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Wasting Green on Going Green

Posted by on September 9, 2010

[This post was originally written for my employer’s blog, Show-Me Daily.]

If you care about going green, you should care about internalizing the costs of pollution.

If you care about sustainability, you should care about property rights.

Why do I bring this up? According to an article over at the Post-Dispatch, Jefferson City has been chosen as one of five state capitals to receive extensive attention from the Environmental Protection Agency (EPA), in the form of plans intending to make the city greener and more sustainable. The project is called “Greening America’s Capitals,” and calls for “a team of designers to produce illustrations on how targeted neighborhoods in chosen capitals can be improved,” with funding provided by taxpayers nationwide the EPA. The Show-Me Institute’s book club is currently reading a lot about public choice economics, and I could write an entire post about the dispersed costs and concentrated benefits of this particular scheme. Instead, I’ll focus on how everything that is proposed by this federal agency would be better handled by a reduction in hands-on government management.

First, the obvious (at least to me): Strong property rights lead to good stewardship. When the costs of harming things falls on those doing the harm, they tend to try to reduce the harm as much as possible. Namely, when something belongs to you alone, you tend to treat it with more care than if it belongs to someone else. Moreover, when the benefits of improving something accrue to those doing the improvement, more improvements happen. Namely, you’re more likely to work to improve your own things than someone else’s things. There are plenty of historical examples, including the dramatic improvement in crop yield and work participation among the early European settlers in America after switching from a communal system to one based on private property.

When I hear “sustainable” and “going green” I think “good environmental stewardship.” There are two components to this, the first of which is taking care to maintain or improve your own property. The second part involves externalities. For the unfamiliar, externalities are any cost or benefit that falls on someone not directly or willingly involved in an exchange. Maintaining a classic car provides a positive externality to those who enjoy seeing one driven around town but who don’t pay for its upkeep. Pollution is the classic example of a negative externality: harming people who had no say in the pollution’s production. This is a problem with no obvious solution, but (as public choice has clearly shown) a lot of bad possible solutions from the government. Ronald Coase is a Nobel Prize–winning economist who demonstrated that the problem of externalities is really a problem of transaction costs (such as the cost of information). Show me a government solution to an externality problem that doesn’t involve internalizing costs and I’ll show you the law of unintended consequences in action.

Greening America’s Capitals will not help the state of Missouri. It’s a fundamental waste that distracts from the real problems of insufficiently robust property rights and, especially, transaction costs. But these difficult technical problems will never be as broadly appealing as a visible, heart-in-the-right-place EPA program. This is not a new problem in politics.

4 Responses to Wasting Green on Going Green

  1. Eapen Thampy

    The ‘environment’ you refer to is essentially a set of common-pool resources, resources that for all intents and purposes within the parameters of our context are very large but not infinite, and impossible to divide or allocate efficiently.

    Markets are human institutions, and they do not function in a vacuum. They depend on the existence of other institutions, some private, some public, for their very existence and to function.

    Show me how it is possible to internalize negative externalities implicating common pool resources under conditions of significant uncertainty that fits within the parameters of your conclusion.

  2. Josh Smith

    On the topic of common-pool resources, I will point to Elinor Ostrom’s work on the effective management of such resources which won her a Nobel Prize last year. This is not a perfect application for her work, more of an example of someone explicitly detailing the functioning of a market long thought to be mystifying or unapproachable by mainstream economics (common-pool resources in general).

    With respect to uncertainty, I will say that it is quite obviously the case that certainty has value. Given that, improvements in technology and processes that increase certainty also have value and the work of Coase in demonstrating that transaction costs are the chief barrier to efficient internalizing of externalities leads to a conclusion that, in the face of robust property rights and competition, we can expect transaction costs to continue to fall and mechanisms for internalizing costs to increase in effectiveness and prevalence, including means of increasing certainty.

    This is a highly generalized answer, but examples are available in both history and economic literature.

    And of course markets don’t function in a vacuum. I hope it didn’t seem like I was implying that. Markets function because of the circumstances of limited resources and the nature of human preferences and behavior. This is why markets have existed in various forms in spite of all barriers erected in their way everywhere in recorded history. The great thing about reduced barriers of the kind found in laissez-faire societies is that transaction costs are reduced both implicitly and explicitly.

  3. Eapen Thampy

    I am very familiar with Ostrom’s work, having recently finished reading most of it. Indeed, my question is a somewhate loaded one, because I presuppose some knowledge of the topic. What I am curious about is how YOU incorporate Ostrom’s work into your framework. I also think that this is PRECISELY the perfect place to apply her insights and I am curious how you manage to reach reach the conclusion that you can internalize everything without a structural institutional framework that allows for common pool resource management.

    The part of the question about uncertainty is also important and your answer is not satisfying to me here. But I’m in a rush and I’ll get to why later.

  4. Rob

    I’m pretty confused by just about everything being said in this post and in the comments. I mean that I understand the discussion of property rights and common pool resources but not how it relates to this news item. The EPA grant is an urban planning grant designed as development stimulus and built around “green” buzzwords. A far as I can tell the grant isn’t being used to address any specific environmental issues.

    So property rights and the commons and transaction costs are all well and good, but who in this story owns property or is a party to transactions? The problem being addressed in Jefferson City is one of vacancy and abandonment, a local problem with its own peculiarities specific to these neighborhoods in Jefferson City and probably quite different from the problems the grant will be addressing in Boston, one of the other cities chosen. So to me it seems like the best application of Ostrom to this issue is to look at how local governance of commons (through formal or informal institutions) is more effective than a centralized one. Property rights do not seem to be the issue because the land in Jefferson City tends to be abandoned. It isn’t that the owners of the land aren’t free to do what they want with it, its that the land is nearly worthless and its highest and best use is parking lots and abandonment. So I think the first thing Ostrom would say is that dealing with the neighborhood effects associated with whatever common resources it is we’re talking about here (I’m not sure what they are still) would be done most effectively by local interests rather than the federal government.

    But I never would have gone there in the first place. I would say that instead of subsidizing development on an abandoned part of the riverfront in Jefferson City, the federal government should stop subsidizing other forms of development and transportation that may have led to the abandonment of that land in the first place. We don’t really know if the riverfront is abandoned because the market determined that or if it is abandoned because barge shipment can’t compete with heavily subsidized rail and trucking modes or because suburban development is artificially cheap compared to centralized urban development. This subsidy is just one thing that makes the market un-free and violates property rights.

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