Wikipedia—externality: an impact on a party that is not directly involved in the transaction.
PERC—enviropreneur: a person who has no patience for externalities.
By Terry Anderson
For several years, I have been on a campaign to expunge the term “externality” from the vocabulary of economists, policy makers, and environmentalists. My campaign is not motivated by a belief that markets perfectly account for all costs and benefits. Rather it is driven by the lessons learned from entrepreneurs—people with a passion for solving problems by finding win-win solutions. Indeed, entrepreneurs thrive in the space where there are impacts not accounted for in market transactions. It is in that space that they create gains from trade.
Consider the example of irrigation water withdrawals reducing stream flows for fish habitat. Viewed through the externality lens, trout fishers might argue that farmers are imposing costs on them and that the government should regulate water use. An environmental entrepreneur, however, sees an opportunity to convince trout lovers to contribute to the cause and to contract with farmers to increase instream flows.
Or consider the desire for open space. Through the externality lens, demanders of open space might say developers are imposing costs on them by building houses and that land use regulations are necessary. Land trust enviropreneurs, on the other hand, accept the landowner’s right to develop and obtain conservation easements to determine future land use.
There is a big difference between the externality approach and the entrepreneurial approach to improving environmental quality. Asserting the existence of an externality pits one user of a resource against another in a zero-sum game where property rights are not clear. California’s Mono Lake is a quintessential example. In the early 1980s, environmentalists filed suit to stop Los Angeles from diverting water out of the Owens Valley even though the city had purchased the water by buying farmland and its accompanying water rights. The environmentalists “won” the suit, but it was not until the late 1990s when the legal wrangling ended and some water started flowing back into Mono Lake.
In contrast, entrepreneurship encourages conflict resolution and results in positive outcomes for all parties involved. Chris Corbin, a PERC enviropreneur fellow, epitomizes entrepreneurship. His firm, Lotic, increases cash flows by encouraging efficient water use, by protecting and maximizing the value of water rights, and by developing water projects with ecological benefits. Rather than promoting conflict like that in the Mono Lake case, Corbin utilizes cooperation to keep more water in streams.
Free market environmentalism focuses on who owns the environment. When property rights are well defined and enforced, markets can work their magic. When property rights are not so clear, environmental entrepreneurs who clarify them do good for the environment while doing well for themselves.
Elinor Ostrom won the 2009 Nobel Prize in Economic Sciences for her work recognizing the role that local entrepreneurs play in eliminating the “tragedy of the commons.” Whether it is forests, fisheries, pastures, oil fields, or irrigations systems, Ostrom provides examples of entrepreneurial institutions that resolve conflicts by defining and enforcing boundaries and sanctioning those who violate those boundaries.
Now in its 10th year, PERC’s Enviropreneur Institute has used the principles enumerated by Ostrom to enhance the abilities of more than 150 environmental entrepreneurs. These enviropreneurs are skilled at clarifying and marketing property rights. To them there are not environmental problems caused by externalities, but environmental opportunities enhanced by property rights and markets. The more they can replace externalities with entrepreneurship, the more we will see conflict replaced with cooperation and environmental rhetoric replaced with environmental improvement.
In “On Target,” PERC’s executive director Terry L. Anderson confronts issues surrounding free market environmentalism. He can be reached at email@example.com.