"Property Rights and Natural Resource Management"
PROPERTY RIGHTS AND NATURAL RESOURCE MANAGEMENTby Richard Stroup and John Baden*1
How much development should be allowed on the Yellowstone River? Is oil being used too quickly? Is the strip mining of coal properly controlled?
The world's limited patrimony of natural resources has stirred up a lively debate: how can we optimally manage our resources? It is no simple task for analysts to determine how best to manage or to allocate resources. Which uses are most "important"? How may the resources be best exploited? And what is the time path for budgeting the use of exhaustible resources? All these are important and complex questions, loaded with emotion. Charles W. Howe, Natural Resource Economics (1979), however, gives one recent and detailed study of how standard economics may be applied for problems in natural resource management.
In analyzing such natural resource issues, it is critically important for us to consider the form and ownership of property rights in resources. Whether the perspective is historical, predictive, or prescriptive, it is important to recognize who controls these property rights, and under what conditions. Only from this framework of property rights can we understand decision processes. Individuals, not large groups or societies, make the decisions. They do so, however, in an institutional framework. The property rights paradigm provides important analytical leverage in comprehending how individuals interact within institutions. The property rights concept, then, not only helps us understand history; it also helps us predict the consequences of today's institutions or to compare the likely outcomes of alternative arrangements. Given the increased pressure from larger populations, and from more powerful technologies which increase our ability to access and process more natural resources, an increased comprehension of our system and our alternatives is most welcome. For an assessment of United States renewable resources, and the increasing pressures on them, see the U.S. Department of Agriculture's The Nation's Renewable Resources-An Assessment, 1975. In the case of exhaustible resources, see Hans Landberg, et al., Resources in America's Future (1963).
In this bibliographical essay we will: (1) trace the outlines of the property rights paradigm as it relates to resource management, (2) sketch the workings of resource markets when property rights are private and readily transferable, (3) explain market failure and the potential gains in efficiency from governmental intervention in resource markets, (4) show why collective control of resources can also be expected to have problems, (5) illustrate by case studies how the theoretical analysis works in practice, and (6) draw some policy conclusions.
The most interesting challenge to the economic historian is to account for changes in the structure and enforcement of property rights over time. Douglass North*2
Property rights theorists, unlike most other economists, do not necessarily begin with the assumption that decision makers seek to maximize profits, income, or even wealth. Instead, these theorists stress the importance of specifying goals (utility function) in each case. The decision maker is then assumed to maximize his own utility (not that of an organization or state) in whatever situation he finds himself. For an excellent review of this perspective, see Eirik Furobotn and Svetozar Pejovich, "Property Rights and Economic Theory: A Survey of the Recent Literature," Journal of Economic Literature (1972).
Property rights in a tract of land, a coal mine, or a spring creek consist of control over that resource. An important feature of a property right is the ability to exclude others from using the resource. The right to use, but not to exclude others from use, is a highly imperfect (or ill-defined) property right. Failure to recognize this leads to a weak, or even useless model and to wasted resources. For an example of such a failure, see Robert Dorfman, "The Technical Basis for Decision Making" in Haefele, The Governance of Common Property Resources (1974).
Such a right to control property is most valuable to an individual when its ownership is outright, and it is easily transferable in exchange for other goods and services. However, even a limited discretionary command over access to a resource confers status and power to the holder. Governments typically exercise at least some discretionary command in this regard. The theory of property rights to control over resources can in fact become a theory of the state. As Douglass North says, "In effect, one cannot develop a useful analysis of the state divorced from property rights."*3
As individuals seek their own advantage, they generally do so within the prevailing institutional arrangement. In addition, however, they may seek gains by attempting to change the "rules of the game," or existing institutions which define property rights. For example, when privately held property rights to land are attenuated by zoning, land owners may gain by changing the zoning rules, or by influencing their administration. Since other individuals may seek the same advantages for themselves, the resulting competition may involve negative sum games: those who "win" may gain less than what is lost (invested) by the competitors as a group. There is a growing literature on the topic of resource use ("rent dissipation") in the manipulation of rules ("rent seeking") by individuals in the quest for individual gain. See, for example, Anne Krueger, "The Political Economy of a Rent Seeking Society" and Gordon Tullock, "The Welfare Costs of Tariffs, Monopolies, and Theft." If the rules allow government officials discretion in determining who has access to a resource, competing claimants can be expected to invest in means to seek favorable administrative outcomes. Informational lobbying, the shift of political support, lawsuits (actual or threatened) and simple bribery can all be brought to bear, though not without cost, by those wishing favorable treatment from decision makers who do not "own," but nevertheless control the rights (access) to resources.
Some property rights theorists, writing on the evolution of institutions, have pointed out that economic growth and efficiency are greatly affected by the way in which prevailing institutions allow property rights to be traded and allocated. When rights are privately held and easily transferable, for example, private decision makers have both the information and incentive to move resources to more highly valued uses. By contrast, if those who would lose from such change can prevent it through governmental means, without bearing the loss to society of such stagnation, then the potentially higher valued uses for resources may be foregone. We turn now to a discussion of privately held property rights, and the impact of freely tradable rights (the market) on resource management.
When resources are owned privately and the property rights are freely transferable, decisions on resource uses are decentralized. Rationing of the scarce resource and coordination of individual plans are accomplished through the market. The owner of a copper mine receives market information on the value of alternative uses, as well as the incentive to supply the highest valued use, through bids for copper ore (or offers to buy the mine). A more complete treatment of markets in a resource setting, as compared with collective management can be found in Richard Stroup and John Baden, "Externality, Property Rights, and the Management of Our National Forest," The Journal of Law and Economics (1973). In this market setting, the owner is able to minimize the social cost of exploiting his resource simply by minimizing the total cost to himself. Bid and asked prices in the market convey both condensed information (shorn of all questions of "sincerity" or genuineness" of the "needs" of the parties competing to be recognized in the decision process) and the incentive to use this information. Owners thus have the information needed for efficient resource allocation, and the encouragement or incentive to serve others by operating efficiently. Consumers, who must pay for what they use, are also informed by prices as to the value others place on what many desire.
Included in the advantages of this management system (based on private property rights) are diversity, individual freedom, adaptiveness, the production of information, and a certain equity. Diversity is fostered under private property rights because there is no single, centralized decision maker but many asset owners and entrepreneurs, each of whom can exercise his own vision. Those who correctly anticipate people's desires are most rewarded. Individual freedom is preserved under the market: those who wish to participate in and support such activities are free and able to do so since market prices provide immediate information and incentive for action as soon as changes are seen. If only a few see scarcities or opportunities ahead, they can buy, sell, —or just provide expertise as a small group of consultants—and thus direct resource use without convincing 51 percent of the voters (or their bureaucracy) of the advantages of their preferences. In this case profits will reward foresight and quick action, while losses discipline those who divert resources foolishly.
Information, another advantage of property rights, is produced as a byproduct of bids offered and prices asked in the market, and is vital to the coordination of plans made in the economy by individuals.*4 Activities not marketed are proving very difficult to manage rationally for there is little or no concrete evidence on how people really evaluated nonmarketed activities relative to other resource-using activities. We know, for example, how much people are willing to sacrifice for a thousand board feet of lumber of a given species and grade, but how much would they pay for a day's access to a wilderness area? In the latter case of a nonmarket good we have only rough estimates. Even the best manager cannot make good resource management decisions without knowledge of the input and output values.
As a final advantage of management of resources through private property rights, there is a measure of equity in having those people who use a resource (or wish to reserve it for use) pay for it by sacrificing some of their wealth. The proceeds from the sale of public assets could be distributed, or invested and perpetually distributed to the poor or others. For example, those using the forests would be required to pay a fee, whether it be for recreation, timber harvest, or even research in a unique area.
The market, as we describe it here, is a marvelous mechanism. Its workings, however, crucially require that property rights to each resource (especially the right to exclude) be privately held and easily transferable. Only if these conditions are met can we be assured that a decision maker (the owner) with an appropriate stake in the resulting decisions (his estimate of what the resource is worth in his use or on the market) will have reason to devote the appropriate amount of attention (but not too much) to how the resource can be used in its highest value (including the potential value to others in their use).
If property rights to the resource are not fully defined and enforceable, those who put a relatively low value on its use may nevertheless use the resource without the need to compensate (or outbid) anyone else. Or, should rights be controlled by a public (or a nonprofit) decision maker who cannot personally gain from more efficient utilization of the resource, waste could occur. The decision maker maximizes his advantage from limited property rights by minimizing his hassles (which he would face from hard decisions in reallocation) or by insuring his future job promotion (by giving in to the desires of politically powerful groups).
If rights are privately owned but not easily transferable (as in the case of agricultural water rights desired for industrial use nearby) another problem emerges. In this case, the farmer is forbidden by law to sell water to the industrial user (because unmeasured return flows might decline, injuring downstream holders of water rights). This prohibition may lead the farmer to irrigate wastefully and thus lose much water to evaporation, even though he would be quite willing to sell the water he consumes to the industrialists at a price both would find compatible.
In brief, when private rights are securely held by private individuals, but easily transferable, the resulting pattern of resource utilization would be difficult to improve upon. This follows directly from the fact that resources are easily mobile, markets provide clear and condensed information on relative values, and each person has the incentive to seek out and fill (and profit from) better uses for each resource.*5 The next two sections will point out in some detail the problems which result in both the market and nonmarket sectors when property rights are undefined, unenforced, not owned by private parties, or when transfer is impeded.
As we mentioned above, market failure occurs when property rights are not properly specified, or are not held by those who can benefit personally by putting the resources to the use most highly valued by participants in the market. These market failures have long been recognized, but are frequently not traced to their origins in imperfect property rights.*6 In this section we discuss the consequences of not specifying clear property rights.
A common reason to distrust market outcomes is the possibility of monopoly. If one individual or firm controls the entire supply of a resource (natural diamonds, for example), that individual has an incentive to limit output not only to reduce production costs, but also to increase price. If there are no good substitutes available to users of the resource, a price well above the cost of added production may benefit the resource owner most. This would be inefficient, in the sense that some units remain unproduced even though they would be valued by users more than others value the inputs required for their production. In this situation the owner of resource rights is presumed to be unable to sell to individuals at any lower price without simultaneously lowering his price on all units.*7
Another frequently cited cause of market failure is the existence of externality. An externality exists when some results (positive or negative) of a decision are not visited upon the decision maker. The classic case of negative externality is air pollution. Since John Evelyn wrote "Fumifugium" about the foul air of London in 1661, there has been public concern about the harm caused some people by smoke produced by others. When the copper producer chooses to send sulfur dioxide into the air, instead of bearing the costs of filtration, he saves money and thus benefits; yet the farmer downwind, whose alfalfa turns brown, pays the penalty and bears the cost. The results of such negative externalities are usually perceived to be inequitable. If the cost of reducing the pollution is less than the damage a reduction would avoid, the pollution also is inefficient. In general, negative externalities are overproduced. The standard economic approach to pollution, and to potential solutions, is set out skillfully, in a nontechnical fashion by Larry Ruff in "The Economic Common Sense of Pollution," The Public Interest (1970). An early property rights approach is in J. H. Dales, Prices, Property Rights, and Pollution (1968).
A related problem sometimes exists. Positive externalities exist if a decision maker's actions yield benefits to others, without compensation. If my neighbor continues to grow wheat on his land, rather than stripmine the coal below, I enjoy the view without having to pay him. He therefore does not consider my values when negotiating with coal buyers and deciding how to use his land. In general, external benefits are underproduced.
We can fruitfully consider both negative and positive externalities as property rights problems. In the example above, both the copper producer and the farmer use the air resource. The copper smelter uses the air as a garbage removal service, to carry away its waste, while the farmer's alfalfa plants "breathe" it. Farmers actually own the air in the sense that, if they are damaged by pollution, they can sue to recover damages.*8 This right to clear (non-damaging) air is imperfect, however, since the farmer here would have to prove in court: (a) the total value of damages, (b) the fact that pollution caused the damages, and (c) that the smelter was indeed responsible for the foul air when damages occurred. This burden of proof is difficult (expensive), and so the property right seldom forces the air user to compensate the owner. Air pollution is similar to a hypothetical case where a copper producer could take labor or capital or copper ore for its own use without paying for it. Any such free resource is likely to be overused:*9
We can approach the problem of negative externality in a slightly different manner by considering it a failure of law regarding liability. For example, the owner of an automobile does not have the right to use it to injure others (or their property), and is held liable for damages arising from the use of his auto. Similarly, we might also hold the owner of a copper smelter responsible (liable) for damages from the operation of his smelter. In a different setting, the implications of alternative liability laws are examined by Roland McKean, in "Products Liability: Implications of Some Changing Property Rights," Quarterly Journal of Economics (1970).
The second case given above of the "free" view enjoyed without compensation again reflects a failure of the rights to control (and to exclude others from the enjoyment of) all output from the land resource. The scenic view is a byproduct for which no credit is received—or foregone when production stops. A classic article showing the property rights aspects of action where a decision maker does not pay the costs or gain the benefits from those actions is Ronald Coase, "The Problem of Social Cost," The Journal of Law and Economics (1960). Coase shows that in the absence of transactions costs (the costs of reaching a final bargain among parties) it does not matter who owns a given resource, except that wealth will change. That is, resource allocation is unchanged to the extent that individual preferences are invariant to the change in wealth caused by different assignments of property rights.
Another class of market problems resembles a variant of externality. It includes the "public good" problem and the "common pool" problem. In each case, the actions of an individual decision maker have external effects on others. A public good is one which, once produced, is available for all to utilize. Paul Samuelson's original definition of a public good was such that one individual's consumption of it led to no reduction in others' consumption of that good. See Samuelson, "The Pure Theory of Public Expenditures," Review of Economics and Statistics (1964). Anyone can be a "free rider," so that no one has an incentive to provide the good unless the benefits to him alone exceed the cost to all society. Public goods, such as national defense, tend to be underprovided by market behavior. They are an extreme case of positive externality.
More germane to natural resource issues is the common pool problem. As in the case of oil, a common pool resembles one soda being consumed by several small boys, each with a straw. The "rule of capture" is in effect: ownership of the liquid is not established until it is in one's possession. If several oil wells, each with a different owner, tap into the same underground reservoir of oil, each owner has an incentive to extract the oil very quickly. Doing so, however, can reduce the total volume eventually taken from the well, due to geologic factors.*10 Another famous example of the problem was the English "Commons" or pastures on which all in the community could graze animals without penalty. Grazing extra animals on the commons could greatly reduce the yield of the pasture in the future. However, since the cost was borne by all, while the individual herdsman gained all the benefit from his extra animals, the incentive was to overgraze. In the common pool, each user inflicts external costs on other users. A thorough treatment of this topic is Garret Hardin and John Baden, editors, Managing the Commons (1977), especially Hardin's study, "The Tragedy of the Commons."
In the case of both public goods and the common pool, the lack of property rights is critical. If whoever provided national defense privately could exclude from protection all who failed to pay, the public good aspect would disappear. If anyone pumping oil from a common pool had to compensate an owner for the lost opportunities tomorrow (less oil tomorrow) for each barrel of oil pumped today, he would not pump out the oil too rapidly.
All instances where markets fail to achieve ideal efficiency standards can be classified under the rubric "transactions costs." For further discussions on transactions costs (the cost of reaching a final bargain among parties), see Furnbotn and Pejovich, "Property Rights and Economic Theory: A Survey of the Recent Theory," in Journal of Economic Literature (1972), and Steven Cheung, "The Structure of a Contract and the Theory of a Non-Exclusive Resource," Journal of Law and Economics (1970). The monopolist artificially increases scarcity only when he finds it too costly to separate those potential customers who will pay the higher monopoly price. If only the cost of locating and bargaining separately with buyers submarginal to the monopoly price were sufficiently low, then both the monopolist and the buyers could profit from added exchange. Again, transactions costs are pertinent in the case of externality. Here, any action imposing an external cost that is greater than the benefit to the decision maker would not be carried out if the persons damaged could bargain costlessly with the (current) decision maker. All parties affected would become part of the decision process in a world of zero transactions costs. In such a world the public good and common pool problems would also be extinct. No potential bargain (nor any exchange offering greater benefits than costs) could remain unconsummated if the costs of defining and enforcing property rights together with the costs of identifying and making mutually beneficial exchanges were zero. Together, these costs are defined as transaction costs. They are the only impediments to ideal efficiency in the market. Unfortunately they always exist in resource markets, so that it always makes sense, in theory, to consider alternatives to market organization.
Another reason that some want to consider nonmarket alternatives for allocating natural resources is the matter of equity. If we think of efficiency as producing the largest "pie" (in value terms) from our given patrimony of natural resources, equity would then determine how to divide that pie among the population. Equity is not the same as equality, though some might believe that a more equal distribution of income is more "equitable." In terms of our pie analogy, the property rights approach emphasizes that decision makers tend to seek control over the largest possible piece, rather than to seek only efficiency. Thus, a major concern is how the pie (equity) is sliced. The growing importance of equity is indicated in Fred Hirsch, Social Limits to Growth (1967), Robert Nisbet, Twilight of Authority (1975), and Daniel Bell, Cultural Contradictions of Capitalism (1976). The desire to influence the distribution of costs and benefits is another reason that some want to turn away from market control of natural resources. This has been most vividly illustrated in recent years by growing governmental interference in energy markets. Worry over "windfall profits" from crude oil is just one symptom of a much broader concern about the equity of market outcomes.
In the hope of achieving both efficiency and equity, we might wish to turn to government institutions. As we examine government, however, a number of problems appear.
If markets are imperfect in allocating resources, so are the governmental mechanisms set up to improve markets. Whether we look at regulated firms or direct governmental control, displacing the market will not insure efficiency. Economists are still struggling with the theory of regulations, but not fruitlessly. See, for example, George Stigler, "The Theory of Economic Regulation" (1979), and Sam Peltzman, "Toward a More General Theory of Regulation" (1976), two technical articles on the topic. The problems of governmental (bureaucratic) control of resources are analyzed in William Niskanen, Jr., Bureaucracy and Representative Government (1971) and Thomas Borcherding, editor, Budgets and Bureaucrats (1977). These problems are illustrated in the context of natural resources in John Baden and Richard Stroup, "The Environmental Costs of Government Action," Policy Review 4 (1978).
Considerable progress has been made in analyzing collective action in a democracy. Now, even those analysts least enchanted with market solutions are aware that turning resources over to the public sector will not guarantee desirable results.
The pioneering contributions of Anthony Downs, An Economic Theory of Democracy (1957); Buchanan and Tullock, The Calculus of Consent (1962); and Mancur Olson, The Logic of Collective Action (1965); have clarified our knowledge of representative government and show some promise of approaching, in rigor and predictive capacity, the economic theory of the firm.*11
What conclusion results from using the property rights approach, in which each decision maker (political or private) acts to advance his own interests as he sees them? We can see the same fundamental flaw in collective or political institutions that exists when imperfect property rights and transaction costs hinder private markets: decision makers are not held fully accountable for their actions. When control is political, rather than by private owners, those in charge (politicians and bureaucrats) cannot be expected to sacrifice their own personal career and other goals by resisting political pressures from special interests. Nor can we expect them to be diligent when the rewards for doing so are non-existent.
Why are public officials not held more accountable for managing natural resources efficiently, diligently, and in the best interests of all the voters? We can identify five components of the problem.
Citizens allocate their decision time and efforts, as they do all other scarce resources, toward those uses which yield personal benefits. Gathering and analyzing knowledge will be undertaken on those matters which are important to the concerned individuals and are significantly influenced by them. The average citizen will fail to study national water policy, not because it is unimportant, but because he will have virtually no personal impact on the policy. It is rational to be ignorant about complex matters which are beyond one's control. Although weather is the most important single determinant of a farmer's income in a given year, the farmer is rational to study fertilizer options and tax strategies instead of meteorology. The weather is simply beyond his control. Similarly, the same farmer will be rationally ignorant about most governmental policies. The exception is likely to be the tiny portion of government policy which influences the market for his own crop. In this case, he has a special interest.
Whereas most citizens are rationally ignorant about most governmental policies, on any particular issue there may be small groups with strong enough interest on that narrow issue to have an impact. Local cattlemen, for example, may have a strong interest in how grazing rights are administered on federal lands. When the issue is sufficiently narrow (grazing rights, not federal lands policy generally) and when the personal interests of a small group are sufficiently large (a large portion of some ranchers' assets are leased federal grazing rights), then a narrowly focused but highly motivated special interest group is likely to wield enormous political clout. The group may support or oppose a politician (or a bureau, in the legislative process) over this one small issue. The interests, however large in total, of the rest of the citizenry may have little bearing on resulting policy in this particular narrow policy area.*12 Of course, governmental policy in general is the sum of such narrow concerns. Another problem for a representative democracy is the fact that each citizen can normally vote, not on each issue separately, but for one representative (or executive) to represent him on all issues.
Even if every citizen could somehow study every issue, and even if special interests could not buy influence through campaign contributions or other forms of political support, each citizen would still face another serious problem in expressing his informed opinion on the thousands of issues arising each year. The voter votes not on individual issues (which stripmine controls? which groundwater policy option?) but on one representative to speak for him on every issue (the Democrat or the Republican?). The lack of precision in achieving one's input into the system is obvious. On this point, see Gordon Tullock, Private Wants and Public Means (1970), pp. 107-114. Again, the payoff to a citizen for being fully informed on most issues is reduced because the bundles of policy choice from which he must choose, in the end, is severely limited even if by some small miracle he were the decisive voter.
If most people are ignorant about most policies—and many polls indicate that the average registered voter cannot name his current U.S. Congressman—then those policies whose major costs or major benefits fall in the futre will be even less well understood. Successful politicians and bureaucrats, to receive sufficient support, must show their supporters current net benefits. Future generations cannot vote in current elections. Thus efforts on our resource base which occur years down the road will have relatively little impact now, unless individuals are willing to sacrifice now for the future benefit of others. Such decisions sometimes occur, but they seem less likely to conserve resources than private speculation (discussed below) which allows the speculator a chance to benefit himself while protecting resources for future (sale and) use. Just as the Indiana woodlot owner can gain by selling wood to Texans, current private owners can gain by conserving or "hoarding" a resource which is becoming more scarce, and selling it later to other "hoarders" (speculators). By contrast, a current government decision maker can seldom gain political support by locking resources away from current voters to benefit the unborn. We can expect government policy to be shortsighted, especially in the long time horizons necessary for conservation and for many natural resource policies.
In the private sector, a firm that uses resources more valuable (as measured by cost) than the value of what it produces (as measured by revenue) loses money and goes out of business (unless rescued by government or supported voluntarily as a charity). No such "reality check" exists for government bureaus. A sufficient base of political support is required instead. Seldom can the public sector decision maker benefit personally from greater efficiency in governmental units. The political incentive is to expand rather than to economize. The public choice literature, taking aproperty rights approach, is developing an increasingly sophisticated set of models to explain bureaucratic behavior. See, for example, Mique and Belanger, "Toward General Theory of Managerial Discretion" (1979), William Niskanen, "Bureaucracy and Representative Government" (1971), Gordon Tullock, The Politics of Bureaucracy (1965), and Oliver Williamson, The Economics of Discretionary Behavior: Managerial Objectives in a Theory of the Firm (1964).
Is our analysis of government's inability to manage resources effectively too cynical? We think not. The scholars whose models we summarize here, have demonstrated (usually in areas of application other than natural resources) that their analyses have explanatory power as well as theoretical attractiveness. This way of thinking simply recognizes that individuals, not organizations or societies, make decisions and that in general, individuals act in their own best interest as they perceive it. To be useful and beneficial to society as a whole, an institution must succeed in connecting authority (command over resources) to responsibility (the capture of costs and benefits flowing from one's actions). The market relies upon private property rights to hold each person responsible for his actions. When rights are imperfectly defined, enforced, or transferable, we can understand why markets fail. Representative democracy counts on informed voters and their elected representatives to hold government decision makers responsible for their acts. We can predict how and why this institution, too, will be imperfect.
Notes for this chapter
Richard Stroup is Associate Professor of Economics and Co-director of the Center for Political Economy and Natural Resources; John Baden is Director of the Center, at Montana State University. They wish to thank their colleagues, Terry Anderson and P.J. Hill for helpful suggestions, while retaining responsibility for any flaws.
Douglass North, "A Framework for Analyzing the State of Economic History," Explorations in Economic History 16 (1979):249-259.
See North (1979):250. This article discusses the factors influencing the way in which rulers of a state advance their own control over resources by selecting from among alternative sets of property rights rules. Economic growth and efficiency can be means to the ruler's ends, but only if the ruler can capture enough of the consequent benefits relative to more easily monitored, controlled, and taxed systems.
Economists of the Austrian school emphasize the role of the entrepreneur who, in his search for profit, finds higher valued uses for resources previously used in a less valuable fashion. See, for example, Ludwig von Mises, Human Action, and Israel Kirzner, Competition and Entrepreneurship.
The workings of the market are explained nonmathematically, with a minimum of jargon, from a property rights approach, in four books on economic principles: Armen Alchian and William Allen, University Economics; James Gwartney and Richard Stroup, Economics: Private and Public Choice; Paul Heyne, The Economic Way of Thinking; and Svetozar Pejovich, Fundamentals of Economics.
A systematic treatment of the "accepted wisdom" on market failure is Francis Bator, "Anatomy of Market Failure," The Quarterly Journal of Economics (August 1958):351-379.
Nearly all introductory economics texts cover this general problem of monopoly, including the four cited in the previous note.
See Corpus Juris Secundum, Vol. 66, p. 9461. This common law approach is being supplemented by statutory laws which proclaim the mere existence of a pollution source a nuisance, apart from demonstrated damage. Such laws are currently being challenged in the courts.
Note that if property rights in clean air were easily enforced, pollution would still be produced, but only in efficient amount: polluters would compensate those damaged, and would reduce pollution until further reductions were more costly than fully compensating all those harmed.
If many well-owners pump more rapidly from many pools, ignoring the "user cost," or reduced availability from each pool later, then oil market prices can be depressed. That happened in the United States in the 1930s, leading to government control of oil well production. See Edward Mitchell, U.S. Energy Policy: A Primer (1974).
A relatively nontechnical presentation of the economics of government failure, paralleled by this section but with emphasis on different applications, is Gwartney and Stroup, Economics: Private and Public Choice (1980), 2nd edition, chapter 32. See also McKenzie and Tullock, Modern Political Economy—An Introduction to Political Economy (1978), chapters 5 and 6; Charles Wolf, " A Theory of Non-market Failures;" and William Mitchell, The Anatomy of Government Failures (1979).
For more rigor and detail on this and related aspects of the political process see Gordon Tullock, Toward a Mathematics of Politics (1967).
End of Notes
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