Public Policies for Natural Resources

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Public Policies for Natural Resources

• Using government to correct for market failures

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Why public policy?

• Try to promote economic efficiency by correcting
  for market failure
• To redistribute benefits and/or costs of natural
  resource use
• Among members of current generation
• Among generations

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What is public policy?

• Collective actions through government
• Results from government decision-making process

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Types of public policies

• Incentive based policies
• Market based incentives
• Government sponsored incentives
• Direct public action
• Command and control (Regulation)
• Public production

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Incentive based policies

• Market based incentives correct for market
  failure by establishing and enforcing property
  rights and then allowing the market to work
• Examples
• Establishing water rights
• Tradable fishing quotas

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Incentive based policies

• Government sponsored incentives
• Taxes or fees in markets where the price is too
  low
• Examples fees for fishing in public waters
  grazing on public lands
• Subsidies in markets where the quantity is too
  low
• Examples providing free tree saplings for soil
  conservation investments by farmers

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Direct public action

• Command and control refers to government issuing
  orders, promulgating regulations regarding
  access and use of natural resources
• Examples size and quantity restrictions on catch
  in fisheries habitat protection to preserve
  endangered species

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Direct public action

• Direct public production of public goods and
  services that the market would not produce enough
  of.
• Examples National parks, wildlife refuges and
  forests public beaches flood control projects

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Market based incentives Property right policies

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

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Property right structures

• Private property access and use are under the
  control of an individual person or corporation
• State property a unit of government controls
  access and use
• Common property a specific group of individuals
  jointly have access and use rights
• Open access absence of any property rights

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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

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Rights assignments methods

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

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Rights assignment methods

• Does it matter to the final outcome how or to
  whom the rights are assigned?
• Ronald Coase argued that it will not matter
  because a post assignment market exchange will
  occur if the initial assignment does not go to
  those who value the resources the highest
  Coase Theorem

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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

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Coase theorem Solved problem 1

• 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?

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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.

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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

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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 Mr. Robin. Rights have been assigned to the
  highest valued use

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Coase theorem

• Complications
• Transaction costs
• Income effects
• Enforcement costs

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Complications high transactions costs

• Example of transactions costs preventing post
  assignment exchange
• Rights to logging in a 10,000 acre forest are
  assigned by giving each of 100 families in the
  area rights to 100 acres.
• The net benefits to each family of logging one
  acre using their own labor and capital are 40
• Total net benefits from logging by the families
  40 10,000 400,000

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Complications high transactions costs

• Total net benefits to Logging Giant Inc. of
  logging are 500,000, 50 per acre
• If rights assigned to LG Inc., it harvests the
  timber
• If rights assigned to families, LG Inc. must
  negotiate for the sale of the rights. Would have
  to pay at least 40 per acre.
• If the costs of negotiating each trade exceed 10
  per acre, the cost per acre would exceed 50, the
  most LG is WTP
• No post assignment exchange, rights remain with
  families, yielding less net benefits!

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Complications income effects

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

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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.

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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

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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.

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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!

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I.b. Government sponsored incentive policies for
external costs

• Use taxes, fees or charges to correct for the
  presence of external costs.
• Forces producer to face the full costs of
  production.

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External cost example revisited

• Socially efficiency dictates producing quantity
  at which MSC WTP
• Add a fee payable to the government equal to the
  external cost, MSC-MPC at the socially efficient
  quantity
• 112.5-87.525

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External cost example revisited

• MSC MPC at q of 150 is 112.5-87.525
• A fee of 25 makes MPC MSC at the socially
  efficient quantity.
• Producer than chooses quantity where MPCfee
  WTP, i.e. 150!

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I.b. Government sponsored incentive policies for
external benefits

• Offer a subsidy to either the producer or the
  buyer
• A subsidy to the producer lowers costs, shifting
  supply to the right
• A subsidy to the buyer lowers price, shifting
  demand to the right

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Subsidy to producer

Quantity of trees
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Subsidy to buyer

Quantity of trees
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Direct public action- commands

• Command/regulations a legal solution to market
  failure
• Government regulations mandate socially optimal
  level of production
• Assumption that laws and regulations will be
  obeyed

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Direct public action - production

• Government produces or contracts for private
  production of a public good or service
• E.g. flood control project Army Corps of
  Engineers usually prepares preliminary design
  alternatives and contracts for final design and
  construction

35
Direct public action

• Problems faced by government planners
• Information on WTP and costs
• Enforcement
• Rent seeking by private interests
• Lack of incentives to choose efficient policies
  among government planners

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Direct public action

• Will government action remedy market failure or
  perhaps worsen the allocation of resources?
• Should compare results from market failure with
  results from imperfect public policies.

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Direct public action

• Principle of subsidiarity assign responsibility
  to the lowest level of government possible
• Land use to local government
• Inland fisheries to states
• Marine fisheries to federal