New Environmentalism

Energy and Natural Resources | Policy Reports

No. 201
Wednesday, January 01, 1997
by Lynn Scarlett

Creating a New Paradigm: The Role of Incentives

What induces people to become good stewards of the environment and to take responsibility for resources under their control? One inducement is the institution of property rights. Another is the marketplace.

Property Rights. Commonly owned resources may sometimes be turned into privately owned resources. Consider Hawk Mountain in Pennsylvania. Some 60 years ago, Mrs. Rosalie Edge was concerned about the shooting of hawks at this mountain flyover, where thousands of the birds passed each year. No government agency shared her goal of preserving the hawks, and many states paid bounties to encourage the killing of such birds of prey. Moreover, no national conservation organization shared her goal. So Rosalie Edge and a few like-minded people bought the mountain and established a preserve.25

Property rights create conditions of stewardship, linking individual choices with the consequences of those choices. If as a farmer I allow my soil to erode, my prospects for a bountiful harvest diminish. If as a forester I chop down all my trees today, I have none tomorrow to sustain my livelihood. But property rights do more than create incentives for stewardship. They also create spheres of autonomy. They allow individuals such as Rosalie Edge and her friends to pursue their values, even when the rest of society does not share those values.

The Marketplace. Market prices are signals for conservation. They are continuous loops of information that give resource users an incentive to do more with less. The higher the price, the greater the incentive. Producers of goods in competitive markets have been responding to price signals for centuries. Their efforts come in big and small steps. For example:26

  • Steel high-rise buildings today require 30,000 tons of steel, whereas several decades ago they required 100,000 tons.
  • Soda can manufacturers today use 33 pounds of metal to make 1,000 cans instead of the 164 pounds required in the 1960s.27

Sometimes using less means using something different. Replacing copper cables with fiber-optic cables has effected monumental savings of materials. It takes around 60 pounds of sand to produce a fiber-optic cable that can carry 1,000 times more information than a cable made from 2,000 pounds of copper.

These are little-known environmental success stories. They represent what the Office of Technology Assessment has dubbed "environmental triumph." Many such triumphs occur in small, incremental, almost invisible steps. The potential for material-use reduction is both unpredictable and location-specific. It depends on what Hayek called the dispersed and fragmented knowledge of experience. It also depends on a decision-making setting that enhances entrepreneurship, competition and innovation.

Tragedy of the Commons. Not every problem can be solved through private property rights and markets. Indeed, most environmental problems emerge from circumstances in which property rights and responsibilities are either nonexistent or are not well defined, enforceable and transferable. One economic analysis of the "environmental commons," made famous by Garrett Hardin, concerns herders who share common grazing land. Herders who overgraze commonly owned land get the immediate personal benefits of overgrazing. Yet the land degradation that results is a cost that will be shared by all herders, not just those who cause it. Thus herders who overgraze get the full benefits but bear only part of the costs of their actions. Conversely, herders who show restraint in order to protect the land bear the immediate cost of their forbearance. Yet the benefits of their good behavior (long-term preservation) are shared by all herders, not just those who cause the preservation. Everyone, therefore, faces perverse incentives to overgraze. To the degree that they act on those incentives, environmental destruction results.

In this analysis, because the land has no owner, it has no protector or defender. As a result, self-interested behavior often leads to environmental degradation.28

The characteristics of this problem have wide application. Most of us would not consider dumping trash in our neighbor's backyard. But since air and water are commons to which we have free access, many of us use them as dumping grounds for all manner of waste. Air, water, public lands and most species of mammals and fish have no clearly defined owners and therefore no protectors or defenders.29 When people use these resources, they derive private benefits, but the costs of use are often borne collectively.

Sometimes environmental problems can be solved by making rights and responsibilities explicit. For example, if grazing land is converted from common property to private property, the owners have a personal interest in preserving it from degradation. This interest motivates them to balance current land use against long-term preservation. Often, however, private solutions are not feasible. For example, no one owns an air basin. It has no stewards to object to polluting air emissions. Thus decisions about the "clean air" level for an air basin are necessarily collective. These decisions, as well as decisions about clean water and other commonly held resources, often result in conflict.

The Political Commons. What can be done about the tragedy of the environmental commons? One option is government regulation. Yet the record of government intervention is spotty. Studies reveal that many government agencies charged with protecting the environment do an inadequate job.30 These include the U.S. Park Service, the U.S. Forest Service, the Bureau of Land Management, the Army Corps of Engineers, the Atomic Energy Commission and its successor, the Department of Energy, the Federal Highway Administration and the World Bank.31

One reason why government solutions fail is that the political process is itself a commons.32 People who support policies that impose costs on the entire community bear only a small part of the cost of the policies. Yet they may derive personal benefits. Conversely, public-spirited people who oppose unwise legislation bear the full costs of their opposition. But if they are successful, the benefits of their efforts are mainly enjoyed by others.

Each of us tends to act on the basis of personal rather than societal benefits and costs. As a result, political decision making all too often results in environmental harm. In general, the political process generates three types of distorted incentives.

First, legislators have an incentive to pass laws proclaiming lofty environmental goals that seem to reflect the public's abstract values but that avoid addressing the requisite trade-offs. This is because making these trade-offs inevitably produces criticisms that the policies are either too lenient or too strict. Thus legislators delegate to agencies the task of translating the vague language of law into specific regulations. For instance, in the Endangered Species Act of 1972 Congress directed the United States Fish and Wildlife Services (USFWS) to strictly regulate the killing or harming of endangered and threatened species. However, the USFWS was given discretion over how to determine when a species is to be considered endangered and what was meant by harm. Congress drew praise for writing such a strong act, while the USFWS was left to fend off criticism and lawsuits concerning its determinations of what counts as endangered and what counts as harm.

Agencies also face a political commons problem. There is often only a weak link between the effectiveness of decisions that regulators make and their own well-being and career success. This means they have little incentive to develop effective and efficient regulations. For example, because part of the revenues from logging on national forests flow directly into the U.S. Forest Service (USFS) budget, the forest service promotes logging on national forests. It routinely allows logging in areas where the management costs exceed the timber revenues. The budgetary shortfall for below-cost logging is borne not by the USFS but by the general treasury and ultimately the taxpayers, yet part of the revenues flow directly USFS coffers. Worse, environmental damage is often associated with below-cost logging operations on steep slopes. This damage is not accounted for by the USFS, but the public suffers from damaged waterways, decreased wildlife populations and increased landslides.

Finally, lobbyists have an incentive to push for laws that benefit the special interests they represent, even if these laws impose large costs on the rest of society. For instance, when environmentalists push for "no disturbance" of sagebrush habitat in Southern California, they realize the full benefits of their lobbying efforts, while imposing costs of increased fire danger and higher housing costs on everyone living in the area. And, for example, when organic cotton growers lobby for mandates against the use of pesticides and gain market share for organic cotton, they impose higher costs for clothing on everyone else.

Incentives of all three groups that play a role in the political process combine to create a kind of political commons in which accountability for poor decisions is weak and personal rewards for good decisions are limited. Because people face perverse incentives in the political commons for much the same reason they face perverse incentives in the environmental commons, the law is degraded for the same reasons as commonly owned grazing land.

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