 Well I guess we can go ahead and start. It doesn't look like a whole lot more people are coming in and so we can go ahead and begin. This is one of my favorite talks because, actually I like all the talks I give. They're a lot of fun at this point. After having done them several Mises use, I really enjoyed this one though because this is sort of my bread and butter as an economist. This is what I studied when I was at Auburn in grad school and it's an important issue for economists to try to figure out and particularly people who are free market economists who are confronted all the time with these arguments that the market can't handle environmental and resource issues that free markets will end up with the despoilation of the environment and you know we'll have extinction of species because companies don't give any attention to environmental quality and so I'd like to help you with this and I'm going to spend a lot of time talking about Ronald Coase. Ronald Coase is the most cited economist of the last, well maybe ever, maybe Adam Smith but in the last century at least if you count up journal citations which is sort of the way of keeping score for academics. Ronald Coase is at the top. He won the Nobel Prize in Economics in 19, I think it was 1990 and so he's very well known. He died just a couple of years ago at the age of 102 and something about people who win Nobel Prizes they live a long time. I don't remember how old Hayek was but I think he was well into his 90s and so I want to take you through some criticism of Coase from the Austrian perspective because Austrians will look at Coase and say well there's some serious problems here. We need to think about this more carefully and the rest of the economic mainstream has just been adoring Coase for a long time and I have some pretty strong reservations about his views on things. By the way, I listened to an interview of him when he was about 101 and he was very sharp and if you're vertical at 101 you're doing great but he had an incredible capacity to work through some of these problems. Unfortunately, I think that they misled us in some directions. All right so let's look at two key issues that are tied up in this environmental discussion. One is environmental resource use. That's deforestation. Are we going to run out of oil? What about extinction of species? Things like how are we going to conserve energy? How are we going to conserve water? I mentioned right before the talk began something about the new dishwasher regulations. These are resource conservation questions and those of us that think markets do a really good job of handling resource uses will tend to say well you know if you leave this to the market then as long as you have private ownership of these things and don't have common access then these resources will be priced appropriately. We're not going to run out prematurely. There have been lots of predictions over time that we're going to run out of oil. I mean we saw that prediction about a hundred years ago, believe it or not, people were saying we're going to run out of oil. We've only got seven years of oil left and of course we didn't run out of oil. William Stanley Jevons, that British economist of the 1800s, worried that they were going to run out of coal and the industrial revolution was going to come to a screeching halt. Years after he died his children were cleaning out his attic with a stockpile of paper that he had gathered up because he was worried that they were going to run out of paper. So there's been a lot of these kind of concerns ill-founded I think in a lot of cases but nevertheless that's an important part of what we think about in environmental economics. Second issue within environmental economics is the externality issue and this is commonly regarded as a source of market failure. So if you've taken a traditional mainstream economics course you're going to find there's three types of market failure that are given to you and almost any textbook externalities that is accidental side effects of your production or consumption activity. Public goods are considered a source of market failure that markets don't provide enough public goods. I don't know what enough is or how you'd find out what that is that magic number and I don't know how you know the government's going to not not going to make things worse rather than better but that's another discussion for another day. And then the third is market power and you heard Tom DiLorenzo earlier in the week on antitrust and monopoly issues so I'm sure he handled that quite capably but we're going to focus on this externality issue here. Now things really aren't as separate as it may appear. I mean externalities really boil down to questions over ownership of a particular resource. We talk about air pollution, water pollution, solid waste pollution, noise pollution as being examples of externalities but really we're dealing with uncertainty over who owns the resource, who owns the air that has these particles being emitted into it, who owns the water that has some kind of waste being poured into it. We all use the air or want to use the air and the water for different purposes. We don't necessarily know offhand which purpose is the most valuable so I'm going to argue that if you turn over these resources to private ownership you're going to tend to get the most valuable use of these resources in society. All right so there's three basic approaches to this externality problem. One is the Pagovian approach named for Arthur Cecil Pagu who held what later became John Maynard Keynes' chair at Cambridge and Pagu said well what you need to do is figure out how much this pollution is costing and then tax an amount that will induce the polluter to cut back on the pollution or if you're creating a positive side effect a positive externality then Pagu said we should subsidize the positive externality, subsidize whatever that activity is. So for example if my mother is growing roses in her front yard for her own benefit and her own pleasure and passers by on the sidewalk benefit from being able to look over and see her beautiful roses then according to Pagu she should get a subsidy for her rose growing so that she grows a larger amount since she's creating these these side effects for her neighbors. Well of course that quickly descends into something quite absurd. I should get a subsidy under this kind of arrangement for wearing deodorant since I'm reducing negative externalities by doing so I should be subsidized for this and again this is pretty much everything we do creates some kind of side effect and to imagine that government is capable of identifying all of these side effects positive and negative to imagine that government can measure with any degree of precision what those side effects are worth positive and negative and then administer this fairly without any bias toward the people who funded their campaigns without any influence from businesses that would like to use this tax subsidy scheme to gain economic grants to imagine any of this is just is just in the realm of fantasy I would I would say. Then there's a regulatory approach where government says we're going to force you to reduce emissions to a level that we regard as socially efficient. Now of course the logical question here would be what's socially efficient how do we know what that level is how do we know how many gallons of water a dishwasher ought to use how many how many gallons per flush should a toilet use we don't really know that and and of course neither does government and there are a lot of other problems that enter into this as well for example the regulations that have attempted to get people to swap out their incandescent light bulbs for compact fluorescent or LED light bulbs might well be an effort by some of the large light bulb manufacturers to suppress their competition. There are lots and lots of incandescent light bulb manufacturers and GE and I think Phillips and some of the others lobbied to get this new technology mandated by law so that they could sell more of their light bulbs and the competitors could be removed from the market and a third approach is the property rights approach which includes a common law approach which includes attention to tort law as a way to deal with environmental problems and I'm going to suggest that Rothbard's approach if you look at his famous paper law property rights and air pollution Rothbard's approach is one that relies on tort law on nuisance as a way to handle these kinds of problems and then there's Kos who wants judges to decide who should get the resource and then he imagines that if transaction costs are low enough then people might be able to negotiate amongst themselves once the property rights have been decided. Now there's two key problems with the mainstream approaches and I'll try to move through this quickly there is a little bit of technical stuff here but we'll work it out. All right first efficiency is an individual goal seeking problem not a value maximization problem. All right that's Roy Cordotto that I'm referencing here he teaches at North Carolina State University he's written a little book on externalities which I believe the Mises Institute has in the bookstore if not I'm sure you can find it online and it's a great treatment of of externalities and he argues basically that from the Austrian perspective efficiency is attained when legal institutions allow individuals to pursue their ends. This is not some sort of social efficiency that we're after here that we can somehow observe separately from individual goal seeking. All right conflicts will arise over the use of scarce goods that's the nature of scarcity that there is some there are competing ends for or competing goals for the same resource but the Austrian economist doesn't try to assess the value of those alternative uses and then decide who should get what and that is because costs are subjective and cannot be measured there's one thing you get out of this talk this morning that's the thing I want you to see costs are subjective and cannot be measured the implications of this are far reaching. Now if you take a typical environmental economics course you'll run into this graph a good bit most of you may not have seen this if you haven't had economics before I'll try to explain it very briefly. All right so the MPC, MSC, and PB here are marginal private cost the cost to the firm of producing the product. This is the quantity of output on the horizontal axis so the more they produce the higher that marginal private cost is going to go. They have to pay more and more to get the scarce resources into their production process the opportunity costs are rising as they bring more raw materials and more labor into their production process. MSC here is the marginal social cost all right so that is higher than the private cost it's the additional cost to the rest of society from these side effects these externalities so if I'm producing electricity let's say and I've got a smokestack for the coal fire that is heating the water to run my turbines and the coal burning generates some kind of emissions and the emissions cause problems for other people then that's part of that social cost the cost of bystanders who had nothing particularly to do with the production or the consumption of that product and then we have the marginal private benefit which is this downward sloping curve and that's the benefit to the firm of producing the good and selling it that's the revenues that they're getting from selling increasing quantities of the good. All right so I should mention by the way here that the social cost is not just the externalities the side effects to everybody else it's also the cost to the firm since the firm is part of society okay so the firm by itself is looking at its bottom line and it's looking at the benefits to itself and the costs to itself and so it will decide that the optimal quantity of output will be right here at q I think that's an m there I'm not sure why it shows m but that quantity is the is the amount of output the firm would find ideal but if you look at this from the point of view of the rest of society then you'd say oh well there's these other costs the firm didn't take into consideration they didn't think about the smoke landing particles landing on other people so if they had taken those costs into account then they would have chosen a smaller quantity here q star that's what they would have would have chosen had they taken into account the side effects positive and negative of all of their production so the argument then is that the government under say a Pagovian system where they tax and subsidize should try to figure out how much this is how much that distance is and apply a tax to the firm of that amount the tax forces the firm to take into consideration those external costs and pushes the firm back toward q star alternatively they could regulate and say we don't care what your costs are we're going to force you to produce here q star and that's the way we're going to handle it in both of those cases the government is in a position of having to discover something they can't discover of having to have information they can't have they don't know what that distance is costs as I said are subjective they don't know what it really costs someone to have the emissions from a coal fired power plant in their air or their water they don't really know this and there's no no good way to find this out if you went say door to door with a survey forum and said hi I'm from the government I'm here to help I would don't laugh well you can laugh so I would like to know that this this power plant over here is belching smoke into the air we'd like to know how much that costs you every year because we're trying to figure out how much to tax the coal fired power plant and first of all people have trouble figuring this out for themselves they don't really have a good idea of how much that power plants affecting them badly bad or good but then they they they might have their own reasons for either exaggerating on the plus side of the minus side what the what the costs really are so they might have it you know have a grudge against the the guy that owns the power plant or something and they think they were overbilled one year so they they say well it's ruined my life it costs me if you had to put a value on it it'd be a hundred thousand dollars a day or something okay well hundred thousand dollars all right so we go to the next neighbor and we tally up their score somebody else might say well you know I work for the power plant I don't want them to tax the power plant because I have my job there I'm going to say that the cost is nil so you you can't get good information on this and therefore you can't really decide where this point is all right now some implications of this kind of analysis I mentioned earlier resource use questions overuse of resource resources as we see with a tragedy of the commons I'm not going to go into a lot of detail here but basically that's when a resource is open for anybody and everybody to use nobody can say no and the pasture gets overgrazed or the water gets over extracted from the well or the passenger pigeons get shot at a too high a rate or something like that the resource is not owned and therefore it gets overused okay so this you can't see that but it says this assumes that we know the optimal rate of use we don't really know that we don't really know where the marginal benefit marginal social benefit equals the marginal social cost we don't know where those curves intersect and that's important we don't know the appropriate tax and for those people who say well you know I'm pro market I want tradable permits I want the government to issue permits for each ton of sulfur dioxide that this this power plant emits I want them to have to have in hand a permit from the government now the green tinted far left doesn't like this because they regard emitting sulfur dioxide as a environmental sin per se so they don't they think this is licensing bad behavior sort of like licensing I don't know prostitution or something they think this is terrible but then there are others who say well this is really this is really pro market you see because we're allowing these permits to be traded in a market and there's a price and so forth that doesn't solve the problem and it's not really a market it's it's like Mises would say we're pretending at markets but it doesn't make it into a true market because who's determining the quantity of permits available in this mark in this market who can either raise or lower that quantity of markets on a whim that's the government so ultimately we're not really solving the problem now we might gain some some efficiencies from not having to treat every power plant the same the ones that can cut costs cheaply will do so and those that can't cut costs cheaply won't do so so it might not be as bad as some other systems we could think of but you're still setting the quantity of pollution at some level which we don't have the information to do we don't know where that level should be set we don't know the government certainly doesn't know whether there should be a million tons of sulfur dioxide permits out there in the market or 10 million tons of sulfur dioxide or a hundred million tons we don't have any good way to tell where that should be and as long as we don't have that information this is pretending to be pro-market when in fact it's it's really not art carden wrote an article for us in the quarterly journal of austrian economics which i i'm on the editorial staff and we have just in the last year to maybe five maybe it was four or five issues back we had we've had a number of articles on environmental issues which i i think are are valuable if you want to look those up and take a take a take a read art carden says that the calculation objection to emissions trading schemes which i've basically just told you is more than a simple how do you know conversation stopper finding the right amount of emissions to allow might require some trial and error but credible commitment remains an important potential obstacle what incentive is there for a state to specify a particular level of carbon emissions that will be allowed each year and then not change in this in response to political pressure so he's saying well you know trial and error maybe we can find the right amount now i i disagree i don't think i mean i think trial and error requires some real information from a voluntary economy like profit and loss but he's pointing out this credit credible commitment problem which is a very serious one how do we know that lobbying or some other pressure on the government is not going to result in changes to whatever this level of pollution permits we have circulating in the market we don't so the scarcity of these permits could change arbitrarily and with very little notice he 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 trying to decide how much to advertise have market tests for their decisions now that's he gets a few points back on this because he's saying this is basically the test of whether we're using this is basically the test of whether we're using resources efficiently maybe i'll give him all the points back i like art he's a great guy so he says governments don't have this information now this is that one of those articles in a in a several among several that we have in the qj a on on environmental issues lately all right what about cost of the environment well no such thing there are cost individuals who might want to use the environment for various purposes and i don't mean just they want to cut down all the trees or suck out all the oil i mean you might have people who say my use of the environment would be to have ecotourism or my use of the environment would be to leave these acres of trees alone and enjoy looking at them and watching the wildlife that that live there and and that's that's what i think is the highest and best use of the property the issue becomes a matter of violating the property rights of another person not about exceeding some level of emissions or damaging the environment rory cordado whom i mentioned earlier uh says pollution is therefore not about harming the environment but about human conflict over the use of physical resources humans change the environment in such a way that it harms others there's your cost it harms others who might be planning to use it for conflicting purposes that's how we can that's the kind of information we need to determine whether resources are being used uh well or badly carl minger whom you've heard about from earlier this week history of the austrian school one of the founders of the austrian school said when all members of society compete for a given quantity of goods that is insufficient a practical solution to the conflict of interest is only conceivable if the goods pass into the possession of some of the economizing individuals that is private ownership of the resources is essential to um uh to an efficient use and efficient not inefficient and efficient use and if these individuals are protected by society in their possession to the exclusion of all other individuals when you can string barbed wire across a pasture and say that that pasture is mine and you can regulate the use of it according to your own feedback of profit and loss then you've got efficient use of the property now i mentioned i would go through some stuff on coast here now uh i've got a lot i could say later i'm just going to have to take the remaining time i think and go through um go through this on the coast theorem but the coast theorem says that in the absence of transaction costs anybody know what transaction costs are some of you uh no that's a tax a transaction costs exist uh transaction costs exist whenever you have well i guess by some definitions you could use a you could refer to a tax as a tar as a transaction cost right it's a it's a cost of searching out negotiating and consummating and exchange so when i go to the store and i have to wander through the aisles a little bit to find what i want that's part of my transaction cost when i have to stand in line that's part of the transaction cost when i have to pay a little fee to use my debit card and the checking account owner does pay part of that fee indirectly when i that's part of my transaction cost uh that's all now coast says if you can do this costlessly then he says the outcome that is the amount of pollution will be the same regardless of the initial assignment of property rights in other words he's saying with zero transaction costs it doesn't matter whether one party gets the rights to the property or the other party gets the rights to the property now transaction costs aren't zero and he didn't argue that they were he was creating a kind of a fictitious world to to study this and so he said courts ought to balance these costs and benefits to both sides and make a determination of who should get the property rights so we're back to this kind of statist assumption that governments have enough information to make these decisions appropriately this is harrell dimsets by the way the cozy and there's a interesting exchange going way back between uh walter block and harrell dimsets in the old uh review of austrian economics from years years back so it's uh it's uh it's very very interesting it was useful to me in sorting through some of these things but dimsets is a cozy and and the the cozy and approach neglects this problem of the subjectivity of costs and benefits that i mentioned earlier so let's think about this classic case it's in the coast coast paper from 1960 steam locomotive rolling along the tracks sparks and stuff coming out of the smokestack and landing on the fields beside the tracks the fields sometimes catch fire and burn the farmers crops uh or well in this case an orchard so um we're going to talk later about the efficiency versus the ethics here i don't think you can take ethical decision making out of this out of this subject let's think about the railroads versus the orchards the orchards are destroyed by sparks from the passing train and let's suppose there's a hundred you can't read this unfortunately but a hundred thousand dollar reduction in the market value of the property of the orchard farmer he's got to either pull his orchard trees back from the tracks to avoid them being burnt and lose the value of that property or he's got to suffer the occasional loss of the trees uh so let's suppose the market value of the property is now fifteen thousand dollars instead of a hundred and fifteen thousand dollars because of this risk let's suppose that there is a cost of these spark reduction devices that the railroad could employ and that that cost is a hundred twenty thousand dollars so the farmer has lost um a hundred thousand dollars of property the cost of the spark reduction devices is a hundred and twenty thousand dollars so let's suppose the court decides that the farmer should have the rights for whatever reason the farmer wins the case against the railroad the railroad pays a hundred thousand dollars then to compensate the farmer after the case is won the railroad comes to the or after the railroad loses the case the railroad goes to the farmer and says look you won we hate that but um would you be willing to accept a hundred thousand dollars if you allow us to avoid the spark reduction device and continue to throw sparks on your orchard because frankly it's going to cost us a lot to to cut back on the spark so if you just take this payment then uh you'd be compensated we'd be happier and we can all go about our business the farmer would have reason to accept that offer and the railroad of course would would benefit from making that offer so probably uh if the transaction costs are low enough the outcome would be the railroad continues to throw the sparks so the trees are gone the devices are not installed and society according to the cosian gains about twenty thousand dollars relative to the alternative the cause instead of incurring a hundred twenty thousand dollar cost society incurs only the hundred thousand dollar cost the case two the railroad gets the rights the court decides the opposite now the farmer is not going to be willing to pay as much as a hundred twenty thousand dollars to induce the railroad to install the devices so the devices are not installed the trees are gone in other words from the cosian perspective we get the same result and society gains by twenty thousand dollars now let's suppose that in addition to the hundred thousand dollar reduction in the market value of the property so that the farmer now has to suffer the farmer suffers a loss of the trees and the market value of the property is fifteen thousand dollars now as before but there's an additional subjective loss to the farmer the farmer may have some non tangible attachment to these trees this was the orchard that his great great great grandfather planted and he proposed to his wife under that tree over there i don't know what it could be but he's got a nine hundred i'm just throwing out a number here nine hundred thousand dollar psychological loss to the farmer it's just almost uh where you can't he would he would be crushed if he lost his orchard orchard okay so also a hundred twenty thousand dollar cost of spark reduction devices case two railroad gets the rights total market value the property is only a hundred and fifteen thousand dollars um so even if he sold the property he would not be able to compensate the railroad enough to induce them to install the spark reduction device there's no way he can i mean the the psychological loss is not something he can sell get enough money to pay the railroad and he can't borrow money i mean what bank is going to say well your collateral is the psychological value of the property to you can't do that so then the farmer can't raise the hundred twenty thousand dollars to induce the railroad to install the devices and we're assuming there that this is the sum total of his net worth and all of that the point is the devices are not installed the trees are gone just as the cosian would predict but society now loses by a hundred twenty thousand dollars minus a hundred thousand dollars minus ninety thousand dollars uh nine hundred thousand dollars so there's an eight hundred eighty thousand dollar loss to society in this case because the cosian ignored this and i'd suggest to you that it is normal that the value to an individual of an asset they have that it is normal that that value to them be higher than the market value how do i know this well um most people uh most uh most people do not have their houses on the market and don't no they the market value of the house is lower than the value to them the minute it's the reverse what do they do they put it on the market they try to sell it i mean there are some transaction costs but uh or take for example the engagement ring i gave my wife i i know do you think that if she had that thing appraised and then the jeweler said that's the appraisal and i'll give you that plus a thousand dollars do you think she would sell it well i certainly hope not uh this is a this is my gold wedding ring uh i don't know how much the gold and it's worth and it's not a lot but probably give us something for a hundred dollars or something this belonged to my father before he died my mother gave it to me or gave it to my wife my fiance at the time to give to me when we got married you think i'd take the melt value of this for this ring there's a lot of psychological value in this thing if i lost it i'd i'd tear the house apart trying to find it okay so we can't forget that value which is pervasive in society this kind of psychological value coast is only looking at the market value now back to the efficiency question here's of course mary rothbard and in his um in uh rizzo's book time uncertainty and disequilibrium rothbard says we cannot decide on public policy tort law rights or liabilities on the basis of efficiencies or minimizing of costs now tort law says if someone aggresses against another person by invading their property or affecting their person with pollution if i blow smoke in your face if i throw a aluminum can on your front yard etc they can be held strictly liable in a court and required to stop or enjoined is the technical term for this a harm is generally understood as physical invasion of a of your personal property so if i can show that there is a harm to you or a threat of harm that is near well maybe not a threat but if there is a if there is a harm to you that is personal physical you can show that it's happened to you i have let's say i develop um uh disease as a result of your um uh burdening me with with your emissions of some kind then i've got grounds for a court case now it's important to recognize that the decline in value of property is not an invasion so if um if i open up a walmart next to your um your retail outlet and your retail outlet loses value because of my walmart that's not an invasion economists will refer to this as a pecuniary externality changes in supply and demand will occur and will affect the value of your property but that's not inefficient and it's not an invasion um you can't read the next line but i um uh schumpeter referred to creative destruction where there's uh whenever a new product comes out the old products lose value that's not an invasion you're not entitled to the valuation other people put on your assets if somehow people came up with a way to manufacture um diamonds that are identical to the kind you dig up out of the ground maybe they have already i don't know but um that so that the world is flooded with diamonds that are that are identical to the ones that um that people have in their jewelry now um they're not entitled any kind of compensation this is not something that you can sue for because you're not entitled to the subjective value that other people place on your own your assets that's not your property their evaluation of your property is not your property hope that makes sense all right um there's this uh Rothbard goes into this in law property rights and air pollution this the uh reasonable man versus strict liability i'm not going to spend a lot of time on on that um here because i'm running short i will point out that a key aspect of Rothbard's take on pollution issues is homesteading you can homestead property of course if it's unclaimed by anybody else and you go onto that property you mix your labor with the land and a lock in sense and um maybe you fence it off you um graze your cattle on it or something that's your property by homesteading but you can also homestead in other senses so for example if i have a quiet homestead uh and then um somebody buys the property next door to me and builds a um a massive international airport and now i've got jet aircraft screeching overhead at um five o'clock in the morning i'm i'm according to my homesteading principle here i have cause to take the airport to court i had homesteaded a certain degree of quiet or a certain level of noise that was customary in my neighborhood that became part of my reasonable expectation that that i that that was part of my property and so it would be no different than if somebody had opened up a factory next door to me and uh dumped pollution on my head it's an invasion in in Rothbard in the Rothbardian sense so we can have air pollution homesteading at the line you can't see there is that air is a dumping ground um and that is valuable i dump carbon dioxide into the air every time i exhale i'm using the atmosphere as a way to dump uh a a um a gaseous waste in a sense um so that that's valuable it's it's helpful to have a place to dump your your waste any production process any consumption process generates waste we have to have a place to put it that's a valuable use of air but so is breathing and there's no categorical there's no way to categorically say well air should always and only be used for breathing and never be used for dumping waste and we can't say the reverse either these are there are trade-offs that we have to um arrive at and homesteading is a way to establish property rights over something as uh vaporous as air um coast mentions this uh problem of coming to the news since i'm going to skip over that too because i've only got about a minute left uh let's see i'll skip that okay um boundary crossings in the sense of trespass trespass is not just if i walk on walk across an imaginary line uh on your property and i i'm now on your property but trespass can take other forms as well um boundary crossings now is a radio station that's broadcasting and sending radio waves across your property trespassing not according to Rothbard it's it's insensible that is it you can't feel it there's no um i know some people would argue about this but there's no argument there's no evidence that it actually harms you when it crosses your property um you could go on and live your life normally with that radio wave transmission so that's a boundary crossing but it's not really trespass air traffic i mean do you have any claim over the airport because they're flying over your house from 30 000 feet no Rothbard says and i'll close with this because i'm out of time the proper distinction is between visible and tangible or sensible invasion which interferes with possession and use of the property and invisible insensible boundary crossings that do not and therefore should be outlawed only on proof of harm i strongly encourage you to read law property rights and air pollution uh by Rothbard if you're interested in this kind of issue and also some articles in the recent uh qj a e if um you want to look at some of the more recent scholarship on this thank you for your attention have a great rest of the day