Arnold Kling  

Environmental Economics

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Joe Katzman has a long, thoughtful post on the economics of common resources, notably water.


Perhaps it's also time to factor these eco-services into a variant of GNP, so their depletion and restoration would both show on a national balance sheet. This move would highlight the depletion of economically valuable natural capital, and also reward efforts like South Korea's tree planting and U.S. subsidies that encourage sequestration of marginal farmland by showing them as the investments that they are.

...As a conservative, I believe in economics and free markets. Hayek's point about a distributed market's superior intelligence and ability to respond to signals remains as true today as it was when he wrote The Road to Serfdom.

In order to work properly, however, our market signals have to tell us more of the truth.

The idea of a natural environment that provides us with potential products that can be sold, and existing services that should be accounted for, strikes me as a better and more honest way of managing our resources.


The points Katzman makes are logically valid. However, as Alex Tabarrok implies, governments have fewer incentives to conserve natural resources than do private owners. Some of the worst environmental abuses have come from Communist countries and projects funded by the World Bank.

If property rights are well defined, the Coase theorem says that the right economic signals will be sent. For example, if deforestation causes flooding, then the owner of a property that is going to be flooded would pay the owner of the forest to refrain from cutting the trees. (Alternatively, the forest-owner would pay the flood-plain property owner not to sue for damages from floods.) This assumes that coalitions of property owners can be formed, if necessary.

For Discussion. Katzman argues that scarcity of fresh water is likely to be a major issue going forward. Bjorn Lomborg, author of The Skeptical Environmentalist, believes that it is a distribution issue, not a scarcity issue. What are the policies that could ward off a water shortage, and will such policies be followed?


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The author at Crumb Trail in a related article titled Connections writes:
    It must be eco-economics week as this sorely neglected subject seems to be popping up on several blogs. WoC has a long one with lots-o-links. [via Econlog] In this post, I'm going to focus on another key insight: What if we gave economic values to the... [Tracked on September 22, 2004 4:43 PM]
COMMENTS (5 to date)
jaim klein writes:

Prof. Fishelson from Tel Aviv University solved that problem a decade ago. The Israeli Government was considering military options as Siria, which is upstream, was damming off and consuming for irrigation the sources of the Jordan River. He said: Nonsense, water is not a scarce resource, it is just another commodity, it can be produced and sold and has a price that can be calculated. His price was 1 US dollar per cubic meter (in fact, nowadays it is 0.4 - 0.5 $/cu m). The amount diverted was 100,000,000 cu m/year, which would never justify war. In fact, no amount of water makes was an option. Israel is now desalinating seawater on an industrial scale and dreaming of selling water to its neighbours. Contamination of water resources, such as lakes and aquifers, should be understood as loss of potential high-quality water supply and the cost of alternative supplies. Since desalination, water lost its magical qualities - at least for Israeli economists.

Kevin Carson writes:

There's a difference between socially or publicly owned, and state owned property, though. A commons is not necessarily state property. It can be a form of private property.

Roderick Long. "A Plea for Public Property
Carlton Hobbs. "Common Property in Free Market Anarchism: A Missing Link"
Kevin Carson. "Libertarian Property and Privatization"

Lawrance George Lux writes:

I thought Katzman had read some of my stuff, and Lomborg is very wrong: It is not a question of distribution, but a question of misuse. Toxicity issues will consume the new century.

I have some difficulty with the Coase argument. Definition of property rights will not cancel the comparative advantage of unprosecutable violation of said property rights--his avowal of the still present need court adjucation fails. Forms of pollution are a case in point. Companies have been specifically formed to be paid to dump Pollutants, scam the Profits, then declare bankruptcy. The Cost of cleanup is immense, with a non-contendre non-payor. lgl

jaime writes:

People, water is not like land, which is finite, but a product. Nowadays, no one - not for irrigation, not for industrial use - consumes ¨natural¨, untreated, unprocessed water. All water is, in a sense, ¨polluted¨ and requiring treatment.

jaime writes:

What are the policies that could ward off a water shortage, and will such policies be followed?

Here in Israel we have thought hard on the first question, and our answer is that water is a product, and water shortage can be avoided by (1) manipulating the price to balance supply and demand, (2) letting free market forces to increase production. Since the water industry seems to be a "natural monopoly", if there is such thing, and Israel has a very hard time to dissolve entrenched state monopolies, the answer to the second part of the question is unknown to me.

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