Another way to protect the environment

Published 11:00 pm Tuesday, October 4, 2016

Libertarian presidential candidate Gary Johnson is polling very well among millennials, recently receiving 29% support among voters aged 18-34.  Nobel Prize-winning economist Paul Krugman doubted in the New York Times that millennials knew about Libertarian Party positions like using private litigation instead of Environmental Protection Agency (EPA) regulation.  Although Professor Krugman finds a market-based environmental policy dubious, I think it could be more effective than EPA regulation.

To see why, we need to consider why pollution is a problem.  Economists identify the problem with pollution as an externality, meaning that firms or individuals are able to dispose of wastes as pollution into the air or water without paying for the resulting damage.

Competition ensures that prices reflect costs and guide behavior, but prices only reflect the costs which firms must pay.  Prices of manufactured goods consequently reflect the costs of labor, raw materials and electricity, but not the damage from the firms’ pollution.  Therefore, prices send an incorrect signal to consumers and firms.  The same problem would essentially arise if businesses got to use any resource for free, for instance, if a printing business got free paper.

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Why do businesses not have to pay to dump pollution into the environment?  This is due to a property rights problem.  We agree that we all have a right to breathe clean air, but cannot sell the air we “own” to the factory.  We can sell, and firms must buy, our labor in the market, which results in wages and salaries.  The lack of a market for pollution leads prices of manufactured goods to be wrong.

The fates of different species further demonstrate the role of property rights in environmental problems.  Whales and buffalo in the wild, effectively owned by no one, were nearly hunted to extinction.  By contrast, thirty million cattle are killed each year in the U.S. without threatening the species with extinction.  Philosophers can debate if people should kill them for food, but the effect of property rights is clear.  Ranchers ensure that cattle they own get food and water, are protected from predators, and are harvested sustainably.

How might property rights protect air and water?  We have some historical evidence.  In England, the Crown owned fishing rights and granted them to anglers’ clubs.  As water pollution started harming fish, anglers’ clubs could take legal action against polluters, and have successfully used the courts to protect water quality.

Courts in the U.S. recognized pollution as a tort starting in the 1800s, allowing people to win suits against factories for air and water pollution.  Once litigation establishes that a specific pollutant causes harm, firms know that must bargain with the persons harmed by pollution.  Economists Roger Meiners and Bruce Yandle found that paper mills in Wisconsin compensated downstream property owners, essentially “buying” the right to pollute the river.

Property rights, litigation, and negotiation make firms pay for pollution, just as for labor.  Prices of goods and services will then reflect environmental harm.  Markets and not bureaucrats can then balance protecting nature against productive activity, which is the attraction of the approach.

Professor Krugman is skeptical of average citizens suing corporations over pollution, and not without reason.  The movie A Civil Action details the challenges and enormous cost of litigation over groundwater contamination in Woburn, Massachusetts.  Deep-pocketed defendants often draw out court cases in hopes that plaintiffs run out of money.  And polluters can create judgment-proof shell companies to ensure that victims never collect compensation.  But I view these as problems with our legal system, not problems with a market approach to environmental protection.

EPA enforcement of the Clean Air and Clean Water Acts has significantly improved environmental quality while allowing continued economic growth.  Regulation has worked in the past, but critics believe that the EPA today is pursing dubious risks like fine particulate matter and carbon dioxide at enormous cost and with little legal justification.  Alternatives to government regulation exist, and perhaps we should now explore greater reliance on markets to protect nature.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision.  The opinions expressed in this column are the author’s alone and do not necessarily reflect the views of Troy University.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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