The Answer Desk has been busy in the first couple of days. Just so you know how it works, when a question is submitted, John or I will try to track down an appropriate guest contributor to answer the question. Sometimes this will go quick, sometimes it might take a few days (weeks?). We'll try to be as quick as we can. On to the first answer...
Lauren asks (I feel like Dear Abby):
We keep hearing about how stronger property rights are a prerequisite to many market-based solutions to environmental problems. What is the underlying theory behind this, how is it being applied to various problems, and how will the recent Supreme Court decision on eminent domain affect these types of solutions?
Since I've been one ramming the property rights mantra down your throats, I'll take a shot. I can definitely answer the first two parts of the question, for the third part I'm going to give a brief response and then punt and hope a reader knows more about it than I do (shouldn't be hard).
The underlying theory behind property rights establishing market outcomes (especially in an environmental or natural resource setting) is the Coase Theorem. In the 1960's, Nobel Prize winning economist (er...lawyer) Ronald Coase argued that in the absence of transactions costs and impediments to bargaining, the only requirement for an efficient resolution to a dispute is the assignment of property rights to one party or the other. OR, another way to read it, in the presence of of significant transactions costs or impediments to bargaining, simple assignment of property rights followed by one-on-one bargaining will not result in an efficient outcome.
Coase argues that if transactions costs and impediments to bargaining are minimized, it doesn't matter to whom the property right is assigned, it just matters that the property right is assigned to someone. Take a simple example. Suppose you live in a condominium complex and your neighbor has a dog that continually uses the common area inform of your place for 'waste disposal.' You confront the neighbor and argue 'the area in front of my condo is for my enjoyment. Your dog is making it less pleasant for me. Please stop.' The neighbor counters 'That area is community property and I can use it as I see fit.'
What is the solution? Coase would argue that the solution is to tell someone they are right (it doesn't matter who) and then let them bargain. Suppose we assign the property right to you. Then the neighbor can offer to pay you to accept the waste. You can either accept the offer or deny it. Or suppose we decide in favor of the neighbor. Then you can offer to pay the neighbor not to use the common area. The neighbor can accept or deny. The point is, assuming both parties are willing to negotiate and are economically rational (i.e. will accept an offer for which the benefits exceed the costs) both solutions will result in the exact same outcome.
Environmental economists have interpreted and adapted the Coase Theorem to mean that if property rights systems can be appropriately defined, there might not be a need for external regulation to solve all environmental disputes. Probably the best example of Coase being applied in a practical setting is the tradeable permit system for SO2 emissions (The EPA's Acid Rain Program). The government established property rights for SO2 emissions: firms have the right to emit S02 as long as they have a permit to cover the emissions. Then the market is open for bargaining. Theoretically anyone is allowed to transact in this market (John may feel differently).
Whew...almost there. What about eminent domain? Now I'm getting into speculation because I'm not a lawyer (but I could play one on TV). I would think that the recent Supreme Court ruling loosening the conditions for application of eminent domain will serve to slightly undermine the application of the Coase Theorem in property disputes. It seems that now there is a little more uncertainty associated with the absolute property right and as such it might undermine the bargaining power of those holding the property. But, my guess is that local municipalities are going to require a lot of convincing before they simply take private property for private development.
So, I tend to think this one isn't that big of a deal...but I could be wrong. Anyone out there know more about eminent domain and economic outcomes?
