David R. Henderson  

Fracking: The Upside of Concentrated Beneficiaries

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It's actually an upside of property rights.

When explaining why various subsidy programs, tariffs, import quotas, and domestic restrictions on entry into various industries and occupations exist, public choice economists lean heavily on the concentrated benefits/dispersed costs paradigm. The idea is that the beneficiaries of such regulations and subsidies tend to be concentrated--they are in the industry, for example, so each of them stands to gain thousands or tens of thousands of dollars annually--and the losers are dispersed. The losers tend to be taxpayers who will pay, say, $100 or less annually each for a given subsidy or consumers who will pay, say, $30 more annually for the good whose imports are restricted. The paradigm isn't perfect but it explains a lot.

But occasionally there is an upside to the fact of concentrated beneficiaries: they are a ready-to-go group that can quickly organize to fight off a restriction that causes losses.

So what happens when there isn't a concentrated group of beneficiaries? It's harder to overturn the restriction.

We're seeing that play out right now in Britain with fracking. And it compares neatly with the United States.

First, the United States. In the United States, landowners tend to own the oil and mineral rights beneath their land. So if there is oil to be gotten, landowners have a strong incentive to fight off a government that wants to restrict it. It's not a sure thing. There's private ownership in New York and yet New York's government has banned fracking. But in Pennsylvania, by contrast, the state government has not banned fracking and many individual Pennsylvanians are getting wealthy as a result.

Now, Britain. There's a move to allow fracking in Britain, but it's not clear that it will succeed. Why? A recent Wall Street Journal article on the issue (Selina Williams, "U.K. Panel to Decide on Fracking," June 23) gives one of the reasons:

British residents don't have the same incentives to support fracking as U.S. landowners, who generally own mineral rights on their property. In the U.K., such resources are owned by the state.

U.K. economist Tim Worstall wrote me the following:
A tiny clarification on mineral rights in the UK. Generally mineral rights are held by the landowner (although they are separable, as are hunting and fishing rights etc). Except for gold and silver (this has long been "Crown" property) and fossil fuels, oil, gas and coal. Those last three stem from legislation of 1934.....that is Crown ownership stems from then.

One can imagine an interesting counterfactual: would the Industrial Revolution ever have happened if coal had been state owned back then?

COMMENTS (7 to date)
AlexR writes:

Brilliant analysis!
The flipside of concentrated benefits is obvious in retrospect, but I'd never thought of it that way. This is a deeply profound idea that merits more than a blog post.

David R. Henderson writes:

@Alex R,
Brilliant analysis!
Thank you. You are generous.
The flipside of concentrated benefits is obvious in retrospect, but I'd never thought of it that way. This is a deeply profound idea that merits more than a blog post.
Hmmm. Are you interested in co-authoring?

Tom West writes:

Oddly enough, I don't see any difference between the two cases. In almost every aspect of life there are external costs imposed upon others by one's activities.

Government is simply the means at which we decide whether the external cost of one's activity outweighs the benefit of generated by the activity.

In both industry regulation that boosts prices and in fracking, the dispersed costs are borne by one group and the concentrated benefits by another.

I don't consider the means by which this occurs to be particularly important, just the outcome.

And for the record, I do think fracking's concentrated benefits are worth the dispersed costs. However, it would be a mistake to pretend there aren't dispersed costs.

ThomasH writes:

The concentrated cost/benefits v. dispersed benefits/costs is a pretty good explanation for departures from policy making based on cost-benefit analysis. [It's analogous and not necessarily superior to Bastiat's visible v. invisible distinction.]

Almost by definition advocates for laws/ regulations with bad cost-benefit relations (proponents of tariffs and departures from uniformity in the application of the corporate income tax, opponents of carbon taxes) are a concentrated group whether brought together by pecuniary or ideological interest. It certainly helps if there are concentrated groups on the other side, whether brought together by pecuniary or ideological interest. Fracking in the US seems to be such a relatively happy issue.

Mark Brady writes:

It has long been recognized that in the 1970s the longshoremen's union on the West Coast was a political lobby that favored the liberalization of trade with Japan.

MikeP writes:

There is actually a very clear example of this phenomenon in California, where the plastic bag manufacturing industry is staving off a statewide plastic bag ban with a ballot measure slated for 16 months from now.

In a statement vying for most economic fallacies possible in one sentence, we have the following stance from the concentrated beneficiary in this case:

"California voters will now have the chance to vote down a terrible law that, if implemented, would kill 2,000 local manufacturing jobs and funnel obscene profits to big grocers without any money going to a public purpose or environmental initiative," said Lee Califf, executive director of the American Progressive Bag Alliance.

In order:

1. Jobs are not the goal of an economy.
2. Ten cents is what paper bags cost from Amazon: I'm not seeing obscene profits here.
3. It is a feature of this legislation that the money doesn't go to the state: that would be truly obscene.

Indeed, the law is terrible, as it interferes with the voluntary relations between a merchant and a customer. But 1 out of 4 is a ghastly rate of truth! Par for the course though from an advocacy group with such a ghastly name.

ThomasH writes:

@ Mike

Amen to 1

I almost defected to the anti-XL pipeline camp every time I heard proponents say how many "jobs" it would create.

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