Economist: Property rights an underappreciated response to resource issues

Indiana University political scientist Elinor Ostrom and her colleagues and students famously showed that people and organizations can work together to prevent overuse of natural resources through the creation of informal institutions and mutually agreed-upon rules.

But what happens when forces compete for “open-access resources” in larger settings that don’t respond to such informal governance? How can we keep from exhausting limited supplies of essential resources such as water, clean air, energy supplies and fishery stocks?

Gary Libecap

Gary Libecap

Economist Gary Libecap, who presented the Ostrom Memorial Lecture this week at IU Bloomington, argues the answer may be to think in terms of competing property rights – rights that can be bought, sold and traded to establish and maintain the value of the resources.

“The idea is, when parties don’t own the resource, they do not bear the full social cost of their actions, and they will use too much of it or too little,” he said. “A clear way to deal with that is to assign ownership. If I own the resource, I bear the full cost of its use; and if I’m unconcerned with that, it will be more valuable to someone else, who will buy it from me.”

Libecap, a professor at the Bren School of Environmental Policy and Management at the University of California, Santa Barbara, presented the second annual Ostrom Memorial Lecture on Wednesday at the IU Maurer School of Law. The lecture honors the memory of Elinor Ostrom and Vincent Ostrom, influential and longtime IU faculty members who both died in 2012.

In the lecture and an interview, Libecap elaborated on his ideas, which he said build on the Ostroms’ work in analyzing governance, institutions and natural resources. He drew primarily on the work of economist Ronald Coase, including Coase’s influential 1960 paper “The Problem of Social Cost.”

Coase brought a novel approach to addressing what happens when the actions of businesses produce effects on others, a problem that economists call externalities. Historically, Libecap said, the response was for government to regulate or tax the harmful activities – the principle of “polluter pays.”

But while the approach sounds good, Libecap said, it often doesn’t work as well as it should. Taxes rarely reflect the true social costs of the activity that is being taxed. And regulations are often poorly designed, ineffective and wasteful but persist because affected parties resist change.

Coase argued that it may be more effective and create more overall social benefits to think of such situations as a market in which the polluter and the people affected by pollution can bargain for a solution. If the government were to assign clear property rights – a right to pollute or a right to be free of pollution – the parties could strike a deal that reflects actual costs and benefits.

In recent decades, Coase’s ideas influenced the development of “cap and trade” regulatory schemes that have been used in areas such as air pollution and fishery rights. But many of those attempts, Libecap said, haven’t been effective because they were “over-engineered” or poorly designed.

One problem, he said, is that governments typically haven’t assigned true property rights but only credits or permits that can be revoked or modified, which weakens their market value. Another is that too many restrictions are placed on selling and trading the permits.

“This undermines what a property right is supposed to do, because it makes it very uncertain,” Libecap said. “The value of a property right is to instill incentives for parties to take stewardship measures, conserve the resource and think long term. They won’t do that if the value is uncertain.”

Libecap cited Vincent Ostrom’s work on “polycentric governance” to raise questions about the role of government officials who design and implement regulatory schemes. In addition to business-related “market failure,” he said, economists should examine “what can loosely be called government failure.”

Government officials, he said, “don’t own the resource. Therefore they do not fully capture the costs and benefits of the resource. So you might get too much regulation or too little regulation.”

Libecap said elected officials are likely responsive to voters, so they do have incentives to approve regulations that are fair and equitable – assuming the interest groups that lobby for and against them are competitive and broadly representative of society’s interests.

But the situation is more difficult, he said, with the career government agency employees who actually do the work of drafting and carrying out regulations. It isn’t clear what signals and incentives they are likely to respond to or what motivates them to make decisions.

“I’m not saying I have an answer to these problems,” Libecap said. “What’s astonishing is how little focus there has been on these potential sources of social costs from politicians and agency officials.”

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