Coase Theorem and Decentralized Environmental Policies

1. Decentralized policies (non-market based) 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.)

2. Decentralized policies (non-market based) Decentralized + incentive-based: central authority sets & enforces the rules (liability conditions, ownership) but is mainly in the background unless there’s an episodic problem (e.g. infringement of prop. right/ pollution spill).

3. Decentralized policies (non-market based) Passive policies: No binding/constraining government action targeting the particular environmental problem. Decentralized + incentive-based: central authority sets & enforces the rules (liability conditions, ownership) but is mainly in the background unless there’s an episodic problem (e.g. infringement of prop. right/ pollution spill).

4. Decentralized policies (non-market based) Ronald Coase (1910- 2013) http://coase.org/

5. The Coase Theorem states that 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) Ronald Coase (1910- 2013) http://coase.org/

6. Coase Theorem, conditions IF: • 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.

7. Coase Theorem: interpretation Depending on your perspective the Coase Theorem can be viewed either as • 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) • 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.

8. Coasean neg. example:“Contracting for Environmental Property Rights: The Case of Vittel” • 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) Vittel catchement area Source: Nestle Waters

9. 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 Source: Nestle Waters •  increased nitrate rate caused primarily by the heavy leaching of fertilizers from the maize …, overstocking, and poor management of animal waste.” Perrot-Maître (2006)

10. Policy options Perrot-Maître (2006)

11. Coasean bargain/contract $155K for the average farm • 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 collaborationwith farmers” • “the opportunity cost of Vittel doing nothing was huge, especially compared with the opportunity cost of farmers changing practices” Depres et al. (2005)

12. In environmental contexts the requirements of the Coase theorem are often not met • Strong property rights: • requires strong institutions (not universal). • Negligible 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” • Complete 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

13. Voluntary action is often pursued by making appeals to morality (using moral suasion) to influence behavior Decentralized policies (non-market based)

14. Moral suasion

15. Voluntary action is often pursued by making appeals to morality (using moral suasion) 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

17. Moral suasion example:water use in Davis

18. To what degree can we rely on people to take costly action to protect the environment simply based on moral appeals?

19. Moral suasion example:Voluntary reduction in water use • Evaluate strategies to encourage conservation • Partner with a metropolitan water utility • Large-scale, natural field experiment with more than 100,000 households

20. Treatment 1: Tip sheet only (mostly information provision)

21. Treatment 2, Weak social norms: Tip sheet + civic duty language Standard, 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!

22. 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.

23. Results Change in average number of gallons used due to treatment. Transient effect: 2007 2008 2009 4.8%  1.8%  1.0%

24. 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.