Policy for Market Failure -- Decentralized Policies

Coasean Bargaining, Voluntary Action Liability Laws, and Property Rights

Decentralized policy: creates a setting in which agents involved in the problem work it out themselves without a central authority mandating action*

*However: central authority may be essential to creating the “setting” (e.g. enforcing laws, property rights, etc.)

Instrument taxonomyNon-market-based, Decentralized policies

Passive Policies

• No binding/constraining government action targeting the particular environmental problem– though government may still ensure that supporting institutions

are in place, e.g. courts to enforce contracts

• Coasean negotiation

• Voluntary actions

Coase Theorem• Private bargaining (e.g. between

generators and receivers of externalities) will overcome externalities,

• without the need for government intervention,

• regardless of to whom property rights are allocated.

• However: certain conditions must be met

(K&O, 2007)

(1910 - 2013)Ronald Coasehttp://coase.org/

Coase Theorem, conditionsIF:– property rights are well defined, enforceable and transferable, AND– transactions costs are negligible (i.e. there’s an efficient and competitive

system allowing for negotiation), AND– there is a complete set of markets (so that private owners may capture all

social values associated with the use of the environmental asset)

THEN: an efficient allocation of resources will result, EVEN IF externalities are present.

Coase Theorem: interpretation

Depending on your perspective the Coase Theorem can be viewed either as

1.An argument in support of the establishment of strong property rights and an otherwise limited role for government, • “Free market environmentalism” (e.g. PERC: Property and

Environment Research Center)

2.A description of the conditions under which property rights will not be sufficient and further regulation is motivated.

Should remind you of how the FTWE (1st Thm of Welfare

Economics) was discussed.

• Region: Vittel, northeastern France

• Ecosystem services: – Regulating (Watershed) – Provisioning (Production &

Extraction) – Supporting (Habitat & Biodiversity)

• Key resource: ‘Grande Source’ (‘Great Spring’) in Vittel

• Vittel mineral water– One billion bottles sold yearly– 70 countries– Nestlé Waters

Source: Perrot-Maitre (2006) Source: Nestle Waters

Vittel catchement area

Coasean bargaining example:“Contracting for Environmental Property Rights:

The Case of Vittel”

• Water quality is crucial: • “every day over 300 tests of water quality are carried out

(in the central laboratory of the Product Technology Center in Vittel (Croville, 2006).”

• Intensification of ag.:– posed a risk to the nitrate and pesticides level in Grande

Source Vittel brand.

• Shift: from traditional hay-based cattle ranching system maize-based system.

• Stocking rates increased

increased nitrate rate caused primarily by the heavy leaching of fertilizers from the maize …, overstocking, and poor management of animal waste.”

Perrot-Maître (2006)Source: Nestle Waters

Policy options

Perrot-Maître (2006)

• Role of public research teams: “generating trust and consequently reducing transaction costs of reaching an agreement”

– “several points of the contractual arrangement were designed in close collaboration with farmers”

• “the opportunity cost of Vittel doing nothing was huge, especially compared with the opportunity cost of farmers changing practices”

Depres et al. (2005)

Coasean bargain/contract$155K for the average farm

Coasean bargaining, E.g.#2“Power plants buyout neighbors, overcome opposition” (Bayles, 5/15/02, USA Today)

•Problem: neighborhood opposition to new power plants.

•American National Power (ANP)…spent $325 million to build a power plant, spent a few million more to buy 52 homes of people who could have opposed it.

•…the company paid a premium price for the homes and is reselling them at a discount to people who don't object to living near a plant and who agreed they wouldn't sue or otherwise delay its opening.

•"This was a situation where everyone did well," says Joseph Fitzpatrick, the former ANP vice president who brokered the buyouts.

Coase theorem requirements• Property rights: requires strong institutions (not universal).

• Transactions costs:– Environmental setting: large, complex, public goods (free-riding)– TCs arguably ubiquitous in environmental policy. – Generally large when:

• Large number of parties• Causation hard to establish• Information not widely available. • Parties act “strategically”

• Absence of markets: if the market for a service flowing from the asset does not exist the owner will not be able to reap the value of that service and so will lack the incentive to maintain that service– E.g. ecotourism

Voluntary action

•Relying on social forces to influence behavior– Moral suasion: influence over behavior through moral

appeals• E.g. “Give a hoot, don’t pollute”• Sometimes the only realistic approach (e.g., littering).

– Informal community pressure• Attempts to inflict costs on those deemed responsible for excessive

pollution through loss of reputation (e.g. through demonstrations) and local markets (e.g. through boycotts)

• Might be facilitated by an information program

J.Leibig/Flickr

Moral suasion

example:

water use in Davis

Moral suasion example:Voluntary reduction in water use

• Evaluate strategies to encourage conservation • Partnership with a metropolitan water utility • Large-scale, natural field experiment with more

than 100,000 households

Treatment 1: Tip sheet only

(mostly information provision)

Treatment 2, Weak social norms:

Tip sheet + civic duty languageStandard, norm-based language from water conservation materials used both nationally and in Georgia:

Dear Members of the XXXX household,

As you know, Cobb County’s water resources are stretched because of population growth and many years of low rainfall. Cobb County residents consume almost one of out every ten gallons of Georgia’s public water supply. As a result, our water use has a large impact on the ability of Georgia’s waterways to protect wildlife and dilute pollutants that threaten human health. We all need to work together to use water wisely….

We need your help. Act on the tips listed in the enclosed tip sheet. We all have to do our part to protect Cobb County’s precious water resources. Reducing our water consumption today is important for preserving our environment and our economy for future generations. Please don’t waste water. Remember: every drop counts!

Treatment 3, Strong social norms:Tip sheet + civic duty language + social comparison

Social comparison:

Your own total consumption June to October 2006: 52,000 gallons

Your neighbors’ average (median) consumption June to October 2006: 35,000 gallons

You consumed more water than 73% of your Cobb County neighbors.

Results

Change in average number of gallons used.

Conclusions

• Information without an appeal to the public good had little impact (tip sheets).

• Standard message combining information and appeal to the public good had moderate impact that disappeared over time.

• Information, appeal to the public good and social comparisons (norms) had largest impact and although smaller, still present two years later.