 Thanks very much for coming to this talk on environmental resource economics. My name is Timothy Terrell. I teach economics at Wofford College in Spartanburg, South Carolina. We're very happy to have made it to the NCAA tournament and made a good showing there last season. That's about all I know about basketball. This is actually one of my favorite subjects and I don't teach the environmental economics course at Wofford, but I do teach a course on regulation, so I use that as my foot in the door to teach about this kind of thing when I get an opportunity. It's an area that I focused on when I was in graduate school here at Auburn because it's an area where I think that the perception is that there are some fairly serious problems for those who want to see free markets, but at the same time, what do we do about these kinds of problems like resource use where there might be deforestation? What do we do about the common perception that we're going to run out of oil reserves or that we're going to fish the oceans out or what do we do about recycling? Those are issues that keep coming up in public discourse, and I think it's important for us to think through those things with a mind toward how we can integrate markets and the way human beings react to incentives. The other key area here that we'll have to cover is the externality issue, the spillover effects, any activity that we conduct, whether it's consumption or production, is going to produce some kind of side effects. That's everything from smoking cigarettes around bystanders to paper mills that generate a kind of odor, fireworks, litter on the side of the road, water pollution, so all of these issues are ones that we're hearing about all the time, and it's helpful, I think, to give at least a quick rundown of some of the ways we can think about these more intelligently. The core issue for both of these is property rights. We're talking about resource use and trying to avoid waste in the use of forests or underground oil resources or water, or whether we're trying to figure out a way to deal with an externality problem, a pollution problem. I think that we have to keep our eye on what's happening with property rights. This is an aerial photograph taken of the border region between Haiti and the Dominican Republic, and you can fairly easily see the border there, even without some sort of fence or flag or anything to point that out because it's very clearly deforested on the Haitian side of the border, and the Dominican Republic side is carpeted with greenery. Trees have not been cut down to the same extent on the Dominican Republic side. If you look at the Economic Freedom Index, which the Fraser Institute puts out every year or two, I think, they rank each country according to how much economic freedom each country has. We see that there's a pretty significant difference between these two countries with regard to their economic freedom. Haiti ranks number 103 in the most recent index, and the Dominican Republic ranks number 62. Even though the Dominican Republic is not as economically free as, say, the United States or Singapore or Hong Kong or something, we would still see a sizable difference between these two countries. And if we drill down into the index, it looks at all kinds of things like police corruption and marginal tax rates and other kinds of things. If we look at the particular part of that index that deals with property rights and the protection of property rights, this is not a ranking. This is the actual score that the index creators attached to the protection of property rights in these two countries. And so Haiti had a rating of 2.79. The Dominican Republic had a rating of 4.82, much, much higher. Not as high as, of course, we would like to see, but the difference there is very clear. And you can see the impact of that, I think, on the forest cover in this area. So where we're going here, if we have enough time, and I've got a lot to cover here, is first a kind of a primer on subjectivity, efficiency, and the environment. So we're going to look at some principles for understanding environmental issues. Government and environmental crisis. So we often see environmental crises that are kind of played up in the media as being the fault of greedy capitalists. And maybe we can think more carefully about that. Is this really a problem of capitalism that's just left free to deplete resources and destroy the planet? What role does the government play in these crises? We'll look at then energy, emissions, and growth. And I think that's an important place to stop here with this brief talk. So first let's look at subjectivity, efficiency, and the environment. So there are a lot of allegations of market failure. If you take a basic economics class of 101 or 201 level micro-macro course, you're probably going to hear about these market failures. One is that markets are alleged to either under-produce or over-produce goods and services that create externalities, these side effects that I mentioned earlier. Secondly, they are said to under-produce public goods. People often confuse that term. They think that maybe a public good is just a good that's provided by the government. What we mean by public good in economic terminology is that a public good is one that is non-exclusive and non-rival. That is, you can't keep people from consuming it once it's produced. And if one person consumes it, there's just as much left over for someone else. And a classic example of that would be a lighthouse. Now there are a lot of problems with the arguments that the mainstream makes on public goods and on externalities. I'm not going to go through all of this on public goods, but just for completeness, I want you to have this kind of list of allegations against the market here in your head. The third is that there may be some kind of inefficiency from market power, that monopolies might emerge that cause the price system to not work very well. And so the argument is that we need government to intervene to do some kind of antitrust. Again, I'll leave that to others to cover that. But the problems that we see with externalities and the problems that we might see with public goods provision really boil down to a property rights issue again. And I think that a lot of these allegations lose their force once we start to investigate where property rights fit into these situations. So you can argue that the market didn't meet some kind of ideal standard. You can argue that maybe markets didn't provide enough public goods, or maybe there's under production of some good that created a positive side effect on society. But even if you could do that, and I think there are enormous calculation problems with trying to do that, even if you could do that, I think you'd still have a long way to go to show that the government needed to intervene here. And you'd have to argue, secondly, that the government intervention would produce results that are superior. And I hope to show you here why that would be a very difficult case to make. I would argue that in many cases where government has intervened supposedly on behalf of the environment, we've actually seen worse results rather than better results. So there are three basic approaches to environmental problems. The mainstream favors typically either a tax subsidy scheme or a regulatory approach to solving environmental problems. So either the government's going to tax a side effect that they think is undesirable or they're going to regulate it. So take fireworks, for example. I have a relative who had a motorboat parked in his backyard and the neighbors set off fireworks. They built on the boat cover, burned through, and destroyed the boat overnight. So we have an externality problem there, right? So if the government's trying to solve that kind of problem, they could either tax fireworks or they could regulate fireworks or ban them or something. And that's typically how people tend to respond to these kinds of problems. They say, well, knee-jerk, the government ought to try to intervene to stop people from using fireworks so indiscriminately. A property rights approach is fundamentally different. And there are variations within this. There's a kind of a common law approach that you would see in Ronald Coase's work and Harry Dimses's work. And then you'd see a natural law approach which comes out of Rothbard and Walter Block. And I think that that second approach is really the way to go. And we'll talk about some of the key literature there. Rory Cardato points out that efficiency, if we're trying to get an efficient outcome, we have a fundamental problem. First of all, it's an individual goal-seeking problem. If you free individuals up to seek their own goals, that's what's going to produce an efficient outcome. We can't simply aggregate all of the well-beings of all the different individuals and talk total up their goals and how close they came to accomplishing those goals and then somehow come to a conclusion about what the optimal amount of fireworks or the optimal amount of paper being produced at paper mills might be. There's really no way to do this. From the Austrian perspective, efficiency is attained when legal institutions allow individuals to pursue their individual ends, which may be very different from one person to another. We do see conflicts that arise over the use of scarce goods, but the Austrian economist does not try to assess the value of those alternative uses because costs are subjective. They cannot be measured. Now, if you take, again, a typical mainstream kind of economics course, principles of economics maybe are certainly an environmental economics course, you'll see a diagram very similar to this. You'll see marginal private costs, that is, the cost to the owner of a resource in doing some kind of production activity, let's say a paper mill. The private cost to the paper mill of producing paper, that's this upward sloping, lower upward sloping line here. Then you have marginal private benefit, which is the benefit to, again, the paper mill for producing paper. That's a declining curve here. The paper mill, looking at their costs and their own benefits, they would produce the quantity of paper there at QM, that's M4 for market. The argument is that this is an excessive amount of paper production because the paper mill is not taking into account the impact on bystanders of their paper production. They're generating a bad smell or maybe there's some water pollution or something that's coming out of their paper production process. Maybe it's logging trucks up and down the roads that are creating noise and risks of accidents as they supply the paper mill, all kinds of ways in which there might be some social cost as the mainstream would tell us. For that reason, the government would then intervene with some kind of tax or subsidy. The problem for the government then would have to be figuring out how much this tax would need to be in order to encourage the producer of the paper to take those external costs into account when deciding how much paper to produce. The idea is the government says, well, here's how much of the external cost is falling on bystanders. We'll create a tax equal to that amount and we'll just impose that on the paper mill. Then the paper mill is going to take that tax into account in deciding how much paper to produce. Okay, well, fine. If you know what this is, if you know what that marginal social cost is, there's no way to measure this. There's no way to get inside the heads of all the bystanders and figure out how much this cost really is. So maybe the government official says, oh, I know, I'll go around with a clipboard in a form and I'll just ask people, how much did the paper mill cost you in bad smells and traffic on the roads and looking at that big ugly steel factory and how much did that cost you? And of course, if you work at the paper mill, you might say, well, I like the smell, smells like money. And if you don't like the paper mill, maybe they fired you the other week, you say, well, it cost me a million dollars a year. It's awful. My life is devastated because there's no way to, I mean, you can't really put that into dollar terms that would mean anything. You can play around with pretend markets and pretend prices and make up some costs, but that doesn't have any real connection to reality that we could rely upon. So some economists who acknowledge that there are these problems with externality say, I know I'm going to be more friendly to the market. What I'm going to do is I'm going to suggest that we create permits. And so we're going to create a permit for emitting some quantity of odor, however you measure that, or particulates, or in the case of power plants, maybe sulfur dioxide. And we've actually done this in the United States with sulfur dioxide permits. So we'll just we'll just decide how much pollution is ideal. And then we'll carve that up into little permit size chunks and we'll auction those off or we'll grant them based on historical emissions or something like that. And we'll we'll have the the high cost those factories that experience a high cost to reducing pollution will buy permits and they won't reduce their pollution. And the ones that have a low cost of reducing pollution will reduce pollution so that they don't have to buy permits. So we get an efficiency here and this is very appealing to economists who are, they like the idea of markets but they think that markets have failed here so they need to create their own market. Okay, this is not really resolving the problem. This is simply shifting it around because you still would have to decide what Q star is. You'd have to decide what's the quantity of sulfur dioxide or the quantity of particulate matter or whatever the pollutant might be. You have to decide what that is first. Before you can then decide how many of these permits should be issued. And that requires, in order to know where Q star is, you have to know marginal social cost again. You're back to square one with trying to figure out how much does it cost people to have that bad odor? How much does it cost people to look out their window and see the big ugly rusting factory? That's a problem that has not gone away simply because you've got something that's tradable and looks market-ish. You haven't resolved the problem at all. And then there are political considerations. Art Cardin says, the information needed to know whether a particular regulation works quite literally does not exist. And the key difference between firms and governments is that firms have market tests for their decisions, governments do not. So we're without the information that we would need in order to make these kinds of decisions. This is back to Mises' socialist calculation problem. It's the exact same problem applied to an environmental issue. Even if we could calculate the efficient quantity of pollution, how could this trump property rights? We have to think about this ethically as well as in thinking about the most efficient outcome. So the issue here then is a matter of violating the property rights of another person, not about exceeding some level of emissions or damaging the environment. I'll refer later if I have some time to Murray Rothbard's classic work on air pollution, law property rights and air pollution from, I think, 1973. In any case, Rothbard does not shy away from discussing the ethical ramifications of these kinds of policies. And if there's one reading that you read to kind of support the lecture here, it would be that one. There's been a lot of recent scholarship in Austrian circles, a whole list of quarterly Journal of Austrian Economics articles that have been published in the last few years on environmental issues. It's a live debate that's going on within Austrian circles. Those of you that are interested in this issue, I encourage you to consider contributing to that literature. Let's talk a little bit about the tragedy of the commons. So again, we're back to property rights here. So if livestock are placed on a pasture that is not owned by anyone in particular, then individual livestock owners will put their livestock out on this pasture as long as the benefit to them exceeds the cost to them. So the outcome of this would very likely be an overgrazing of the pasture. The herders would be gaining all of the benefits of the grass their animals eat, but they would suffer only part of the costs. So the outcome here, in a case where you don't have ownership of the pasture, is that the costs are largely imposed on other livestock owners. So I put my cow out to graze on the pasture. Any grass my cow eats, I get the benefit of. But the cost of overgrazing falls on every other owner of livestock. I won't take you through the prisoner's dilemma here on this. If you'd like to ask about that later, I'll be happy to go through it. But Carl Minger talked about this many, many years ago. He said, when all members of society compete for a given quantity of goods that is insufficient, a practical solution to this conflict of interest is only conceivable if the goods pass into the possession of some of the economizing individuals. And if these individuals are protected by society and their possession to the exclusion of all other individuals. In other words, we resolve this problem with property rights. We put up the barbed wire around the pasture, which is beneficial to the livestock owners because then they can restrict the use of the pasture to the maximum productivity. Ronald Coase, who is, last I heard, the most cited economist of all time, won the Nobel Prize in Economics for really very few articles. His work on property rights is highly regarded. Coase is known for this Coase theorem, which says that in the absence of transaction costs, that is the cost of arranging a trade, the outcome will be the same regardless of the initial assignment of property rights. Now, Coase was not saying that transaction costs are zero. For Coase, he understood that they really aren't, that the people who are trying to come up with a trade are going to have to negotiate, and that's costly. So he said courts ought to balance the costs and the benefits to make a determination as to who should get the property rights. And we're back to the same kind of problem we were discussing earlier, that costs and benefits are subjective. There is no way for a judge in a court, even a highly educated judge that's very familiar with the pollution problem at hand, there's no way for that judge to be able to get inside the heads of the victim of the pollution and the creator of the pollution and figure out what the optimal result is. And this creates enormous problems for the Coase theorem. So let's consider briefly a case where we have a railroad that passes by an orchard. And this is an old-style coal-fired locomotive that has sparks that fly out of the smokestack and could set fire to the orchards. So the orchards could be destroyed by sparks from the passing train. So then what should happen here? From the Coasean perspective, if the transaction costs are zero, it doesn't matter who the court decides should have the rights. Should the railroad have the right to continue to trundle along the track and emit sparks or should the farmer have the right to have an orchard unburnt? So let's suppose that there's a $100,000 reduction in the market value of the property. So the farmer has to endure this loss of trees. The market value of the property is now only $15,000 and it would cost $120,000 for the railroad to install spark reduction devices in all of its locomotives. So should the sparks fly from the locomotives or should the orchard be allowed to grow unburnt? So what's more valuable? Should we allow the railroad to proceed using the air as a dumping ground for its sparks or should we allow the farmer to use the space to grow fruit? Now to Coase, it's as though the question of who got there first, who homesteaded the right to either grow apples or drive trains down the track, that doesn't really come to the fore in his thinking. What matters here is that the outcome is going to be the same regardless of the court's decision. So the mainstream is going to look at this and say, well, $120,000 is greater than $100,000. The cost of the railroad of installing the spark reduction devices would be greater than the cost to the farmer of losing the orchard. So therefore it's better to lose the orchard than to require the railroad to undertake that expense. So growing trees is inefficient. All right, so now let's suppose that this goes to court and the farmer gets the rights. The farmer wins in court. So the railroad would then be very willing to pay $100,000 to the farmer to avoid having to undertake the $120,000 expense of arresting the sparks. So this means that the orchard gets burnt, the devices are not installed, the farmer's fully compensated, and the railroad continues to throw the sparks. So society gains by $20,000 relative to the alternative. Now let's suppose that in an alternative case, the court awards the rights to the railroad. In this case, the farmer can't sell the orchard or a part of the orchard and raise enough money to pay the railroad to stop throwing the sparks. So there's $100,000 is the value of the orchard in the marketplace. There's no way to raise enough money to pay for these devices to get the railroad to stop throwing sparks. So the orchard is burnt. The devices are not installed. Notice that the outcome is the same regardless of the court's decision and that's Coase's point. However, let's introduce the subjective costs and benefits. Now the Austrian school is going to be very attentive to this and even though we can't measure these psychological costs and benefits, they're nonetheless real. In fact, I would suggest that we commonly accept or commonly see these psychological benefits and costs. I gave my wife an engagement ring. It's a diamond. It's got a market value. I expect that she's going to hang on to that because rather than sell it, even if the price of diamonds in the marketplace goes up because it's got sentimental value to her. This is real sentimental value. So she's sitting here in the audience. I hope that's great. You still have that, don't you? Right. So good. We'll see what happens when the price of diamonds goes up. So what happens to this farmer? Maybe the orchard has a sentimental value. Maybe this was the farmer's great, great, great grandparents orchard or maybe there are other, it's a special breed of apples that's irreplaceable or something. In this case, if the railroad gets the rights, then the market value of the property was only $115,000 orchard plus the rest. And so the farmer can't raise enough money to induce the railroad to install the devices. The farmer is going to lose the orchard that was worth psychologically $900,000. So society here, including the railroad plus the farmer, loses by $880,000, a massive loss. But according to Kosians looking at this, well, you know, market value is the only thing that they're really considering here. Murray Rothbard said, we cannot decide on public policy, tort law, rights or liabilities on the basis of efficiencies or minimizing of costs. And the way to resolve this, according to Rothbard, is property rights again. You can detect that running theme. So he says, well, what about water pollution? He's writing back in 1973. This is in four in New Liberty. Rothbard says, suppose a private firm owned Lake Erie. Anyone dumping garbage in the lake would be promptly sued in the courts for their aggression against private property and would be forced by the courts to pay damages and to cease and desist from any further aggression. Thus, only private property rights will ensure an end to pollution. Only because the rivers are unowned is there no owner to rise up and defend his precious resource from attack. If in contrast, anyone should dump garbage or pollutants into a lake which is privately owned, he would not be permitted to do so for very long. The owner would come roaring to its defense. And I'll mention also a recent book that's come out by Walter Block and Peter Nelson. It's available in the bookstore, I believe. Water Capitalism, the case for privatizing oceans, rivers, lakes and aquifers. Now, about all of that plastic. Anyone here have a plastic soda straw? No? Very, very correct of you. Okay. Now, you've heard about maybe the Great Pacific Garbage Patch floating mats of plastic, supposedly, in the Pacific. And we're told in the United States, so you need to use a paper straw or reusable metal straw or something because to use a plastic straw is environmentally irresponsible, it's going to wind up in the Great Pacific Garbage Patch. Well, it turns out about 90% of all the plastic that reaches the world's oceans gets flushed through just 10 rivers, and I don't know if you know where all those are, but none of them are in North America. American plastic is not getting washed into the ocean, for the most part. In fact, most of that plastic is fishing gear. Fishing nets account for 46% of the trash with the majority of the rest composed of other fishing industry gear. 20% of the debris is from the 2011 Japanese tsunami. Now, the ocean is, for practical purposes, unowned. So, I suggest you go and take a look at Walter Block's book, Block and Nelson's book on water capitalism. People say, well, you know, that's just a libertarian pipe dream for privatizing the ocean. I mean, good grief. How would you possibly do that? It's maybe we need to think a little more broadly about this. And I think that one of the reasons we're concerned about pollution in these kind of commonly owned or commonly regarded areas might be because there's simply no property rights that are effective in those places. I'm going to skip over some of this just in the interest of time. Let me point out that homesteading of property rights can take place in more than just land. We tend to think of homesteading as something that applies to square footage of land or acreage of land. But in fact, you could have noise homesteading. If I'm accustomed to a certain level of quiet in my neighborhood and along comes a factory next door and starts creating a racket, then I under a property rights protective regime would have the right to sue in court and win an injunction against the creator of the noise. The same would go for air pollution. Air presents some special problems because it of course flows across boundaries as noise does. But there's no reason why that could not be homesteaded as well. In fact, we see a court case from 1932 that dealt with exactly that issue. In fact, I think this is one of the court cases that Ronald Coase mentions in one of his most famous essays. So we can boil this down to issues of trespass and nuisance. We can think about the impact of air pollution as being similar in nature to someone driving down the road in front of my house and dropping a bag of garbage in my front yard. I would have recourse in court for someone who tried to do that. The same way we could see that with boundary crossings of other sorts, radio waves perhaps or air traffic. Now Rothbard does make a distinction. I won't get into too much detail on this, but he says there's a distinction between boundary crossings that you can't sense and that you can't really tell that they're creating a problem like radio waves. I'm being bombarded with radio waves right now. I expect most of them are pretty harmless. I would have to be able to show that they are harmful in order for me to be able to obtain an injunction against those. I'll leave you to read Law of Property Rights and Air Pollution on your own. I did want to say one thing about government and environmental crisis before we wrap up here. There are certain cases of environmental problems that have emerged. There's kind of poster children for environmental crisis. One of these was the Love Canal episode from the 1970s and 80s, which was a failed canal that was later used as a dumping ground for toxic waste. Now in fact, the private firm that used the canal to dump waste was doing so responsibly according to the standards of the time the canal was sealed so that toxic waste could not leak. In fact, it seemed to work pretty well and they capped it off with clay and it seemed that the toxic waste was safely contained. By the way, the Army and the local municipal government also contributed toxic waste to this dump even though later the private firm was the one blamed for this crisis. So then in 1953, the city government decided they would like to have this land and they threatened the company with imminent domain unless the company turned over the land to the city to use as a school. Great idea, right? So the company said, you should not do this. There's toxic waste underground here. They took the school board officials out to the property and drilled eight test wells, drilled two over the dump and sure enough, up comes toxic waste and drilled on the sides and no toxic waste. So you see, there it is, it's contained. You really don't want to be messing with this, this toxic waste site. Nevertheless, the city said, no, we're taking your land or you're going to sell it to us. Take your pick. So they said, fine, we'll sell it to you for a dollar. And they wanted to put into the deed that there's toxic waste here. They put what for a deed is a fairly long section and they're saying this is a waste site. You shouldn't do anything with it except make it into a park maybe. But the city said, no, we're not going to make it into a park. We're going to build a school on it. We're going to sell off the rest to developers without saying quite as much as you have said about the toxic waste. And by the way, we're going to put some storm drains in here. And we're going to, you know, that involves poking holes in the clay barrier. So, I mean, here comes the city government says you're going to give this to us. The company then is, well, you know, we're telling you what's there. And the city government then pokes holes in the clay barrier, scoops off the clay top of this thing and carries it off to use as fill dirt at another site for a school. And in other ways just disturbs the entire capsule of toxic waste. And sure enough, later on, the residents in the area find that there are enormous health problems that emerge, birth defects and other problems. So, the story here as it's often portrayed is that private firms just completely misbehaved here and they had no regard for human safety and no regard for the future consequences of their dump site. But in fact they had. The city, when they were told and were complained to by the residents, responded initially by saying, well, it's not really that much of a problem. Here you can have a window fan to air out your house from that bad odor that's creeping into your basement. So this ended up being the case that was the, again, the poster child for what later became the Superfund Law, which was a massive intervention of government into toxic waste sites where if they could find some company still around that might have contributed to the toxic waste that was leaking, then that company could be saddled with the cost of the cleanup. There are other cases I don't have time to go through here, but I do hope that you will take the time to read the Rothbard essay and if you like I can, if you want to email me, I can send you some other readings that might help as you're thinking through this and this list here would be part of that. Just some essays in the quarterly Journal of Austrian Economics that deal with environmental questions. So thank you very much. I'll be happy to talk to you after what you like.