 I'm here to talk about resource and environmental economics, and this is really one of my favorite areas. It was the area I concentrated on when I was in graduate school here at Auburn. I've done some work on that since. I've testified before a congressional subcommittee on energy and environmental regulation. And so it's an area where I find a lot of satisfaction in learning and thinking about some of these things. And I think it's an important area for us who are thinking about the implications of Austrian economics for different policies. It's important for us to consider what I think is one of the more troublesome sets of issues for market-oriented economists to deal with. And it's one of the reasons that I wanted to look at this in graduate school. I came into graduate school with a kind of a broadly favorable idea about markets. And I thought, well, environmental issues are one of those things that might be a little problematic. So I wanted to figure out some of these things. There are really two key issues here. One is a resource use question. There are people who are concerned about running out of oil or running out of fresh water or running out of various other resources, the environmental resources that we have. So we can address that. But where I wanna spend most of my time is on the externality issue, the spillover effects. So anything that you do, any exchange that you make with another person is likely to create some kind of impact on others, either positive or negative. Sometimes those impacts are monetary. So if I open a store and it competes with your store, then your store may lose some revenue. That to economists is not really a concern. And I don't think it should be a concern for us as market-oriented economists either because of course a store does not have a property right in its customers. So if you lose business to a competitor, that's not really an ethical problem. And economists would generally not say that that's an efficiency problem either. But I do wanna spend some time on this. They're really not as separate as it may seem because externality issues or spillover effects usually boil down to questions over ownership of a particular resource. So who owns the air? Who owns the water, body of water? Who owns the right to either quiet or the right to create noise? These are questions that are really about resource issues as well as being about spillover effects. So I won't say much about the resource use question, but I will put up one of my favorite pictures. I show this to my class all the time. This is the border between Haiti on the left and the Dominican Republic on the right. And you can see pretty clearly there that Haiti's landscape has been denuded of vegetation while the Dominican Republic side is green and verdant and it's obviously there's a lot more forest there. There are several examples of this sort of thing where you see a landscape and the only difference between the two is an institutional difference. It's a difference in the property rights regime. On the Dominican Republic side, the Dominican Republic is not one of the more, I don't think it's even in the top half of economic freedom if you were to index that somehow, but it's certainly more of a property rights protecting regime than Haiti is. So I think you can see that from the air as you do here that the Dominican Republic's relative protection of property rights seems to have produced some conservation of this tree resource that's on that island. Nobody's going to effectively be able to prosecute you if you cut down a tree on the Haitian side. Property rights might exist somehow in a piece of paper somewhere, but they're not enforced effectively and so you can cut down other people's trees without fear of adverse consequences. But I do want to spend most of my time on the externality issue here. There are three basic approaches to studying externalities. One is the Pagovian approach, a name for Arthur Cecil Pagu, maybe I should say Pagovian approach, and that is a system of taxes and subsidies intended to try to balance out some of the externalities that are created as we interact with each other. A second is a regulatory approach where the government forces reductions in emissions to a level that the government deals, deems socially efficient. We'll come back to that. I think there are some obvious questions about really both of those. And then there's a property rights approach. I'm looking at this broadly. There are really two subsets that I want to try to de-homogenize for you here. One is the more common law torts approach that you would see with Ronald Coase or Harold Dimmesets. We'll talk some about this later. There's an exchange between Walter Block and Harold Dimmesets in the old review of Austrian economics. And you can take a look at that if you're interested. It's a very instructive debate, I think. The other approach is the natural law, also a tort-centered approach that's suggested by Murray Rothbard and Walter Block and some others. These, I think, are both employing property rights as a way of thinking about how to handle externalities. But I think the Coase-Dimmesets approach uses property rights as more of a means to an end. Their end is efficiency. The Rothbard and Block approach and others who've written in this area that I'll mention later would see property rights as more of an ethical requirement and if efficiency happens to flow out of that rate, but our primary concern is the right of a person to his person and property. So I'll try to separate those two in a few minutes. So there are two key problems, I think, with the mainstream approaches. One is this problem of trying to make a goal out of efficiency and maybe misconstruing efficiency in the process. So efficiency, according to Roy Cordado, is an individual goal-seeking problem, not a value maximization problem. How do you maximize value over an aggregate of individuals? So Austrians would say you can't do this. It's impossible to make these interpersonal comparisons in a way that would allow you to maximize some sort of collective utility. And that's one of the fundamental problems with all kinds of welfare economics. So from the Austrian perspective, efficiency is attained when legal institutions allow individuals to pursue their ends, their goals. Conflicts will arise over the use of scarce goods. So kind of a defining aspect of scarcity is that there are conflicting ideas about how to use resources. But the Austrian does not try to assess the value of those alternative uses. We're not sitting there as an armchair welfare referee trying to figure out who has the best or highest use of a resource. A second problem with the mainstream approaches here, and this goes for the Pagovian approach as well as the regulatory sort of command and control approach is that we have subjective costs. And we put a heavy emphasis on this in Austrian economics for a good reason. We can't measure those costs. Now, some of you that might have seen some of this maybe in an earlier economics class at your college or university might have seen this marginal private benefit marginal social cost diagram. I'm gonna go through that with you here just briefly. So this is how you would see this in a typical environmental economics course, any course dealing with externalities. You might even see this in principles course. You've got vertical axis here with marginal private cost, marginal social cost. And the downward sloping line here is the marginal private benefit. That is the benefit accruing to the use of whatever is being produced, producing widgets or something. So the private cost here is the cost to the supplier of producing this good. And we have an upward sloping marginal private cost curve here. So the individual producer is considering those costs when deciding how much to produce. But then you have the marginal social cost here, which I've drawn this above the marginal private cost curve because it's acknowledging that there may be some negative spillover effect falling on bystanders. People who are not involved as a buyer or a seller, but they are experiencing the costs of that production nonetheless. So I, for example, live near an airport and it's an airport that attracts sometimes a large aircraft and they fly over my house sometimes and they make noise and it's not a very big cost to me much, but some of my neighbors, I know, have worried that the sky is falling or something when one of these aircraft flies over their house at a low altitude. So maybe this is some sort of external cost. The private producer of this product may not take that extra cost, that social cost into account. So this additional cost, which is the gap between these two curves, you'll notice that gap is widening as we increase the quantity of the output. That is not taken into account. If the producer did take that into account, then the producer would produce a lower quantity at Q star and the mainstream says, well, this is efficient. This is what we need to strive for. This is where we need to go with policy to try to achieve that point. So they would say there's an overuse of resources. We're using air as a dumping ground for effluent too much. They would say we're dumping these particulates or maybe a sulfur dioxide or nitrous oxide or something into the air and yes, air is useful as a dumping ground, but it's also useful for breathing and other nice activities like that. So we see the mainstream saying that we need to have the government restrict use of the air as a dumping ground to the point where the optimal use of the air, the balance, the appropriate balance between breathing and emitting your biocardics has been achieved. Okay, well, that assumes a lot. It assumes that we know what the optimal rate of use is. And we in fact don't know where that intersection point is between the marginal social benefit and the marginal social cost. We don't know where this point is. We don't know where Q star is. If we don't know where Q star is, it's gonna be pretty hard to create a policy that gets to it and does not overshoot or undershoot. So we don't know what the appropriate tax would be on the producer of this spillover effect. Some people have said, well, you know, we don't wanna tax the producer of the product and by the way, a carbon tax would be sort of in that direction. It's not exactly a Pygovian tax, but it's pretty close. So some people have said, well, we need to have tradable permits. We've had this kind of policy to a limited extent, the United States for some decades, where a producer, if they want to produce, will have to buy a permit to produce. So the government might issue a permit that says, you have the permission to emit one ton of sulfur dioxide for a year. And they create however many of these permits they think are necessary to get to that ideal, optimal level of output or pollution. And so if you wanna admit, then you buy a permit and if you think that you can reduce your pollution cheaper than buying permits, then you reduce your pollution. But the government gets to that Q-star point wherever they think that it happens to be by limiting the amount of pollution in that way and letting the market sort of price these permits. And it appeals to a lot of market-oriented economists because there is a buying and selling of permits. And so they say, well, look, there's a price. We like prices. They tend to allocate resources efficiently, but there are some problems. Now, backing up a bit, and I'll go back to the tradable permit thing in a minute, here's the idea of a Pagovian tax. So the Pagovian tax says what we're gonna do is we're gonna tax the effluent. We're gonna tax that pollution. We have to measure it somehow and then we have to enforce this tax, but we're gonna tax it. And if we impose a tax on the private emitter of this pollution, then the emitter of the pollution begins to take this marginal social cost curve as being their private costs. Because now they're paying the cost of their labor and their raw materials and their capital and they're paying the tax. So they begin to treat this marginal social cost curve as being relevant for them. So the government then says, okay, we're gonna tax that. But again, you have to know where exactly is that marginal social cost curve in order to know what the tax should be. We don't know where that curve is and the tax could then easily be. In fact, we'd be surprised if it were exactly where it should be. We would expect it to be either too high or too low, possibly creating a worse problem than we started with. So the tradable permits tackles this a different way and it says, okay, what we're gonna do is forget the setting of an appropriate tax. What we'll do is we'll say, okay, well, we think the Q star is the ideal amount of output based on where we have estimated these two curves to intersect. And so we've decided what this will be and we'll let the market kind of decide what that price of a permit is going to be. So this gap then turns from a tax into the market price of a permit. And there are some advantages of this over some alternatives where the government just says, you will install a scrubber on your coal-fired power plant. If the government just says you have to install the scrubber and doesn't care about the cost, then that could easily be much, much more of an inefficiency than this. So there are some advantages maybe to this. Both of them, the permits and the requirement of the government that you have a scrubber, both of those are an abridgment of property rights, but some of them may allow more flexibility on the part of the producer of the pollution and therefore be a little more easy to deal with. So there are some political considerations as well. Art Cardin has said, the calculation objection to emissions trading schemes, which is what I've just described, 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. And I actually think he's, at this point, he's wrong. He corrects that later, but trial and error requires you to have some kind of measurement of success or failure. And my whole point has been you don't have that. Okay, but anyway, moving along, he says finding the right amount of 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 this in response to political pressure? How do you know that the permit system is not going to be altered radically next year? How do you know that the tax is not going to change next year? Producers have to make long-term decisions. Do I build this new power plant or not? And how do I know if I'm gonna build it if I don't know what the government's gonna do in response to the emissions I create? Also, how do we know that politicians aren't going to set limits that are conducive to exploitation by constituent groups? There's a common kind of mythology around political decision making that says something like, well, we have these wise experts, maybe not the elected officials, but at least the people they appoint at the EPA who are sitting around studying scientifically, trying to figure out what's best for all of us. And we're ignoring a very important problem. These regulations or taxes or permits have different effects on different firms and different effects on different industries. And it is entirely possible. In fact, in my own work, I've found that it does happen that some of these firms will use their influence with the regulatory authorities to try to gain an advantage. So they get a regulation passed that hurts their competitors more than hurts them. And that kind of problem is endemic in this kind of regulation and taxing to deal with externalities. Here's where Cardin corrects that earlier misstep. 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. Governments do not. We don't know how to find that Q-star. We don't know where to find that, how to find that marginal social cost curve. And it's not as though we can simply put more experts on to the task, it's not going to work. The kind of information they need is not available. All right, so let's move on to a discussion of this efficiency versus ethics concern that I mentioned briefly at the beginning. Even if we could calculate that efficient quantity of pollution, how can this trump property rights? The issue becomes a matter of violating the property rights of another person, not about exceeding some level of emissions or damaging the environment. And Roy Cardado seems to agree, he 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 who might be planning to use it for conflicting purposes. So we have to decide whether this change that we're about to make in our environment as we undertake some activity is going to trespass on another person's property right. And if so, ethically, we cannot condone that. So one of the problems that I think the mainstream began to deal with later on with regard to resource use and also externalities is the problem of unowned resources. What happens when you have a resource that no one has titled to? And typically I would say what we see is what we saw with Haiti in the earlier slide. We get an over extraction of the resource because no one has any property right over it until they harvest it. The only way to gain title over a whale in the current legal regime is to harvest it. The only way to gain property rights over a school of fish in the open ocean is to harvest it. Otherwise it's swimming around and nobody owns it. Now there are some interesting ways to tackle that, I think, and some of them have been tried and are being tried. I won't get into that now for lack of time, but one of the ways to try to understand this is with a kind of a prisoner's dilemma here. So suppose we have two ranchers, Al and Bob and they are trying to decide how many cows to put onto a pasture that neither one of them own. No one owns the pasture. No one can tell them no. So rancher Al can put either one cow or two cows on the pasture. Same for Bob, one cow or two cows. Now if four cows are on the property because both have decided to put two cows on the pasture, then the total weight gain of the cows or milk production or whatever you're getting out of cows is eight divided equally between Al's and Bob's cows. If they restrained their use of the pasture to only one cow each, then the total output would be 10 divided equally between the two. You have fewer cows, but that one cow is able to eat the grass at a more optimal rate so weight gain is actually higher than it would be if you had two hungry cattle or four hungry cattle. So the ideal would be for Al and Bob to both put one cow each on the property and get a return of 10. And of course, if there are three cows on the property, then it's nine total, but since Al's got two and Bob's got one, then Al gets six and Bob gets three. And vice versa, if Bob puts two cows on the property and Al puts only one. Some of you have seen this before, maybe in a different layout, but it's essentially the same kind of problem. So Al and Bob, if they can't come to some kind of, if they're making these decisions independently of each other and simultaneously, will tend to wind up here. So here's why. So Bob is thinking, do I put one cow or two cows? What do I do? Well, if Al is gonna put one cow on the property, then my choice is either to also put one cow on this property and get an outcome of five or to put two on the property and get an outcome of six. Six is greater than five. I put two cows on the property. If Al is gonna put two cows on the property, then Bob thinks to himself, well, if I put one cow on the property, I get three. If I put two cows on the property, I get four. Four is greater than three. I put two cows on the property. So either way, no matter what Al does, Bob has an incentive to put two cows on the property. And of course, this is symmetric. Al thinks the same way and we end up with an outcome where both put two cows on the property and we get only eight as an output instead of 10. So this is not something that is a new problem. One of the ways to handle this is for the property, the pasture, to come under the ownership of someone. Maybe Al, maybe Bob, maybe somebody else. And that someone would have the incentive to maximize the value of that property by limiting the grazing to only two cows. And then Al and Bob would pay rent to the owner of the property in order to achieve that goal. And the owner would say, if one of them decided to put three, a second cow on the property, then the owner would say, nope, that's too much. That's going to reduce the overall gains and reduce therefore my rent. So ownership of the property resolves this problem of overgrazing. Carl Minger recognized 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. So if that happens, if we can recognize a property right over this here to four common property, and Rothbard would suggest homesteading is the pathway by which we do this, then we can resolve this overgrazing problem. Now, let me try to de-homogenize coasts and Rothbard. I burned about two thirds of my time here. And this is a more complex sequence in my presentation. So hope you drank your coffee. Coasts is perhaps best known for his coast theorem, which says in the absence of transaction costs, the outcome that is the amount of spillover effects will be the same regardless of the initial assignment of property rights. It's not just the amount of pollution, but the eventual outcome of property rights will be the same, he says. Now, some people say they use the phrase, in a cosian world, by which they mean in a world with zero transaction costs. But coast did not think that transaction costs were zero. He recognized that. He knew very well that it costs something for people to come to agreements with each other, to make contracts, to establish who owns what. That is a positive cost. So, for coast then, courts, the state, should balance costs and benefits to both sides and make a determination. So we're back to the state trying to find Q star again. We're not really out of the woods on this. We're still dealing with some of the same problems. So the cosian approach I would argue, and I'm simply following Rothbard on this and Block and some others, the cosian approach ignores the problem or neglects the problem of subjectivity of costs and benefits. So let's think about a classic kind of cosian case. Railroads versus orchards. So we have orchards alongside a railway. And orchards, and this is an old style railway with a steam engine and the steam engine burns wood or coal or something and sparks fly out of the stack and they land on the grass nearby and the grass burns and then the trees burn and the orchard is destroyed. So let's suppose there's a $100,000 reduction in the market value of the property, the orchard property. Farmer has to suffer the loss of the trees. The market value of the property is now measly $15,000. You can't grow anything on it. It's not worth much else in an alternative use. Let's also suppose that spark reduction devices that prevent these embers from flying out of the smokestack will cost $120,000. Put some sort of screen or mesh or something on the smokestack, maybe whatever it takes to try to reduce or eliminate those sparks. So the question then is for coasts, should the sparks fly or should the orchard grow? What's more valuable? Is it more valuable to allow the railroad to proceed to use this space as a dumping ground for its effluent, in this case, sparks? Or is it more efficient to or valuable to allow the farmer to use the space to grow fruit? So the mainstream looks at this and says, okay, well, $120,000 is greater than $100,000. So the railroad's use is more valuable and therefore growing the trees would be inefficient. So let's think about this again now. We're viewing $100,000 reduction in the market value of the property. Property's now worth $15,000, $120,000 cost of spark reduction devices. Now, here's where coast enters in with his, it's zero transaction cost. It doesn't matter who gets the property rights initially. It doesn't matter what the court decides in a zero transaction costs world. It only matters that the court decides. So case number one, let's suppose the court rules in favor of the farmer. Railroad pays $100,000 to compensate the farmer for the loss of the trees because that's cheaper than putting $120,000 spark arrester device on the trains. So the devices don't get installed. The farmer gets compensated instead. The trees are gone. Society gains about $20,000 relative to the alternative of putting $120,000 spark arrester device on the locomotives. Case number two, court says the railroad gets the rights. Now the farmer's not going to be willing to pay $120,000 to induce the railroad to install the devices. The property is worth $100,000 as an orchard. $15,000 in addition to that. So we have $115,000 value of this orchard. It's not up to what it would take to entice the railroad to put the device on the trains. So the farmer can't raise the money. We're assuming this is the only asset the farmer has. Can't raise enough money to induce the railroad to stop emitting sparks. So again, the devices are not installed and the trees are gone. In this sense, the coast is correct that it doesn't really matter who the court favors. It's going to end up in a trees are gone situation. And again, from the mainstream's perspective, society gains about $20,000. All right, now let's add subjective value into this scenario. Same situation as before, except now we're acknowledging that the farmer might actually have some non-marketable value in this property. Maybe his family has had this orchard for generations and it means something to him apart from the market value. This should be normal. I mean, we all understand that this happens all the time. If it weren't true that this happened, then we would have a very different world. When I became engaged to my wife, I gave her a ring, a diamond ring. I don't think she's watching the diamond market figure out if the value of the diamond has gone up enough to, at least I hope she's not. Well, you know, this is now worth however much more. I think I'm going to sell it because the market value has risen on this thing. It's a great investment you gave me there. No, I mean, she's hopefully got some additional personal value that would not be shared by anyone else in the market. Nobody else puts the same value on it that she does. And then we have the same other sort of arrangement. So case number two, railroad gets the rights. Total market value is only $115,000. Farmer can't raise $120,000 to induce the railroad to install the devices. As before, devices are not installed, trees are gone. But this time society loses because it's losing the farmer's subjective additional value on this property. So we have a $100,000 loss market value plus a $900,000 loss of the subjective psychic value to the farmer had. And then of course we get the savings because we don't have to put the spark arrestor devices on the trains. And so we get a net loss of $880,000. So COSES arrangement here fails because it fails to account for this additional unobservable, non-marketable value. And so we could end up with courts rearranging property rights in a way that really do reduce overall values. COSES didn't consider here whether the farmer might have an ethical right to this property. The invasion of property by the locomotives presents the farmer with a problem that is the ethical ramifications of this are just ignored. I think Rothbard and others who follow this sort of Austrian approach to the dilemma would say we can't decide these things based on efficiency because we can't observe what we would need to observe in order for a court to make this determination. We can't do this rearrangement of property rights based on minimizing costs because we don't know exactly what those costs are. Maybe not even approximately what those costs are. So COSES would say, I mean, Rothbard would say let's use tort law instead. So if someone aggresses against another person by invading their property or affecting their person with pollution, then they can be held strictly liable in a court and required to stop. They're enjoying, you're told by the court, you have to stop. A harm is generally understood as physical invasion of a person or property and it is near and imminent. It's not something theoretical, far off, distant, unobservable. The key article that I'm referencing here is Rothbard's peace, law, property rights and air pollution, which I highly recommend that you read before you go much further into this area. It's a cogent laying out of some of these kinds of problems. And in it he says no action should be considered illicit or illegal unless it invades or aggresses against the person or just property of another. Decline in the value of your property is not an invasion. If Walmart opens up next door to your mom and pop and your mom and pop finds that your customers prefer Walmart, that's not an invasion, that's not an aggression. You didn't have, your mom and pop did not have title to those customers. Your customers are free to go wherever they want. I'm sorry you didn't satisfy them as much as Walmart did. And I know you don't like the aesthetics of the big box on the interstate, but that's not an aggression. That's creative destruction. Something got created that satisfied customers more than the old way of doing things which got destroyed as a process in the process. A couple of things that I think are useful in learning more about this. There's Walter Bloch's free market environmentalism in addition to the law of property rights and air pollution that Rothbard wrote. There's Roy Cordado's article in the quarterly journal of Austrian economics toward an Austrian theory of environmental economics. And there's another piece in volume 17. I don't know why I didn't put the author in the title on that, but you can take a look at that as well. And then volume 18, number one, I think that is the Ed Dolan discussion and Art Cardin. And so there's a more recent discussion about what happens when you have multiple emitters like you have a whole bunch of people who are all emitting some tiny little bit of pollution each, but it amounts together to a lot and it can create some kind of negative externality. So that's an area of current interest and work in Austrian economics. How do you deal with this? Rothbard would say you don't have the ethical permission to create some sort of class action lawsuit where you bring people in as plaintiffs who didn't agree to be plaintiffs. So there are some problems with that. And if you're interested in more, we can talk about that during my office hours later today. Thank you very much for attending. And... Thank you.