No Free Lunch: Economics for a Fallen World: Third Edition, Revised

Chapter Six: Applications in Markets 144 Further, properly defined property rights will provide the market incentives for effective stewardship! Let’s say you own a piece of property, a one-acre plot in town. If you keep it clean and neat, it will sell for more than if you let it get overgrown and don’t keep people from dumping trash on it. You have an incentive to take care of the property, since the care you take will be reflected in how much you can sell it for. In most cases, effective environmental stewardship will increase the future value of any property and therefore increase the current value today. This does not mean that we’ll have no pollution (recall our earlier discussion about the optimum amount of “bads”). But it does mean that if we have clearly defined property rights, the property owner is incentivized to use the property in a way that provides the largest total return. For example, we have to have garbage dumps to some degree—we’re never going to have zero waste and the best of recycling will still leave some. So where does the dump go: in the middle of downtown, or in a remote area? It’s almost always originally placed in a more remote area; not just because of the nuisance smell, but because remote land is cheaper than downtown areas. Incentives matter. While private landowners have appropriate financial incentives to take care of the property that they have legal ownership of, such is not the case with government ownership of land. There are competing interests in use of the land; in some cases environmentalists call for limited/no use of the land, while others call for unlimited use for whatever purpose they want (hunting, off-roading, etc.). But neither group is necessarily interested in maximizing the value of the land. While the environmentalists “no-use” policy will result in having the same potential in the future as today, that policy will forgo the benefits of that property in the present (until subsequently used). The public servant administrators of the property also have no personal financial stake in effective stewardship; it is no coincidence that large environmental disasters occur with government administration of the property affected. (Google: Chernobyl or Rocky Flats for some examples.) Where property rights are ill defined or collectively owned, we see a phenomenon referred to as the tragedy of the commons. The tragedy of the commons shows how use of collectively owned assets does not properly account for both cost and benefits. Let’s say there is a pond in town full of fish. The benefit to you of catching a fish is the whole fish. However, the cost to you is the reduced potential of catching that fish in the future—a cost shared by every other person in town. While you get the sole benefit of eating the fish, everyone in town shares the cost. The result is that the pond will be “over fished” compared to a private pond where the owner receives both the full benefits and full costs of removing a fish from the pond. Clearly assigned property rights will result in individuals having the incentive to consider both the full costs and full benefits of using that property. Clearly assigned property rights will result in individuals having the incentive to consider both the full costs and full benefits of using that property.