Monday, March 31, 2014

Austrian Environmental Economics (Part 1): Air Pollution as a Coordination Problem

The Austrian school of economics has experienced a renaissance in recent decades. Its adherents have put their distinctive paradigm to work in nearly every field of economics. This post is the first of two that will examine the Austrian approach to environmental economics, with special emphasis on the problem of air pollution.

Pollution as a Coordination Problem 

A distinctive feature of the Austrian approach is approach is the idea that environmental issues are problems of coordination. As Roy Cordato puts it, they are “not about harming the environment, but about human conflict over the use of physical resources.” The Austrian paradigm differs in that regard from that of the neoclassical school, which looks at environmental problems in terms of efficiency and maximization of social welfare, and from that of ecological economics, which frames the issues as conflicts between humans and nature.

The Austrian school of economics has experienced a renaissance in recent decades. Its adherents have put their distinctive paradigm to work in nearly every field within their discipline. This post is the first of two that will examine the Austrian approach to environmental economics, with special emphasis on the problem of air pollution. (Followthis link for Part 2.)

Pollution as a Coordination Problem

A distinctive feature of the Austrian approach is the idea that environmental issues are problems of coordination. As Roy Cordato puts it, they are “not about harming the environment, but about human conflict over the use of physical resources.” The Austrian paradigm differs in that regard from that of the neoclassical school, which looks at environmental problems in terms of efficiency and maximization of social welfare, and from that of ecological economics, which frames the issues as conflicts between humans and nature.

Just whose actions require coordination in the Austrian view? Consider a typical scenario, one in which emissions of SO2 and NOx from power plants in the American Midwest mix in the atmosphere to form acid rain, which harms people and property downwind, along the Eastern seaboard. Four groups of actors play central roles in this scenario:

  • The power plants themselves
  • The downwind victims of the pollution they emit
  • The suppliers of fuels and technology for the plants
  • Customers who buy the electricity the plants generate

The actors in each group have their own plans, some of which are not consistent with others. Power plants want to use the atmosphere for waste disposal. Downwind residents want to breathe the air and to protect forests, lakes, buildings, and scenic vistas from the harmful effects of acid depositions. Suppliers to the power industry are competing with one another to persuade the plants to burn more coal, oil, or natural gas; to buy pollution abatement equipment; or to buy wind generators and solar panels. Customers, not all of whom live downwind from the power plants, want cheap, reliable electricity.

There are many fronts for coordination among these actors. Polluters need to take abatement measures that recognize the interests of those living downwind. They need to coordinate with one another so that cutbacks occur where abatement costs are lowest. Suppliers of fuel and generating equipment need to offer cleaner options. Customers need to contribute by conserving on electricity. Even after all appropriate abatement measures are in place, people living downwind may need to adapt to the remaining pollution. For example, farmers may need to consider what crops are best to plant, engineers may need to design buildings that resist damage from any remaining acid rain, and so on. Actions by these four groups will have secondary ripple effects that spread to other regions and other industries.

In short, the coordination needed to deal with a large-scale pollution problem like acid rain is inherently complex. What kind of mechanisms could facilitate it?

Property rights and tort law as coordinating mechanisms

Austrians identify one mechanism in particular as the key to promoting environmental coordination. Roy Cordato puts it this way: “It is logical that both the origin and the solution of the problem is to be found in a lack of clearly defined or enforced property rights.”

Cordato and other recent Austrian writers draw heavily on a seminal 1982 paper by Murray Rothbard. Rothbard sees air pollution is an invasion of the rights of downwind property owners—in legal terms, a tort of trespass or nuisance. Pollution victims, he says, have the right to seek redress under common law.

That characterization of the problem might seem to place Rothbard firmly on the side of pollution victims, but not so fast. As he goes on, he enumerates a daunting list of procedural hurdles that plaintiffs would have to overcome to prevail in court.

The first is that, in Rothbard’s view, not all emissions violate property rights. Specifically, people have a right to emit quantities of pollution that are small enough to do no perceptible harm, especially when the surrounding airspace is empty or sparsely populated. Once a person or company establishes a level of emissions, continuing that level becomes a permanent right under the principle of “first use” or “homesteading.”  People who later move to the area have no right to object to the first user’s emissions, since they have “come to the nuisance.” The price they pay for their property will reflect the existing level of pollution, so they have no grounds to claim further damages.

For example, imagine that a homesteader builds a cabin in an isolated mountain valley and heats it with a wood stove. Later, a ski resort brings in new residents and the valley becomes densely populated. Newcomers no longer have the right to install wood stoves, since the pollution would become intolerable, but they still have no legitimate grounds object to smoke from the first cabin, which was there when they arrived. The original homesteader, in effect, has a permanent emission easement.

The legal implication is that anyone who brings a lawsuit for trespass or nuisance must first prove that the polluter does not have a valid emission easement established by first use. But that is only the beginning of the plaintiff’s difficulties.

Rothbard next introduces a set of stringent standards for proving causation. For example, if your crops are damaged by acid rain, you would have to show that they were harmed not just by acid rain in general, but by pollution from source A, not source B. You would also bear the burden of proving that the some other factor, say a fungus, did not cause or aggravate the damage. What is more, you would have to prove causation beyond a reasonable doubt, not just by the preponderance of evidence. Rothbard approvingly quotes a legal authority who acknowledges that where there are many sources of pollution and many remote victims, establishing causation “is almost always an impossible task.”

Making it even harder to bring a successful suit, Rothbard sets strict standards for joinder of defendants and plaintiffs. You would have to sue each polluter separately unless you could prove that they acted in concert. Your ability to unite with other victims in a class action would be limited narrowly to cases where all plaintiffs suffered similar damage and actively joined the suit.

In short, as Rothbard himself acknowledges, there is no realistic chance that plaintiffs could prevail in a pollution suit where there are many sources and many victims. Even so, he says, it would be wrong to seek a solution “at the expense of throwing out proper standards of proof, and conferring unjust special privileges on plaintiffs and special burdens on defendants.” Instead, if pollution victims cannot surmount the legal obstacles, then victims of pollution “must assent uncomplainingly.”

None of this means that the property rights approach to environmental issues is never helpful. There are many cases in which it leads to just the kind of improved coordination that Austrians look for. As I have discussed elsewhere, organizations like the Nature Conservancy and Ducks Unlimited, as well as wealthy individuals like Ted Turner, use property rights to protect millions of acres. Their tools include not only outright purchases, but also conservation easements, mitigation banks, and more. Terry Anderson and Donald Leal of the Political Economy Research Center show how the property rights approach has led to better coordination of the varying interests of ranchers, farmers, hunters, and conservationists in the American West.  In an urban context, property developers use covenants, easements, and other devices to coordinate the conflicting interests of individual owners in condominiums and planned developments. David Zetland has detailed how markets and property rights can help coordinate the overlapping plans of farmers, homeowners, and industry for use of scarce water resources.

However, there are limits. The property rights approach works best when the number of parties involved in an environmental dispute are few and proximate, but in many of the most important environmental issues of our times, both sources and victims are many and remote from one another. In addition to acid rain, examples include urban smog, airborne mercury pollution, emissions of the chlorofluorocarbons that cause ozone depletion, acidification of oceans, and anthropogenic climate change. In those cases, enforcement of property rights under tort law, à la Rothbard, fails to provide an adequate coordinating mechanism. Something is missing.

The missing piece

We do not have to look outside the Austrian school to find the missing piece. As famously articulated in Friedrich Hayek’s 1945 essay on the use of knowledge in society, the price system, not tort law, is the best mechanism for facilitating economic coordination among large numbers of widely scattered actors. Hayek uses the market for tin as an example. Sellers expand supply when the price is higher than their estimated costs of production. Costs are determined by the prices at which workers and resource owners are willing to supply inputs to tin producers. Consumers buy more when the price is below the maximum they are willing to pay for an additional unit. Coordination occurs without the need for face-to-face negotiation or even the knowledge of who your customers are or why they want your product. The law and property rights are there as a backstop, but only as a last resort in cases of fraud or breach of contract.

In the same way, a price for the right to emit pollution—for the right to use the atmosphere for waste disposal, if you prefer—would promote coordination of the many interested parties. In the acid rain scenario discussed earlier, such a price would encourage abatement by signaling polluters that their emissions interfere with the competing plans of downwind property owners. It would provide an incentive to concentrate abatement where its costs were lowest. The price of pollution would be passed backward along the supply chain in a way that gave a competitive advantage to cleaner fuels. It would be passed forward to customers in a way that encouraged energy conservation.

In contrast, in a system where the property rights of pollution victims are poorly defined, or where they are well defined but there is no practicable possibility of enforcement, no price for pollution rights will emerge. If polluters cannot be made to pay, they will view atmospheric waste disposal as a free good. There will be no coordination, no mutual adjustment of conflicting plans.

In Hayekian terms, then, we can restate the problem of air pollution as one of how to bring the price system to bear. In the second post in this series, I will show how that can be done in a way that would be more effective than tort law, and at the same time, fully consistent with Austrian concepts of property rights.

 (Follow this link for Part 2.)

This post is based, in part,  on the F.A. Hayek Memorial Lecture that I presented at the 2014 Austrian Economics Research Conference in Auburn, Alabama, sponsored by the Ludwig von Mises Institute. The lecture was subsequently published in the Quarterly Journal of Austrian Economics (Summer 2014, along with comments by Art Carden and Walter Block.

Austrian Environmental Economics: Air Pollution as a Coordination Problem

The Austrian school of economics has experienced a renaissance in recent decades. Its adherents have put their distinctive paradigm to work in nearly every field of economics. This post is the first of two that will examine the Austrian approach to environmental economics, with special emphasis on the problem of air pollution.
Pollution as a Coordination Problem
A distinctive feature of the Austrian approach is approach is the idea that environmental issues are problems of coordination. As Roy Cordato puts it, they are “not about harming the environment, but about human conflict over the use of physical resources.” The Austrian paradigm differs in that regard from that of the neoclassical school, which looks at environmental problems in terms of efficiency and maximization of social welfare, and from that of ecological economics, which frames the issues as conflicts between humans and nature.
- See more at: http://www.economonitor.com/dolanecon/?p=2730&preview=true#sthash.IDnLLSun.dpuf

Austrian Environmental Economics: Air Pollution as a Coordination Problem

The Austrian school of economics has experienced a renaissance in recent decades. Its adherents have put their distinctive paradigm to work in nearly every field of economics. This post is the first of two that will examine the Austrian approach to environmental economics, with special emphasis on the problem of air pollution.
Pollution as a Coordination Problem
A distinctive feature of the Austrian approach is approach is the idea that environmental issues are problems of coordination. As Roy Cordato puts it, they are “not about harming the environment, but about human conflict over the use of physical resources.” The Austrian paradigm differs in that regard from that of the neoclassical school, which looks at environmental problems in terms of efficiency and maximization of social welfare, and from that of ecological economics, which frames the issues as conflicts between humans and nature.
- See more at: http://www.economonitor.com/dolanecon/?p=2730&preview=true#sthash.IDnLLSun.dpuf

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