New Environmentalism

Energy and Natural Resources | Policy Reports

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

How Should Collective Decisions Be Made?

Environmentalists face a dilemma: when property rights are not well defined, private voluntary action can lead to environmental degradation. And even when property rights are well defined, managing property to maximize the return on investment sometimes produces environmental impacts on neighboring ecosystems. Yet transferring decision-making power to government creates new problems because the political system is a commons. And governments typically produce one-size-fits-all policies, even though environmental problems vary by circumstance and location.

An Environmental Covenant

To solve this dilemma and improve collective decision making, we propose a covenant between citizens and government. Such a covenant would help to "fence in" collective decision making, to ensure that decisions promote environmental goals as well as other goals and that such decisions are fair and reasonable.

A covenant between the public and private sectors could function in the political commons as property rights do in the environmental commons. It would clarify rights and responsibilities, shaping the incentives of decision makers. The environmental covenant we propose comprises both a set of principles to determine how decisions are to be made and a set of filters to determine the context in which they should be made.

Adherence to the covenant would ensure that those most affected by a particular environmental problem make the relevant decisions. The covenant would erect barriers against those who seek private benefits at others' expense. It would reduce conflict, enhance innovation and broaden the expression of individual and local values.

Principles for Collective Decision Making

In the marketplace, property rights and market prices create constraints on the choices people make. They link decisions about resource use to the consequences of those decisions. Poor decisions reduce property values and lower returns on investment. Good decisions improve the long-term value of assets and increase returns on investment. The principles offered here create a similar though less self-sustaining set of constraints on decision makers. Because they reflect widely held environmental value, the constraints reduce conflict and produce desirable benefits at affordable prices.

Individualism Principle: Other things being equal, when individuals make their own decisions about what values to pursue, conflict is reduced and the well-being of society is enhanced. Before thrusting a problem or environmental issue into an arena of collective decision making, we must first ask whether the problem can be resolved spontaneously by individuals or through market arrangements. Do we need, for example, a single rule demanding that people eat butter, not margarine? Do we need a single rule dictating that all packaging be recyclable? Or reusable? Or made of glass? Is a universal rule likely to lead to the best results?

Smoking no doubt has some impact beyond the sphere of the individual smoker. However, this impact is typically confined to a relatively narrow domain. Moreover, much smoking takes place indoors, in which case the impact is restricted to those sharing that indoor space. Thus, smoking is a divisible problem. One indoor space can accommodate smokers while another accommodates nonsmokers, and market arrangements can satisfy this demand for diversity.

The individualism principle promotes personal empowerment over the status quo. It enhances prospects that even radical environmental values can be pursued rather than tempered or undermined as they often are in collective decision processes.

Decentralization Principle: When decisions must be collective, the best place to make them is at the lowest possible level of government. When collective rule making is necessary, we should ask whether the problem is local, regional, national or international.

In contrast to tobacco smoke, consider ground-level smog generated largely through vehicle emissions. Smog often disperses widely over an air basin. It is not possible for me to have one level of smog while my neighbor has another. And traditional tort remedies probably are not adequate to address this problem, since it is difficult to identify the polluter. Indeed, the polluter is often "everyone," since people drive cars and cars now account for as much as half of remaining air emissions. Hence, some form of collective decision may be required. But must the rule that emerges become national? Or is it feasible for different locales, in different air basins, to establish their own rules?

The principle of decentralization requires that the decision be made by those directly affected by it. For example, hazardous waste sites demonstrate the importance of decentralization. So-called brownfields are sites identified as having some toxic contamination; many are abandoned factory locations. Under current federal law a number of these sites are in limbo, no longer used for their former purposes but unavailable for new uses. They are local blights.

Often, local communities would like to see these sites redeveloped. Many of them have low levels of contamination or problems that could be remedied quickly and cheaply. But current federal cleanup standards deter redevelopment because they don't take into account realistic potential uses of these sites. Bringing cleanup decisions back home allows local people to consider local conditions, evaluate the potential harms and benefits from redevelopment and devise their own cleanup plans.

Decentralization improves environmental policy in at least two ways. First, those closest to the problem have the most relevant information about it. Second, the harms it causes, the benefits resulting from the remedies and the trade-offs or costs associated with different remedies are felt by people at the point of impact. Bureaucrats in Washington - or even in state governments - are too remote to be personally affected.

Whether decentralized decision making is appropriate depends on how local a problem is and whether having different rules in different areas would create significant coordination problems. For cleanup standards at a specific Superfund site, coordination problems are likely to be minimal: the problem is local, its impacts are local and remediation activity can be concentrated. For ground-level ozone, the problem is less discrete.

Firms often balk at decentralization, saying that it is costly or even impossible to meet 50 different standards in 50 different states. It is unwieldy for firms to meet different labeling requirements or material input standards - for example, state-specific recycled content requirements - or to produce products that meet diverse safety or emission standards.

The solution is to eliminate input and output regulations. For many input and output decisions, price signals in the marketplace already function rather effectively. For others - for example, air emissions - command-and-control mandates may be inappropriate. Emission charges, an alternative approach, would allow firms to decide whether to respond with a single control technology in all their plants or to tailor their remedies to specific locations. And sometimes, where a potential harm is well understood, poses acute dangers and varies little by location, a universal federal rule establishing acceptable levels may be appropriate.

Do No Harm Principle: Action should be taken only where it is clear that more good than harm will result. This principle is common sense, but it is often violated. The reason is that the principle often requires us to do nothing, especially where the cause and effect are uncertain. The principle defies the natural human inclination to do something, even if it is the wrong thing, in the face of a problem.

For example, both the USFWS and the FDA regulate the use of pesticides and residues in food, on the theory that they are carcinogenic and thus a threat to human health. Evidence suggests that the risks are trivial, and the regulations are costly. They lower the output of fruits and vegetables and raise their costs to consumers. Further, fruit and vegetable consumption is a major weapon in the war against lung, stomach and colorectal cancer and other illnesses. The National Research Council's Committee on Diet and Health has emphasized that the increased risk of exposure to pesticides is much lower than the potential benefits from greater consumption of fruits and vegetables.33

Some people still worry about even these small risks. For them, the marketplace provides options, since an unmet need is an invitation for an entrepreneur to succeed. In the realm of pesticide-free food, farmers are responding with organic produce. Also, labeling programs are helping consumers know what they are buying and agricultural extension programs are helping farmers reduce pesticide use without jeopardizing productivity or food quality.

Balancing Principle: Where decisions must be made collectively, the benefits of a chosen policy should always exceed the social costs. The world is full of opportunity costs. If we undertake x, we cannot do y at the same time with the same resources. This is why people compare benefits and costs (if only subconsciously) almost continuously. Society as a whole should do the same.

Cost-benefit analysis is a comparison of the estimated costs of an action with the estimated benefits it is likely or intended to produce.34 Almost all business decisions involve some measures of cost vs. benefits. Yet many government decisions are taken without adequate consideration of either.35

Many critics argue that one cannot place a dollar value on a human life or a natural resource. But that is not the intent of cost-benefit analysis. Rather, such analysis permits comparison of various options, all of which may be beneficial in some way but not all of which can be undertaken simultaneously.

Failure to engage in cost-benefit analyses is bad for humans and for nature. For example, researchers have found that wasting economic resources reduces our life expectancy.36 In general, the wealthier a society is, the healthier its citizens are likely to be and vice versa. According to one estimate, for every reduction in national wealth of $3 million to $8 million, one additional premature death will occur.37 Spending money on one activity, even if it reduces a particular risk, makes those dollars unavailable for other risk-reducing expenditures that might have produced greater gains in public safety. Even when the goal is protecting human health and ecosystems, at some point the marginal benefit derived from spending one more dollar is unjustified in light of other possible uses for the money.

Efficiency Principle: Other things being equal, social goals should be attained in the least costly way. All resources are scarce. As a general rule, there is little or no excuse for wasting resources in the pursuit of even the most noble goal. This is even more true when the resources used are not one's own. The principle is both common sense and common courtesy, yet it is often ignored in the public policy decision-making process. The government should always strive to achieve social goals in the least costly manner because when resources are squandered to achieve a particular goal, fewer resources are available to achieve other goals. For example, each dollar spent above what is absolutely necessary to attain the desired level of clean air is unavailable to reduce other environmental hazards or human health risks.

Flexibility Principle: Individuals and firms should be free to meet regulatory requirements in the least costly way and to implement new and better ideas. Flexibility in decision making offers four benefits. It facilitates trade-offs that involve complex decisions, maximizes opportunities for expression of individual values, enhances innovation and encourages the efficient use of resources. The more complex the problem, the less likely it is to yield to edicts issued on high. And pick-the-winner technology strategies force everyone to suffer from bad choices and deter entrepreneurs from developing better ones.38

Compensation Principle: Where possible, people should be compensated when they are required to provide public amenities. Sensible as this principle is, it is routinely violated. Consider some regulatory decisions made under the Endangered Species Act, wetlands rules and other environmental laws:39

  • Brandt Child of Moab, Utah, hoped to develop campgrounds and a golf course on his property; the federal government used the Endangered Species Act to block his plans because the rare Kanab ambersnail resided in the springs on his land.
  • A Baptist congregation in Florida wanted to build a new church and adjacent parking lot; federal officials determined that the site was more important as a wetland.
  • Retiree Margaret Rector of Austin, Texas, sought to sell 15 acres of land; the government blocked the sale because the land was a potential habitat for the black-capped vireo and the golden-cheeked warbler.

These are examples of policies establishing certain public amenities or public goods. Yet the government offered these people no compensation. It simply ordered them to leave their property in its original condition and thereby provide ecological benefits to the rest of us. No matter how vital or important the activity, it is improper to impose the costs of providing a public amenity on a single individual or small group. Instead, the cost should be spread over all who benefit from the policy. This is what we do in virtually all other cases where government uses private property to provide public goods such as schools, roads, airports and defense facilities.

The compensation principle is more than an issue of fairness. It gives property owners a financial self-interest in protecting habitat and preserving endangered species. In the absence of compensation, property owners are penalized by preservation and rewarded by extinction.

For example, in the United States we have taken a regulatory approach to eagle protection by imposing a "thou shalt not kill" command. Yet this regulation has created perverse incentives for ranchers whose lifestock is killed by eagles. Their incentive is to surreptitiously destroy the birds rather than to act as their stewards. Why? Because preserving the eagles means losing their livelihoods. In some cases their only option is to break the law in order to maintain the economic viability of their ranches.40 And when the laws are such that they cannot be obeyed, then civil disobedience becomes the norm. In the United Kingdom, some eagle lovers tried a different tack, one designed to harness rather than undermine the marketplace. They hired biologists to assess the extent of farmers' losses from eagles preying on livestock. They determined that such losses could mean the difference between solvency and bankruptcy for some marginal farmers. Armed with this information, they asked an insurer how much an insurance policy against livestock loss from eagle killings would cost. Based on the biologists' data, the insurer came up with a premium. The eagle lovers purchased the insurance, then asked farmers not to destroy eagles who were preying on their livestock. Instead, they invited the farmers to simply provide proof that eagles had killed their livestock so the insurer could compensate them. The result: the eagle lovers' values were brought into consonance with the farmers' pursuit of their livelihoods.

The idea of compensation is not about paying people not to pollute. Compensation is for situations in which laws result in "taking" (sequestering or withdrawing) land from usage, with the burden falling on the landowner and the benefits accruing to the public. Compensation for takings also is not intended to apply to health and safety regulations.41 The long tradition of nuisance law and property rights protections precludes one property owner from imposing harm on others unless those harmed agree to that nuisance in exchange for a benefit.42 Air, water and other pollution effects fall into the age-old common law categories of nuisance or trespass. The default rule is that producers don't have a right to pollute. Hence, regulations to limit pollution are not a matter for compensation.

Filters for Collective Decision Making

Other things being equal, we should all prefer policies whose benefits exceed their costs. When the reverse is true, there is an undesirable waste of resources. However, we do not get good public policy if cost-benefit rules are imposed inappropriately. For example, it is unwise for the federal government to try to make cost-benefit decisions in cases where local individuals or businesses have all the relevant information. Conversely, we do not want individuals or local businesses imposing their own cost-benefit calculations in circumstances that are national or worldwide.

Decision-making filters help us determine the appropriate context for applying the principles discussed above. Unlike the principles, which are based on value judgments, filters are used to sort objective evidence. Whereas principles are used to answer should questions, filters are used to answer fact questions. The following are some examples:

Consensus filters partition problems based on whether a consensus exists. Lack of a national consensus creates a presumption in favor of the decentralization principle and local decision making.

Divisibility filters partition problems based on the degree of divisibility. Problems that have no national or global effects and that lack a national consensus also fall to local decision makers.

Knowledge filters group problems based on society's knowledge of cause and effect of a problem. If the knowledge is limited, the do no harm principle suggests that the justification for acting on those problems is also limited.

Risk filters group problems based on the degree of risk they pose. When the threat to health or safety is high, then the flexibility and balancing principles suggest a strong case for strict regulation. If the threat is low, the same principles indicate that government should set standards and let companies decide how to meet them.

Strategy filters partition problems based on the potential for different types of solutions. For example, to reduce a pollutant we could regulate it, use the tort system, impose taxes or fines or create tradable property rights. Once potential solution strategies are identified, we could employ the balancing and flexibility principles to choose among them.

Ownership filters partition problems based on the degree to which property rights are defined and protected. If resources are owned, using the individualism and compensation principles can improve social well-being by clarifying and enforcing responsibilities for environmental wrongs and by rewarding individuals that positively contribute to environmental quality. Where resources are unowned or property rights are not well-defined, it is appropriate to apply other filters and principles that follow from their application.

Information flow filters separate problems based on the potential for enhancing channels of information. Many problems can be solved by improving the flow of information so that individuals can make wise decisions. Once opportunities are identified, the principles can be used to help choose among them. When information flow solutions do not exist, it is appropriate to look at other filters.

These filters help us establish decision-making hierarchies. For example, we would want to consult the consensus filter and the divisibility filter before applying the decentralization principle. That is, we would want decentralized decision making only after we first determine that there is no national consensus and that the problem is truly divisible. We also would want to consult the divisibility filter before we apply the balancing principle. A true balancing of costs and benefits can take place only at the level of decision making where all relevant factors are being considered.

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