more effective at absorbing heat than Carbon (PRT )
7500 million tonnes per annum of carbon as CO2 which is $25 per tonne if global warming worked out at 1% of GWP. Environmentalism can do a lot of harm - they got DDT banned in 1968 which cause Malaria in Sri Lanka to got up from 17 cases in 1963 to 2.5 million in 69 and DDT is now known to be harmless. ( looses its toxicity in a few days) P40
Economic losses per decade from weather are about $ 23 billion and rising each decade from windstorms World consumption of energy : 8700 mil tonnes of oil equivalent 7.82 tonnes of oil equivalent per capita in US, 5 in ex USSR, 3 in W Europe, .0.4 to 1.2 in Third world, average 1.6 world Half the world don't have access to commercial energy. 20% energy used in transportation, 40% in industry, 40% commercial/domestic movements of forests, crops in Peru associated with El Nino. (1) "The Ice Age cometh" widely screened in the 70s.
(2) CATO ( Internet)
(3) Systems of Survival , Jacobs p 55
(4) Systems of Survival , Jacobs p 175
(5) Systems of Survival , Jacobs p 210
(6) Economic Affairs April 93
(7) Global Warming John Houghton
(8) see PRT Ch6
(9) I recognise that private property rights should not necessarily be absolute but allow some rights of passage and minor use. (10) World Bank June 97 The State in a Changing World p 138