Charging for pollution externalities of motor vehicle travel invites more complex issues. One approach widely explored involves reliance upon what are known as Pigou taxes, after noted British economist Arthur Pigou.(31) It attempts to recover the costs of externalities in the natural environment and even involving health damages. Yet Pigou taxes are more often talked about than actually implemented. Related to such designs are those growing out of the theories of Ronald Coase, designed not necessarily to recover the full social costs of negative externalities but rather to foster the most efficient economic choice among options, even if some parties are disadvantaged.(32) Taxes recovering such costs are most easily collected at the production stage -- at the wellhead or the refinery for oil, and from the manufacturer for tires and other materials.(33) Still a third approach is that represented by the Georgist tradition, which would recover the costs of specified pollution externalities by accepting them to the extent that the environment is capable of absorbing them, and charging polluters for the use of the environment as a sink for such wastes. This approach is particularly attractive as a way to charge for the release of noxious gases in motor vehicle exhaust.(34)... read the whole article

Was he laughed to scorn? Au contraire, he was raised on the shoulders of his adulatory peers and anointed a demi-god (which tells you something about his peers). Having risen on wings of theory the idea found its way into practice, and today The South Coast Air Quality Management District awards "offset rights" to those with worthy track records of emitting. New emitters must buy "property rights" from old ones.  ...  read the whole article

In a proper view of things, I submit, private property is a means to an end. It is not an end in itself; it needs a functional rationale. The end is to get land put to the best use. All the private land in the world was originally granted by some sovereign public person or body, mainly for that purpose, not as a welfare entitlement. Landowners and their lawyers have slyly, over time, turned the means into an end, a fetish they endow with "sanctity." This is a term they borrowed from absolutist medieval theology. "Sanctity" means the quality or state of being holy or sacred, hence inviolable. It means property may not be challenged, or even questioned. It has become an end in itself, its own voucher. You're not even supposed to think about it, it is above thought. Taboo!

Neoclassical economics, historically, marked the final, total surrender of the profession to this fetish. The modern economist's view runs something like this: "I pledge allegiance to the 14th Amendment, and to the overinterpretation of private landowner supremacy for which it has come to stand." It is ironic to recall that Radical Republicans passed that Amendment, at a time when a "Radical Republican" was one who favored freeing the slaves. The 14th Amendment was designed to protect the rights of freedmen. As interpreted now, the 14th Amendment means that The Emancipation Proclamation itself was unconstitutional! Fortunately, no one has brought that case - yet.

The Neo-classical economists' view of their proper role is rather like that in The Realtor's Oath, which includes a vow "To protect the individual right of real estate ownership." The word "individual" is construed broadly to include corporations, estates, trusts, anonymous offshore funds, schools, government agencies, institutions, partnerships, cooperatives, the Duke of Westminster, the Sultan of Brunei, the Medellin Cartel, Saddam Hussein, congregations, Archbishops, families (including criminal families) and so on, but "individual" sounds more all-American and subsumes them all. This is a potent chant that stirs people to extremes of self-righteousness and siege mentality when challenged.

The resemblance between Neo-classical economics and the Realtor's Oath is easier to understand when you learn that Professor Richard T. Ely, founder of the modern discipline of Land Economics, was heavily subsidized by the National Association of Real Estate Boards, the utilities, the major landowning railroads, and others of like mind and property interests.

When it comes to violating property rights, air pollution today is perhaps the greatest invader and confiscator of property. Where do economists stand? Once a few of them tried to say, following A.C. Pigou, "let the polluter pay," and in parts of Europe they still do. In our modern backward thinking here at home, however, it's not the polluter who is invading the property of others, nor the human rights of those not owning property. Rather, when you tell them to stop, the government is invading their rights. The wage-earning taxpayers must pay them to stop, else you are violating both the 14th Amendment and the "Coase Theorem," a rationalization for polluting now dearly beloved by Neo-classical economists.... read the whole article

Peter Barnes: Capitalism 3.0 — Chapter 4: The Limits of Privatization (pages 49-63)

Free Market Environmentalism
One other version of privatism is worth considering. Its premise is that nature can be preserved, and pollution reduced, by expanding private property rights. This line of thought is called free market environmentalism, and it’s favored by libertarian think tanks such as the Cato Institute.

The origins of free market environmentalism go back to an influential paper by University of Chicago economist Ronald Coase. Writing in 1960, Coase challenged the then-prevailing orthodoxy that government regulation is the only way to protect nature. In fact, he argued, nature can be protected through property rights, provided they’re clearly defined and the cost of enforcing them is low.

In Coase’s model, pollution is a two-sided problem involving a polluter and a pollutee. If one side has clear property rights (for instance, if the polluter has a right to emit, or the pollutee has a right not to be emitted upon), and transaction costs are low, the two sides will come to a deal that reduces pollution.

How will this happen? Let’s say the pollutee has a right to clean air. He could, under common law, sue the polluter for damages. To avoid such potential losses, the polluter is willing to pay the pollutee a sum of money up front. The pollutee is willing to accept compensation for the inconvenience and discomfort caused by the pollution. They agree on a level of pollution and a payment that’s satisfactory to both.

It works the other way, too. If the polluter has the right to pollute, the pollutee offers him money to pollute less, and the same deal is reached. This pollution level — which is greater than zero but less than the polluter would emit if pollution were free — is, in the language of economists, optimal. (Whether it’s best for nature is another matter.) It’s arrived at because the polluter’s externalities have been internalized.

For fans of privatism, Coase’s theorem was an intellectual breakthrough. It gave theoretical credence to the idea that the marketplace, not government, is the place to tackle pollution. Instead of burdening business with page after page of regulations, all government has to do is assign property rights and let markets handle the rest.

There’s much that’s attractive in free market environmentalism. Anything that makes the lives of business managers simpler is, to my mind, a good thing — not just for business, but for nature and society as a whole. It’s good because things that are simple for managers to do will get done, and often quickly, while things that are complicated may never get done. Right now, we need to get our economic activity in harmony with nature. We need to do that quickly, and at the lowest possible cost. If it’s easiest for managers to act when they have prices, then let’s give them prices, not regulations and exhortations.

At the same time, there are critical pieces missing in free market environmentalism. First and foremost, it lacks a solid rationale for how property rights to nature should be assigned. Coase argued that pollution levels will be the same no matter how those rights are apportioned. Although this may be true in the world of theory, it makes a big difference to people’s pocketbooks whether pollutees pay polluters, or vice versa.

Most free marketers seem to think pollution rights should be given free to polluters. In their view, the citizen’s right to be free of pollution is trumped by the polluter’s right to pollute. Taking the opposite tack, Robert F. Kennedy Jr., an attorney for the Natural Resources Defense Council, argues that polluters have long been trespassing on common property and that this trespass is a form of subsidy that ought to end.

The question for me is, what’s the best way to assign property rights when our goal is to protect a birthright shared by everyone? It turns out this is a complicated matter, but one we need to explore. There’s no textbook way to “propertize” nature. (When I say to propertize, I mean to treat an aspect of nature as property, thus making it ownable. Privatization goes further and assigns that property to corporate owners.) In fact, there are different ways to propertize nature, with dramatically different consequences. And since we’ll be living with these new property rights — and paying rent to their owners — for a long time, it behooves us to get them right. ... read the whole chapter

Peter Barnes: Capitalism 3.0 — Chapter 6: Trusteeship of Creation (pages 79-100)

“Let us suppose,” economist Ronald Coase wrote in 1960, “that a farmer and a cattle-raiser are operating on neighboring properties.” He went on to suppose further that the cattle-raiser’s animals wander onto the farmer’s land and damage his crops. From this hypothetical starting point Coase examined the problem of externalities and proposed a solution — the creation of rights to pollute or not be polluted upon. Today, pollution rights are used throughout the world. In effect, Coase conjured into existence a class of property rights that didn’t exist before, and his leap of imagination eventually reduced real pollution.

“Let us suppose” is a wonderful way for anyone, economists included, to begin thinking. It lets us adjust old assumptions and see what might happen. And it lets us imagine things that don’t exist but could, and sometimes, because we imagined them, later do.

Coase supposed that a single polluter or his neighboring pollutee possessed a right to pollute or not be polluted upon. He further supposed that the transaction costs involved in negotiations between the two neighbors were negligible. He made these suppositions half a century ago, at a time when aggregate pollution wasn’t planet-threatening, as it now is. Given today’s altered reality, it might be worth updating Coase’s suppositions to make them relevant to this aggregate problem. Here, in my mind, are the appropriate new suppositions:

* Instead of one polluter, there are many, and instead of one pollutee, there are millions — including many not yet born.
* The pollutees (including future generations) are collectively represented by trusts.
* The initial pollution rights are assigned by government to these trusts.
* In deciding how many pollution permits to sell, the trustees’ duty isn’t to maximize revenue but to preserve an ecosystem for future generations. The trusts therefore establish safe levels of pollution and gradually reduce the number of permits they sell until those levels are reached.
* Revenue from the sale of pollution permits is divided 50 percent for per capita dividends (like the Alaska Permanent Fund) and 50 percent for public goods such as education and ecological restoration.

If we make these suppositions, what then happens? We have, first of all, an economic model with a second set of books. Not all, but many externalities show up on these new ledgers. More importantly, we begin to imagine a world in which nature and future generations are represented in real-time transactions, corporations internalize previously externalized costs, prices of illth-causing goods rise, and everyone receives some property income.

Here’s what such a world could look like:

• Degradation of key ecosystems is gradually reduced to sustainable levels because the trustees who set commons usage levels are accountable to future generations, not living shareholders or voters. When they fail to protect their beneficiaries, they are sued.
• Thanks to per capita dividends, income is recycled from overusers of key ecosystems to underusers, creating both incentives to conserve and greater equity.
• Clean energy and organic farming are competitive because prices of fossil fuels and agricultural chemicals are appropriately high.
• Investment in new technologies soars and new domestic jobs are created because higher fuel and waste disposal prices boost demand for clean energy and waste recycling systems.
• Public goods are enhanced by permit revenue.

What has happened here? We’ve gone from a realistic set of assumptions about how the world is — multiple polluters and pollutees, zero cost of pollution, dangerous cumulative levels of pollution — to a reasonable set of expectations about how the world could be if certain kinds of property rights are introduced. These property rights go beyond Coase’s, but are entirely compatible with market principles. The results of this thought experiment show that the introduction of common property trusts can produce a significant and long-lasting shift in economic outcomes without further government intervention. ... read the whole chapter

Mason Gaffney: 18 Fallacies

Partly wrong, although some economists are guilty as charged. Economics, properly pursued, deals with how best to meet human wants. Recreation, fishing, wildlife, amenities, clean air, pure water, sustained resource supply, watershed protection, good health, and conservation are legitimate human wants.  ... 

Here are four reasons why environmentalists and economists are natural allies.

(a) Economizing is conserving.
Rationalizing water use, the proper aim of economics, is inherently conserving. For example, if we put the Santa Ana River to its highest and best use, it would obviate megatons of water imports, and with them the associated environmental damage.

I myself possess a share of this river, which rises naturally in an area of intense water shortage, yet I waste it. Why? There is hardly any variable charge imposed on me for using more. There is a yearly fixed cost, at about $20 per acre-foot for a 'standard' amount. The 'standard' hasn't changed in a century, and is much more than I properly need.

Incidentally, the small charge covers expenses of the Gage Canal Co., which delivers to me in the cheapest old-fashioned way, by gravity, in rotation with other users. There is no charge at all for water as such.

Meantime, the State is importing water here at a true social cost of about $2,000 per acre foot, 100 times what I pay). If there were a market where I could sell my 'right' for a tenth of that price I would surely do so, but there isn't, so I am waiting. If there were a price charged to me at a tenth of that cost, I would not buy, but there isn't, so I am taking. Thus I, and thousands like me, just stand pat and waste water.

Abuse of local waters in arid areas of high demand, like Southern California, results in 'hydro-imperialism.' The prevailing ethic is mixed-up macho. Conservation is for sissies: Real Men don't conserve water; Real Men prove they possess predatory genes by preying on peaceful people's waters. The predators can build more golf courses in the Sonoran desert of the Coachella Valley.

(b) Subsidy wastes both dollars and ecologies.
Hydro-imperialism is the common enemy of Sierra Clubbers and economists. That is lucky for economists, because Sierra Clubbers have more clout. For example, twenty years ago some pork-barrellers proposed pumping water from the lower Mississippi River up to West Texas, to overcome drought in Lubbock. It was to be one of the The Great Boondoggles -- a real record-smasher for pure waste.

I laughed when I read ecologists were fighting it to save the habitat of some unremembered nothing-bird, say the 'Least Southwestern Shiny-rumped Fleapicker.' ...

'You have no right to stop growth,' says the hydro-imperialist. I agree, but insist on the counterpart: we have no duty to subsidize growth. Hydro-imperialists and allied land speculators have no right to demand subsidies. Water supply and flood control and navigation projects, the traditional kinds, are heavily subsidized. Subsidy generates waste almost by definition, in the amount of the subsidy. If it is a subsidy to withdraw water it also creates scarcity of water where nature may have given us plenty. Consider the lower Colorado River.

Every major user is subsidized, mostly by Congress. No one pays a dime for water at the source, but everyone gets paid to suck it up and take it home. No wonder there is a shortage. No wonder there are 82 golf courses operating in the Coachella Valley, a Sonoran desert, and 50 more planned.

No wonder The U.S. Bureau of Reclamation can't even find takers for water carried to Phoenix in its multi-billion dollar Granite Reef Aqueduct. I could go on, but exhorting Congress not to waste money is scolding sinners in Sodom. Come on, ecologists, find an endangered species!

(c) Correct economic analysis prescribes more water for fish
Twenty years ago a study on the S... River of B.... prescribed sacrificing the fishery to a proposed power project, reasoning as follows. The fishery has no value because it is overcrowded; 'its rent has been dissipated by the tragedy of the commons'.

The value of the catch is only great enough to pay the fishermen. The fishery as such therefore has no residual value; it adds nothing to the total value. Take it away and nothing is lost, net of costs.

That is a profound fallacy. You will have noted it is a way of 'dehumanizing' fishermen and assuming away their unemployment costs, but that is not my main point. It says you should remove water from the use that is crowded with people, and dedicate it to the use of fewer people. This violates the basic law of diminishing return'; (a.k.a. variable proportions). It violates good marginal analysis, a bedrock of economics. ...

(d) Correct economic analysis presumes public trusts
Another thing some economists do right is to acknowledge that 'entitlements' -- the initial assignments of property rights - have a major effect on the relative bargaining power of different parties.

For years, economists would ask, say, canoers what they as individuals would pay to keep a river wild.. They got rather low valuations, and duly reported them as the value of recreation. This was an effective defensive strategy for dam builders.

One day it occurred to some unsung genius to ask not what the canoer would pay for the wild river; ask what the power company would have to pay the canoer, and all potential canoers, to extinguish their entitlements.

The second question presumes that canoers, as citizens, already own the wild river.

In recent years ecologists have been catching onto this point and rubbing the noses of legislators and bad economists in it. In the currert lingo, one arguing ex parte the canoers stresses that canoers' WTA (Willingness to Accept) is the relevant dollar value, and it is higher, perhaps much higher, than their WTP (Willingness to Pay). 

In defense, the black-hat economists are developing the new defensive strategy of trivializing the matter by claiming WTP = WTA.

They follow a Chicago-School guru, one Ronald Coase, who has written it doesn't really matter how you assign entitlements so long as it is clear and firm. Then just call the signal for 'Free Market!' and punt: everything will work out for the best. Property will be allocate the same, no matter who starts the game with all the chips, because WTP = WTA.

Bunk! You are not surprised when someone says 'My home is not for sale. I will not sell at any price' even in our highly mobile, commercially oriented society. They can take that attitude when they hold the initial entitlement.

You would be amazed to hear anyone say 'I will pay any price,' There are many documented instances of a person swearing under oath his land is worth no more than $X for tax assessment purpose and soon thereafter swearing again it is worth $15X when being condemned for a park or other public use, because he wouldn't sell it for less.

Modern' micro-economics is a throwback to the old Manchester School, some of whose members carried Adam Smith far beyond Smith's intent. They prescribed 'free trade in land' as the solution to all resource problems -- free trade beginning with entitlements inherited from millennia of conquest, corruption, aristocracy, confiscations, negligence, covin and fraud.

In this narrow view, everyone is an economic man; everyone has his price; all decisions are marginal; etc. Facts are forced to fit that theology. One modernist works the northwest Pacific Coast these days taking questionnaire surveys to put a value on environmental values. He has written that he rejects and screens out WTA answers when they exceed WTP answers by more than 5%. They don't fit the model, so they are invalid 'aberrations.'

If so, aborigines are aberrations. Consider Indian tribes with Treaty Rights to fish. Their WTP for those rights is minimal, partly because their ability to pay (ATP) is minimal. In addition, the mere hypothesis they are the ones who must pay implies they are impoverished and cannot pay anything.

On the other hand, their WTA presumes their Treaty Rights are valid and they are in control. In their culture, traditional land rights rank very high relative to money. They have seen people squander money and be ruined by it land is not squanderable, by nature. Land has more than marginal value to them because they have just one way of life, based on fishing. Substitution of other lands is not part of their ethic. Religion is also involved. It is entirely believable they mean it when they say they will not sell 'at any price.' They may be unreasonable, but that's the point: ownership lets you be as unreasonable as you please. We only notice when someone else has the entitlement. Politics and institutions are involved: Treaty Rights are the most valuable mode of holding property there can be. They enjoy legal supremacy as high as the Constitution itself (Article VI, Section 2), preempting contracts and ordinary legislation.