Consider, for example, our atmosphere. It’s not
just today’s pollution that hurts, it’s the
accumulation of fumes we’ve been pouring into the
air for centuries. This has already caused ice caps to
melt, hurricanes to gain ferocity, and the Gulf Stream to
weaken. Almost universally, the world’s scientists
warn that far worse lies ahead. The question our
generation faces is: will we change our economic system
voluntarily, or let the atmosphere change it for us? ...
read the whole chapter
“ 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