Public Policies for Natural Resources

1
Public Policies for Natural Resources

• Property rights solutions

2
Property right policies

• Correcting for market failure through the
  assignment (and enforcement) of property rights

3
Property right structures

• Private property access and use are under the
  control of an individual person or corporation

4
Property right structures

• State property a unit of government controls
  access and use
• E.g. public grazing lands

5
Property right structures

• Common property a specific group of individuals
  jointly have access and use rights

6
Property right structures

• Open access absence of any property rights

7
Private property characteristics

• A complete private property rights structure
  includes
• All resources are privately owned
• Rights are enforceable
• Rights are transferable
• Rights are separable
• E.g. mineral rights, development rights

8
Rights assignments methods

• Who gets property rights when private rights are
  developed?
• Apportion among current users
• Homesteading
• Lottery
• Auction to highest bidders

9
Coase theorem

• The initial assignment of rights does not matter
  to economic efficiency
• If the rights are not assigned to those who value
  them the most, those assigned the rights will get
  offers to sell the rights to those who value them
  most thereby insuring maximum net benefits are
  derived from use of the resource

10
Coase theorem examples

• An 100 acre wood is currently open access
• Chris Robin lives next to the woodland and uses
  it for recreation
• LG enterprises, a logging company is interested
  in harvesting the timber
• LG pays 50 per acre for timber land in the
  area, so the property is worth 5,000 to the
  logging firm
• The government plans to assign property rights to
  one of the two
• Will the rights be held or traded?

11
Solved problem 1

• Scenario 1
• Rights are assigned to LG
• Chris Robin offers to buy the land for 3 pots of
  honey.
• LG turns down the offer
• Conclusion land is worth more to LG than to
  Chris Robin. Rights have been assigned to highest
  valued use.

12
Solved problem 1

• Scenario 2
• Rights are assigned to C. Robin.
• LG offers to buy the land for 5000.
• Mr. Robin accepts the offer
• Conclusion land is worth more to LG than to Mr.
  Robin. Rights have been traded and reallocated to
  highest valued use

13
Solved problem 1

• Scenario 3
• Rights are assigned to C. Robin.
• LG offers to buy the land for 5000.
• Mr. Robin declines the offer
• Conclusion land is worth more to Mr. Robin than
  to LG. Rights have been assigned to the highest
  valued use

14
Coase theorem

• Complications
• Transaction costs
• Income effects
• Enforcement costs

15
Complications high transactions costs

• The 100 acre wood is also used for recreation by
  99 others.
• If the rights are assigned to the current users,
  LG must successfully negotiate a deal with all of
  them if it wants to buy the land! The costs of
  doing so could easily outweigh any resource rent.
• If the rights are assigned to LG, the 100 users
  must act collectively if they want to buy the
  land. The costs of organizing and fundraising
  could easily outweigh any net benefits. These
  costs include dealing with free riders and
  holdouts.

16
Complications income effects

• Income effects
• WTP is bound by ability to pay
• Willingness to sell, WTS is not

17
Complications income effects

• Scenario 2 revisited
• If the government assigns rights to the 100 acre
  wood to C. Robin he would not sell for less than
  6,000 but he cannot pay more than 3 pots of
  honey.
• LG is only WTP 5,000. No trade is made.

18
Complications high enforcement costs

• Enforcement costs if the costs of enforcing
  respect for a property rights assignment exceed
  the net benefits, the assignment reduces social
  welfare

19
Complications high enforcement costs

• In the example of logging rights, suppose the
  government assigns the rights to LG, Inc. which
  intends to log the land next year
• In the meantime, the local families go into the
  forest to harvest timber for their own use as
  they have been doing for years before the rights
  assignment.

20
Complications high enforcement costs

• The net social benefits of LG logging are
  500,000 if the forest remains in its current
  state
• The cost of hiring forest rangers and prosecuting
  trespassers is 700,000 over the next year.
• Society suffers a net loss of 200,000 if rights
  assignment is enforced!