EFL Lesson 7

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EFL Lesson 7

• Property rights
• Is the environment different?

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IS the environment different, or is it like other
goods and services?
Question
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ERP 1 People choose, and individual choices
are the source of social outcomes.
Review

• Scarcity necessitates choices not all of our
  desires can be satisfied. People make these
  choices based on their perceptions of the
  expected costs and benefits of the alternatives.

Is environmental quality scarce? (Does it use
resources?)
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ERP 2 Choices impose costs people receive
benefits and incur costs when they make decisions.
Review

• The cost of a choice is the value of the
  next-best alternative foregone, measurable in
  time or money or some alternative activity given
  up.

Do decisions about the environment have
opportunity costs?
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ERP 3 People respond to incentives in
predictable ways.
Review

• Choices are influenced by incentives, the rewards
  that encourage and the punishments that
  discourage actions. When incentives change,
  behavior changes in predictable ways.

Do peoples choices about environmental quality
respond to incentives in predictable ways?
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ERP 4 Institutions are the rules of the game
that influence choices.
Review

• Laws, customs, moral principles, superstitions,
  and cultural values influence peoples choices.
  These basic institutions controlling behavior set
  out and establish the incentive structure and the
  basic design of the economic system.

Are the incentives that influence peoples
choices about environmental quality in shaped by
environmental laws and regulations (the rules of
the game)?
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ERP-5 Understanding based on knowledge and
evidence imparts value to opinions.

• Opinions matter and are of equal value at the
  ballot box. But on matters of rational
  deliberation the value of an opinion is
  determined by the knowledge and evidence on which
  it is based. Statements of opinion should
  initiate the quest for economic understanding,
  not end it.

Is this true of opinions about the environment?
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IS the environment different, or is it like other
goods and services?
Question

• YES!

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IS the environment different, or is it like other
goods and services? YES!
Question

• So, what does that mean?

• We can use economic reasoning to think about
  environmental issues and problems
• Institutions (rules of the game)/incentives
• Opportunity cost
• Price effects laws of supply and demand
• Marginal analysis

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Activity The Fish Game
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Institutions / Incentives Property Rights

• Property Rights The formal and informal rules
  governing the ownership, use, and transfer of
  goods, services, and resources.
• Property rights may be
• Private
• Common
• Collective

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Property Rights

• Think of property rights as the privileges and
  limitations of ownership.
• Full property rights are
• clearly defined
• exclusive
• transferable
• enforceable

Private Property
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Common OwnershipThe Tragedy of the Commons

• the common lot

• the farmers lot

Incentives associated with common ownership
encourage overuse and exploitation
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What about collective (public) ownership?
Collective property is like common property in
that everyone owns it, but decisions about the
use of collective property are made through
government.

• Which is cleaner
• the public park or your back yard?
• the bathroom in your house or a public restroom?
• Why is that?

If everybody owns it, its as if nobody owns it.
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Commercial Salmon Fishing
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Year Session Length (days) vessels Catch
(M lbs.)1980 65 333 5.7 1985 22 334
9.61990 6 435 8.61991
19921993199419951996
British Columbia Halibut Fishery

• Introduction of ITF (Individual Tradable
  Quotas)

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Year Session Length (days) vessels Catch
(M lbs.)1980 65 333 5.7 1985
22 334 9.61990 6 435 8.61991
214 433 7.2 1992 240 431 7.61993 245
351 10.61994 245 313 9.91995 245 294
9.51996 245 281 9.5
British Columbia Halibut Fishery

• Introduction of ITF (Individual Tradable
  Quotas) Source Fraser Institute

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Bottom Line Private property arrangements, where
feasible, have the most environmentally friendly
incentives IF people value the environment.

• People take better care of things they own.
• Ownership provides incentives for wise use.
  (Why?)
• Ownership provides incentives for conservation?
  (Why?)

Private Property
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Commercial Salmon Fishing

• Fishermen pay for the boats and gear but when
  they catch and keep fish, they dont pay for the
  reduction to the stocks of fish (future fish
  available)

• This could be solved by using IFQs, but the govt
  refuses to use this solution because of disputes
  over who should get what share of the IFQs and
  the profits from fishing.

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. . . BUT!

• What if for some things it is not easy to assign
  property rights that are
• clearly defined
• exclusive
• transferable
• enforceable?

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When Markets Work Well An Exchange of Costs
and Benefits
But . . .
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Coal-Fired Power Plant
Who owns the air?
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Negative Externalities

• . . . COSTS that spill over onto people who dont
  receive the benefits.

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Positive Externalities
Benefits that can be enjoyed by People who dont
bear the costs.
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Positive ? Negative ?
Might depend which way the wind blows !
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Flu Shots - Oh, Boy! (?)
You definitely bear the cost but are you the
only one who benefits?
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Externalities are NOT paid for in the market
transaction

• Just as you dont pay for external costs you
  impose on others . . .

• You cant charge for external benefits you
  provide.

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• How do we prevent negative externalities from
  occurring?

2 helpful tools markets and property rights
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Other options for eliminating or avoiding the
externality are

• Fines and laws
• Internalizing the cost (clean it up yourself) and
  benefits
• Moral persuasion
• In ALL cases, the pertinent question is which is
  the least-cost alternative?

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The Big Ideas from Lesson 7

• The tragedy of the commons arises when property
  rights are not well-defined or not enforced.
• Well-defined property rights increase the value
  of resources and products.
• Many environmental problems arise because
  property rights are not clearly defined or secure
  and prices cannot effectively signal the marginal
  costs to the marketplace. These conditions may
  create a role for government action.
• When property rights are well-defined and cheaply
  enforceable and transferable, private voluntary
  transactions between individuals help to create
  wealth in society.