How Free Markets Protect the Environment

Conventional economic wisdom, in a theory first propounded by Nobel laureate Paul Samuelson, holds that the unregulated market cannot be expected to protect the environment. In this theory, clean air and water are "public goods" whose value is not well reflected by market processes.

Potential polluters do not consider the social costs of their action, but only the costs to themselves. In addition, since efforts to maintain a clean environment benefit even those who do not help fund them, each individual faces a strong temptation to avoid footing the bill.

This analysis has become so accepted that many people now see no alternative to the system of government environmental regulation and control that has been pieced together over the past two decades.

This system, however, is beset with difficulties. When environmental goals and controls are politically determined, they are subject to a process that is often driven by groundless accusations, supported by public fear, and legislated with special interest in mind. Populist sentiment and pork-barrel politics, rather than actual environmental dangers, currently determine priorities.

We should therefore be prepared to reconsider the free-market solution to environmental pollution, which has worked in the past and could be made to work better now. Over the long run, private ownership is the most effective protector of the environment--provided ownership is transferable and backed by courts that make people liable when their pollutants invade the person or property of others. This system of private ownership would protect the environment for the same reason that it protects other kind of property: because it encourages good stewardship.

Property rights and accountability

When backed by effective liability laws, private property rights tend to work well. Because well-tended property increases its value, private owners generally take care not to despoil their land.

This safeguard works even when owners care only for themselves, not for their heirs. For at the very first signs of poor stewardship--the first indications of land erosion, for instance--appraisers and potential buyers can project the results into the future, and the value of the property declines immediately.

With an effective liability system, these pressures can also keep corporations from despoiling land or property that they do not own. Although disputes occur, the obligations of those who harm others' property are so widely accepted that many people do not even have to go to court when their cars are damaged: insurance companies generally handle such cases routinely.

Unfortunately, environmental damage is often not as recognizable as a dented fender. Common law requires plaintiffs to prove damages and identify the responsible parties, and though the standard of proof is not as high as in criminal cases, it remains substantial.

In order to sue you successfully for polluting my lungs, I must show that I suffered the damage for which I am demanding compensation. And I must prove that the cause of the damage was your air pollution.

Without reliable information, owners cannot adequately defend their property rights in court. Air could have been contaminated by many different sources, for example, or the health effects could be hard to measure. Thus the nature of emissions can make liability laws unenforceable, particularly in the case of air pollution.

The difficulty of obtaining satisfaction in court was, in fact, an important factor creating pressure for government intervention to control pollution. But government intervention does not eliminate the need for accurate information.

Problems with government control

Like private individuals, the government has trouble knowing the source and effect of pollutants. Unfortunately, it has therefore tended to adopt standards that do not demand solid evidence connecting emissions with harm. Under today's regime, the mere suspicion of harm, combined with educated guesses as to the source of pollution, are driving policies that have enormous costs.

Los Angeles, for example, is about to impose measures to require reformulation of products such as deodorants and paints and conversion of cars so that they run on methanol rather than gasoline.

Not only does the government lack the necessary information for controlling pollution, but politicians often have little incentive to obtain the information. Politicians find it easier and more popular with most constituencies simply to adopt a stance of outrage against polluters. In fact, generating outrage is an effective way to generate votes.

The passage of Superfund boosted the careers of a number of congressmen, even though it resulted from misinformation about Love Canal and the incorrect implication that every town had a potential disaster in its backyard.

The political pressures that dominate government also work against taking the long view. Government officials are legally barred from personally capturing any value that they help create; correspondingly, they pay no financial penalty for property that deteriorates.

By contrast, a private owner of land will see its value change immediately after a major investment, because the value reflects future benefits and costs stemming from his action. Since no such "capitalized value" exists in the government setting, government officials are more interested in maximizing political power than economic value.

Examples of government mismanagement

It is true that government officials are usually well-intentioned. But pursuing their professional mission almost inevitably means disregarding some goals important to the public interest and catering instead to specific individuals and groups.

For example, Forest Service foresters tend to be highly committed to harvesting and replanting trees, often neglecting the potential value of the national forests for recreation.

This commitment has led the Forest Service to log extensively areas such as the Rocky Mountains, where the timber value of the trees is low and where the environmental harm from extensive cutting can be severe. A perverse result is that the harvested trees command prices lower than the cost to the taxpayer of cutting them down.

Politics also affects our national parks. The National Park Service generally follows the views of the leaders of prestigious environmental groups, even though the policies that this small minority espouses are not necessarily those that most Americans want.

The decision to allow fires to burn in spite of decades' worth of fuel buildup led to the devastation of much of Yellowstone in the summer of 1988. While environmental leaders endorse these policies because they minimize human intervention, the disappearance of wildlife such as the beaver and the grizzly bear disturbs many people. One reason the harm is so severe is that it follows decades of the opposite extreme--extreme intervention, during which park rangers killed off Yellowstone's wolves and suppressed all fires.

Other examples of destructive or at least questionable government actions abound. For many years, the Bureau of Reclamation built costly dams that flooded thousands of acres of habitat. Today, feral horses and burros are harming federally owned rangelands, but they cannot be controlled because of opposition from animal-rights groups. And until recently, the Bureau of Land Management, which oversees rangeland, was routinely using crawler tractors to pull up bushes and small trees in large stretches of grazing land, despite a low cost-benefit ratio on much of the land.

Improving the common law

The common law, of course, has its flaws, too. Nevertheless, its rules of evidence and its history of even-handed protection of individual rights make it in most cases the best vehicle for holding accountable those who damage the environment.

We should begin by recognizing that many of the common law's failings were introduced by the legal activists who have been working to change the system since the 1950s. According to a number of analysts, courts today tend to compensate victims from whatever "deep pocket" might be found, even if the deep pocket acted responsibly. This approach destroys the link between liability and responsibility, and thereby reduces the incentive to take costly steps to avoid damaging others.

One remedial step would be to restore the sanctity of contract, and to let insurers help control the risks from unintended pollution. Insurance companies have enforced safety in many industries while at the same time making safety cost-effective.

In addition, governments could rely less heavily on direct regulation and instead require environmentally risky ventures, such as hazardous-waste dumps, to be bonded or insured. Both bonds and insurance can provide the accountability that is otherwise absent when insolvency or bankruptcy prevents companies from compensating victims. A firm that has posted a large bond to guarantee solvency in case of liability claims will have a much stronger incentive to handle its hazardous materials safely and efficiently.

Increased emphasis on accountability through the common law could lead to other salutary developments.

For example, chemicals that might escape into the water or air might be "branded" by dyes or radioactive isotopes to help identify their source. Responsible companies could protect themselves with branding, because they would be in the clear if contaminants that caused damage did not carry their brands.

In addition, faced with laws that assure the solvency of potential polluters and that make liability more certain for anyone whose contaminants invade the property of others, insurers and others responsible for potential damages would provide a bull market for the development of better forensic technology, as well as better containment and decontamination procedures. When general accountability--rather than specific behavior--is stressed, the incentive to avoid damage is greater.

Private protection of the environment

When it comes to maintaining environmental quality, protecting natural beauty, and preserving wildlife habitat, private organizations have often done a better job than government. One reason for their effectiveness is that their actions do not have to reflect majoritarian views, which often change.

Private conservation began long before the American public developed today's environmental consciousness or enlisted the government to protect endangered species and enforce cleanups. Hawk Mountain Sanctuary Association in eastern Pennsylvania, for example, was formed privately in 1934, at a time when hawks were considered vermin because they ate chickens.

Sea Lion Caves, a tourist attraction on the coast of Oregon, began protecting sea lions in the 1920s, when the state of Oregon had a $5 bounty on each sea lion. At that time, the animals were viewed as pests because they ate fish and harmed the salmon industry; Sea Lion Caves provided a haven until public opinion changed and laws were passed to protect sea lions.

Even today, when the government is supposed to control the environment, private groups are responsible for much of the effective protection of wildlife.

The Nature Conservancy has more than a thousand nature sanctuaries, and since its founding in 1951 it has preserved some 2.4 million acres. The National Audubon Society has more than sixty preserves, covering more than 250,000 acres. Ducks Unlimited protects more than a million acres of wildlands each year through easements that preserve waterfowl habitats.

Operation Stronghold is a national association of private landowners committed to managing their land in a way that protects or enhances wildlife habitat. There are hundreds of other such sites in the U.S., providing refuge and habitat for all sorts of flora and fauna.

The beauty of such private efforts is that people who do not care for ducks or egrets need not pay for their upkeep, as taxpayers do when the government is in control. Also, since private organizations do not use funds coerced from other people, but rather rely primarily on donations, they tend to target their efforts efficiently.

Conclusion

As our standard of living has improved, our desire for environmental amenities has increased. We can expect this demand for natural beauty to continue to grow as our national income increases, for attention to the environment is correlated with higher income.

We can further expect the private sector--both profit and nonprofit--to continue to take the lead in meeting the increasing environmental demands whenever it is allowed to do so.

That does not mean that private organizations will solve all environmental problems. Where property rights are nonexistent, ill-defined, or unenforceable, there will be no owner to insist on protection. Rather than abandoning private management in favor of direct governmental control, however, we should try to find ways to establish accountability (along with the freedom and incentive to innovate) by establishing or strengthening property rights.

We need to compare the problems stemming from imperfect property rights with the "solutions" put into effect by imperfect government. The evidence suggests that the political process has all too frequently caused the greater degree of waste and destruction.

Richard L. Stroup is professor of economics, Montana State University, and senior associate, PERC. Jane S. Shaw is a senior associate at PERC. This essay is excerpted from Rational Readings on Environmental Concerns, Jay H. Lehr, editor (New York, NY: Van Nostrand Reinhold, 1992).

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In the rush to protect the environment at any cost, individual rights have been violated and ignored. Richard L. Stroup advocates restoring people's rights against both polluters and against false claims of damage as the best way to ensure environmental protection. Both measures would increase the effectiveness and the marketability of further...
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Before joining PERC, Jane Shaw was a journalist who had developed an uneasy feeling that much of the commentary about environmental policy that she read--and even some that she wrote--was tilted in the wrong direction. The usual solution to an environmental problem was to turn it over to the government. She had become uncomfortable with this...
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