Monday, April 16, 2007

Libertarians and the Environment

I've considered posting on global warming, but thought better of it. Instead, I'm going to outline how I think environmental problems should be addressed in general. Hopefully this will demonstrate how a libertarian perspective can not only work smoothly, but bring about substantial environmental protection.

Most environmental problems - pollution, global warming, overfishing - fall into a category best represented as a tragedy of the commons. That is, when multiple parties use a public resource, it is to the benefit of each to use as much as possible, since they get reap all the profits but the costs are shared among the whole. Of course in the end, they are all worse off as the public resource is depleted or destroyed. The quote attributed to Aristotle sums it up nicely: "That which is common to the greatest number has the least care bestowed upon it".

One solution proposed by most traditional environmentalists is for governments to regulate the resource. For instance, they may set a cap on how many fish a given person can catch in a year. There are two fundamental problems with this. First, it is difficult or even impossible for the government to know how to best allocate fish. Perhaps one person is better at keeping fish fresh from the sea to market. Under a free market, it would be beneficial for him to catch more fish, which would earn him more money and provide a better product for the consumer. A central planner allocating fishing licenses has a great deal of difficulty quantifying this, which is the fundamental problem with communism (not the oft-quoted "people need incentives to work").

The second problem is that it will often be more beneficial for one party to spend money trying to influence governmental decisions, rather than actually improving the social welfare by doing a better job than his competitors (referred to as rent-seeking behavior). We see this behavior in eminent domain takings, the Kyoto protocol, and even with interior decorators in Nevada.

The reason a complete free-for-all doesn't work is that an individual entity doesn't pay all of the costs of a particular decision (or necessarily collect all the benefits) - this is referred to as an externality. A particular action may have a positive marginal benefit for a single party, and therefore be pursued, while it has a a negative marginal benefit for society as a whole. In the case of common resources, the costs to the individual may be small while the externalities are large.

So how do we ensure that decisions truly do maximize social welfare? We eliminate the externalities - everyone pays the costs incurred by their actions. The first step to doing this is to strongly enforce private property rights. It's counterintuitive to many, but strong property rights lead to strong environmental protection. If you don't own the water downstream from your power plant, or the air downwind, you are infringing on the rights of the people who do when you pollute it.

It's actually a relaxation of property rights to allow some pollution so as to not completely cripple the ability to do anything. The second step is to ensure that this is not taken advantage of by making people pay for the damage they do to another's property. In the case of global warming, this could be done through any number of mechanisms that charge anyone for releasing greenhouse gases outside of their property. Of course, figuring out the cost associated with global warming is a difficult problem in its own right, but it's something that must be estimated for any mitigating process. The receipts collected from emitters should then be given to the people who are paying the actual costs.

Even though libertarians are generally hostile to government, they can still believe in a strong environmental policy - just not one where the government is in charge of picking winners and losers.


Alan Rosenwinkel said...

California and and 4 other Western states, the North-Eastern US, Canada and the EU all have or are planning markets for greenhouse gas emissions.

dave hiller said...

It seems that many governments are on board with cap-and-trade systems, which are somewhat market based although I'm not convinced one way or the other whether they're the absolute best option.

A big problem is that these systems themselves are often set up to benefit one party over another. Kyoto's exemption of developing countries, as well as targets set based on 1990 emissions, is a particularly vivid example of this.

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