Criteria for Compensation
by Peter VanDoren
Over fifty years ago, the economist Joseph Schumpeter coined the phrase "creative destruction" to describe how innovations in markets continually upset conventional relationships between firms and consumers. For example, the invention of the automobile had devastating effects on buggy-whip manufacturers and their employees. The invention of hand-held electronic calculators in the early 1970s had a similar impact on the slide-rule industry. Private innovations create new wealth for innovators and new opportunities for consumers but cause some existing firms and their labor forces to suffer losses in wealth and employment, at least in the short-term.
Changes in public policies and regulationsthat is, policy innovationscreate wealth and employment dislocations analogous to those created by private innovations. For example, if New York City were to deregulate its taxi industry and no longer require medallions, the market value of medallions would plunge from approximately $180,000 to zero. If retail electricity were deregulated and customers were free to stop purchasing power from plants whose fees are high, the market value of electric companies would be reduced by approximately $200 billion, according to Peter Passell of the New York Times.
I draw this analogy between the effects of private innovation and policy innovation because in one important respect society treats them very differently. Firms and employees who lose wealth or employment as a result of private innovations usually do not make claims for compensation. For instance, slide-rule companies did not demand compensation from engineers who purchased calculators instead of slide rules. And if the industry had demanded compensation, the public would have greeted its demands with skepticism.
In contrast, firms and employees who lose wealth or employment as a result of policy innovations often demand compensation. The most prominent and current example involves the electric utilities. The possibility of a $200 billion loss from deregulating the industry has led electric utilities to demand compensation for their "stranded" or sunk costs.
Are Policy Innovations Special?
Do the wealth and employment dislocations created by changes in public policy differ from those created by private innovation? If the presumption is that dislocations caused by private innovations are just a part of normal market operations, should investors and employees who are affected by public policy changes receive special treatment?
The answer to that question is of great practical importance because the wealth losses that arise from policy reforms generate political opposition to efficiency-enhancing policy changes. As the current struggle over deregulating the retail electricity market illustrates, political disputes about regulated markets center mainly on wealth losses that result from policy changes. Stakeholders in regulated markets often organize to preserve the status quo in order to prevent the wealth losses that accompany change.
Do markets respond to changes created by policy reforms differently than they respond to changes created by private innovations? The risk of policy change is just one of many risks that firms must take into account. The dilemma posed by the wealth changes created by policy innovationswhat Gordon Tullock, professor of economics at the University of Arizona, calls "the transitional gains trap"exists because of a failure to differentiate the prices of assets and wages paid before the "policy-change lottery" is played and the gains and losses that arise after the dice have been rolled.
All policy reforms that affect markets create "apparent" wealth losses, but the prices of capital, land, and labor always reflect the possibility of those changes because all agents know that legislatures, bureaucrats, and voters can enact policy reforms at any time. Thus, the apparent wealth losses are the product of a "fair lottery" in which all prices prior to the occurrence of change reflect the expected value of gains and losses.
Regardless of the actual rate at which the political system enacts changes that affect markets and as long as expectations in markets about the probability of change are unbiased, the distribution of wealth losses after market liberalization is the product of a fair lottery whose average loss is zero. That is to say, those who are protected from market competition always know that one day the game might end, causing them to lose their privileged position. The only source of "real" wealth gains and losses, then, is a permanent change in expectations about future policy. A permanent change in expectations, like the change in expectation of a high-inflation future to a low-inflation future, causes a one-time "real" change in wealth. That has been the case, for example, in the stock market since 1985.
The practical implications of this argument are twofold. First, claims for transitional assistance from stockholders and employees who suffer "apparent" wealth losses because of policy changes should have much less moral standing than they currently possess; those stockholders purchased assets at a discount and those employees accepted wages that included a premium that reflected the risks of policy change. Compensation for policy change after the fact is never necessary to preserve fairness or equity. Second, because most equity concerns about policy are illusory, the focus of policy analysts should be confined to efficiency. Policies are useful if they facilitate gains to trade that would not occur naturally in markets. In the absence of such effects, existing policies should be repealed.
The Effects of Implementing Policy Privileges
Government policies that increase an industrys cash flow, such as tax preferences, entry barriers, or direct subsidies, initially raise the prices of assets in that industry by making them more valuable than assets without the equivalent benefits. For example, the introduction of guaranteed prices for certain agricultural crops made farmland more valuable than it was without the subsidies.
Once firms recognize the existence of policy-created privileges, such as subsidies or tax provisions, new firms will enter the industry. If entry is not difficult, new firms will enter the privileged sector and compete with incumbent firms for the policy privileges. That competition will cause profits and asset prices to return to the pre-privilege level. Firms will continue to enter the privileged sector until the risk-adjusted profit they earn is the same as elsewhere in the economy. At the new equilibrium, all firms in the industry will earn normal returns, but too much capital and labor will exist in the industry relative to the pre-privilege levels.
But if firms that want to enter an industry because of policy privileges encounter barriers to entry, then some of the excess profits created by the privilege will remain. Barriers to entry may be created by policy, as in the case of taxi medallions, or they may be a private characteristic of certain markets. In both cases, entry barriers limit the dissipation of the excess profits created by policy privileges.
If entry is not allowed or is not sufficient to dissipate the initial increase in asset prices, only those individuals who own assets at the time of the change gain wealth. Subsequent owners of the assets will receive normal returns because the excess cash flow received by the assets will be capitalized positively into the asset prices. For example, the current market prices for electric companies that possess geographic monopolies reflect the economic privileges created by public policy.
The Effects of Repealing Policy Privileges
Policy changes that eliminate tax preferences, subsidies, or barriers to entry have the opposite effect of policy changes that create privileges. Initially, repealing privileges reduces the cash flow to some incumbent firms and lowers the returns on their assets. Once markets adjust for the elimination of the privileges, firms will want to exit the industry. If exit is allowed, firms will divest and laborers will leave until the return on assets and payments to labor are similar to those in other sectors of the economy. If barriers to entry are eliminated, entry will occur until the profits in the sector are normal and the value of the policy-created license or entry barrier is zero.
If barriers to exit exist, all assets in a sector that has lost privileges will earn a return that is lower than returns in other sectors of the economy. The market will adjust for that, however, and buyers of assets after the market adjustment will pay prices that they expect will give them at least normal returns. The market prices of those assets will be depressed enough to offset the reduced cash flow. A historical example is the freight railroad industry. In order to stop the provision of service on a branch line, the industry needed permission from the Interstate Commerce Commission. That exit barrier depressed the railroads returns, but once firms understood this, subsequent buyers of railroads were compensated by the depressed price of the industrys stock.
If exit is not allowed or is not sufficient to dissipate the initial decrease in asset prices, only those individuals who own assets at the time of repeal lose wealth. Subsequent owners of the assets will receive normal returns because the depressed cash flow received by the assets will be negatively capitalized into the asset prices.
The wealth losses created by repealing policy privileges fall into two categories, depending on the existence of entry barriers when the privileges were created. First, in markets in which the initial privilege was accompanied by an entry barrier, those who owned firms when the privilege was enacted simply lose the wealth gains they received at the time of enactment. Those who entered the market after the privileges were enacted lose the entire premium they paid for the policy-created benefits.
Second, in markets in which the enactment of a policy privilege is not accompanied by barriers to entry, the effects of repeal depend on the barriers to exit. In the absence of any original barriers to entry, wealth losses are suffered only by the firms that go bankrupt and exit the industry. The firms that remain after the repeal of the privilege earn normal profits.
A good example is provided by the 1974 entitlement program that was enacted to equalize profits across refineries with differential access to price-controlled oil. The program gave extra subsidies to small refineries. Entrepreneurs built small, inefficient refineries to take advantage of the subsidies until their returns were no better or worse than elsewhere in the economy. In the early 1980s price controls were lifted and the entitlement program ended. Most small refineries went bankrupt, but some remained. The remaining refineries earned normal profits before, during, and after the entitlement program. The main effect of implementing the entitlement program was to induce entry into refining, and the main effect of its repeal was to induce exit.
If barriers to exit exist, such as those in the railroad industry from 1950 to 1975, then all assets in the sector that loses policy privileges suffer a wealth loss that will be reflected in their prices. Subsequent buyers of such assets, however, are neither advantaged nor disadvantaged by the barriers to exit because those barriers are reflected in the new market prices.
Approaches to Transitional Wealth Losses
How should the government handle the wealth losses that occur when privilege policies are repealed? One possibility is that the government should compensate the citizens who suffer wealth losses. Harold Hochman argued in 1974 that compensation is ethically required in most situations. Hochman wrote, "Current taxicab operators invested in existing franchises at the market price and did so with reason to believe that the licensing rules under which these franchises had been capitalized were permanent and legitimate."
Another possibility is not to compensate industries because compensation would not be efficient. Tullock argued that compensation would not be efficient because the costs of identifying those who ought to receive compensation would, in general, outweigh the benefits of abolishing an inefficient policy. All we should do, he argued, is avoid enacting such policy traps in the future.
A third possibility is to categorize policies according to the efficiency rationale behind their initial enactment. In that case, one has a right to compensation only if a program was originally implemented for efficiency purposes. Such analysis would require the development of a taxonomy that differentiated public policy interventions that had efficiency justifications from those that did not. We all could construct such a taxonomy and place policies under various headings. For example, most people would put policies authorizing the funding of police, the courts, and the enforcement of copyrights in the valid-rationale category. But others would claim that zoning also should be included. Who would adjudicate the differences of opinion?
The adjudication process would quickly become a full-employment program for economic historians who would determine which policies were "justified" and which were not. This method for determining compensation clearly would be prone to arbitrary judgment calls.
A fourth possibility would be to recognize how expectations regarding future policy changes may alter the idea of "windfall wealth losses." Economist Richard Posner argues that compensation is not necessary to achieve equity because asset prices and wages reflect the possibility that political activity will create wealth losses. Other analysts divide policy changes into those that are anticipated and those that are not. They argue that when policy changes are perfectly anticipated, compensation is inappropriate because those expectations were taken into account when investment choices were made. On the other hand, they believe compensation may be appropriate if the policy changes were not anticipated.
Finally, some analysts point out that expectations should not be thought of as an all-or-nothing proposition. Joseph Cordes and Robert Goldfarb argue:
Reasonably well-informed individuals confronting changes over time in zoning laws, tax rules, air pollution requirements, auto emissions standards, and so forth, will observe that current rules or decisions are likely to change in the future. While the exact change is unknown, probabilistic expectations of change can be formed. If such anticipations are present, the ethical requirement for compensation is less compelling.
The decision to compensate losers also may have efficiency consequences. In a sector where diversification is difficult, the failure to compensate increases the risks faced by labor, land, and capital and, therefore, may reduce investment and employment in that sector.
The intuition of Posner, Goldfarb, and Cordes can be formalized by incorporating expectations regarding future policy changes in a simple model of asset prices. That model shows that the failure to compensate does not reduce expected investor returns nor does the payment of compensation increase investor returns. Under some conditions, however, compensation may be necessary to promote an efficient allocation of resources. In the next section, I present a stylized nonmathematical explanation of the intuition behind the model.
Suppose an investor owns an asset that produces a risk-free cash flow at the end of each year in perpetuity. Also suppose that the cash flow is tax exempt, like the interest on the debt obligations of local governments. The market value of such an asset is simply the cash flow discounted by an interest rate. That is because investors price assets by discounting their future cash flow at an interest rate.
Now, suppose the annual cash flow is taxed at a flat rate. The imposition of a tax on the returns of a previously tax-exempt asset lowers the annual cash flow and, thus, the present value of the future cash flow. That reduction, in turn, lowers the market value of the asset. The government could guarantee investors a fair return despite the change in tax policy by sending them a check for their wealth loss paid by the taxpayers.
While compensation is sufficient to preserve equity, it is by no means necessary. Suppose investors were not compensated for changes in asset values caused by changes in government policies. Assume investors expect that the tax exemption will be repealed in any particular year, with a probability greater than zero but less than 100 percent. For simplicitys sake, further assume that once the tax exemption is repealed, it will never be reinstated. The market price of an asset under such circumstances, then, would be a weighted average of the price of the asset if tax exempt and the price of the asset if taxable, taking the probability of each event into account.
In the year the tax exemption is repealed, the owners of the asset appear to suffer a windfall loss. Similarly, in any year in which the tax preference is retained, the owners of the asset appear to earn above normal returns. Both the windfall loss and the above normal returns are illusory. Before policy privileges are repealed, all investors have the same probability of earning the market return. After any particular policy change, some investors receive gains because they bet on assets that did not suffer policy changes, while others lose wealth because they bet on assets that did suffer policy changes.
Holders of tax-favored assets know that what the government has granted, it can also take away. Those holders are compensated accordingly for taking that risk. This approach treats a wealth loss from a policy change no differently than a wealth loss from a private innovation. Exposure to such possibilities is a normal business risk for which the market compensates before any change takes place.
The Policy-Change Lottery
If no compensation is paid after a policy reform, the values of the relevant assets decline. Those who would suffer such wealth losses often believe that result would be unjust and, therefore, are likely to attempt to block the enactment of such policies. But those wealth losses are analogous to losing two dollars when you bet on a horse race and fail to win. In horse betting the payoffs before the contest are fair because they are set by the market to equal the probability of winning the bet multiplied by the total winnings available minus the cut by the state or the track. But after the race, almost all of the ticket holders lose. If those losers asked for their money back, we would laugh because lotteries have low ticket prices and large prizes only because most people lose. A lottery cannot work if you keep the winnings when you win and get your money back when you lose.
Because of market expectations, both a compensation and a no-compensation world are equitable. If those who suffer wealth losses are compensated after policies have changed, asset prices will rise and wages will decrease to reflect the "good deal" provided by the compensation. If no one is compensated, then asset prices will be lower and wages will be higher to reflect that risk. In both cases, investors earn a fair return and employees earn a fair wage.
Markets Adjust for Risks
The claim that asset prices and investor returns reflect the likelihood of future uncompensated changes may seem difficult to believe. Some examples demonstrate, however, that assets that face a greater risk of policy change are priced lower than assets that face a lower risk. James Poterba, an economist at the Massachusetts Institute of Technology, shows that investors in one-year prime grade municipal bonds earned 40 to 45 percent less on a pretax basis than investors in one-year treasury bonds between 1955 and 1983. Investors in twenty-year tax-exempt bonds earned only 20 to 25 percent less than investors in twenty-year treasury bonds. The only difference between the two comparisons is the time involved. Because the probability of change in the tax-exempt status of assets is greater over twenty years than it is over one year, investors in tax-preferred assets demand a premium to compensate them for that risk.
Similarly, consider the taxi medallion system used in New York City. In the early 1990s medallions leased for $1,000 a month. If that cash flow were to last forever, it would represent a present value of $240,000 at 5 percent interest. Under normal circumstances the value of assets in markets is the present value of their future cash flow adjusted for risk. Because of the possibility of deregulation, however, the actual market price of medallions is less than the present value of its rental income in perpetuity. At the time I made these calculations, a permanent license for a taxi medallion sold for only $100,000. The present value of a monthly cash flow of $1,000 at 5 percent interest equals $100,000, not over an infinite period, but twenty years. In effect, the market price for medallions behaves as if the probability of deregulation is 5 percent annually or 100 percent over twenty years, even though additional medallions have not been created since 1937.
In both the tax-exempt-asset and taxi-medallion cases, the owners are playing a lottery. In every year in which policy changes do not occur, owners win the lottery. In every year in which policy changes take place, owners lose the lottery. On average, the prices of both assets are such that the owners neither gain nor lose wealth because of policy changes.
Asset Values Change With Expectations
Investors expectations cause asset prices to change long before policy changes occur. Because we cannot identify exactly when expectations form in investors minds, we cannot identify those who should be compensated for the wealth losses that occur if change takes place. I will offer some examples.
Publicly traded real estate limited partnerships lost over 23 percent of their value relative to the stock market as a whole from 7 May 1986 to 12 May 1986. During that time the Senate Finance Committee approved a tax-reform bill that limited the deductibility of losses from passive investments, such as real estate limited partnerships. At the time of the committees decision, the probability of enacting changes in the tax code was not certain because the bill still had to pass the Senate and the conference committee, but the probability of policy change rose considerably as a result of the committees action, and asset values changed accordingly.
Given that tax reform was enacted in 1986, which investors would we compensate for the change in the tax treatment of real estate limited partnerships? The owners of such assets change daily because the stocks are publicly traded. On what day did the owners suffer a compensable loss of wealth because the price did not reflect a fair bet about the possibility of tax reform? That question, of course, has no answer.
Another example is the variation in the price of tobacco quotas over time. In the 1970s, the real value of tobacco quotas in 1985 dollars was approximately $9 to $10 per pound of quota allotment. By the mid 1980s, when the possibility of changes in the tobacco price-support system seemed more probable because of President Reagans attempt to terminate agricultural subsidy programs, the market value of tobacco quotas fell to $3 to $5 per pound even though Congress did not terminate the program.
The electric industry provides a final example. The prospect of changes in the regulation of electric utilities first surfaced with changes in natural gas prices and natural gas turbine technology in the late 1980s. Those changes lowered the cost of electricity produced with natural gas compared to that produced with coal or nuclear power. Utility costs also are higher than they would be with natural gas turbines because utilities signed contracts with independent generators under provisions of a 1978 energy law. To be sure, under that law the utilities had to sign contracts with independent producers, but in many states the prices at which they were signed were the product of "sophisticated" utility forecasting models that predicted large increases in oil and coal prices. Utilities signed the contracts with independents as a hedge against large increases in oil and coal prices for electricity generation. The gamble proved to be a bad bet, and electric utilities are now saddled with the obligation to buy independent power at two to three times the marginal costs of power generated with natural gas.
In a competitive market, consumers would abandon utilities that made bad bets and buy power from those that made good bets. Because electric utilities are state-protected monopolies, however, consumers continue to pay for their bad bets. Large users of electricity have responded to the high-cost electricity monopoly by threatening to generate their own electricity from natural gas and sell their surplus back to the utilities. If those large users are granted access to cheaper electricity, it will be very difficult politically not to deregulate and grant residential consumers the same option.
This brief history of the electric utilities suggests that the possibility of deregulating electricity has grown from zero to something greater than zero over ten years. As industry players have anticipated that possibility, utility stock prices have suffered. Table 1 shows annual returns, not including dividends, on the Standard & Poors 500 and the Dow Jones utility average from January 1986 to January 1997. The return over the entire period is 321 percent for the Standard & Poors 500 and only 32.9 percent for the Dow Jones index. As the prospect of retail deregulation dramatically increased during 1996, utility stocks rose only 3.1 percent compared to 45.2 percent for the market as a whole.
S&P 500 Versus Dow Jones Utility Average From 1986 To 1997
Index 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 *1997 Total S&P 500
236.3 268.8 265.9 323.1 335 376.2 415.7 451.6 460.4 541.7 786.7 26.50 13.8 -1.1 21.5 3.7 12.3 10.5 8.6 1.9 17.7 45.2 321% Dow Jones
206 175.1 186.3 235 209.7 226.2 221 229.3 181.5 225.4 232.3 17.80 -15 6.4 26.1 -10.8 7.9 -2.3 3.8 -20.8 24.2 3.1 32.9% * 1997 return was calculated from 1995 to 3 February 1997.
Source: American Almanac 1996 to 1997, Wall Street Journal, 4 February 1997.
Niagara Mohawk, an electric utility in upstate New York, is particularly affected by contracts that it signed with independent producers. Those contracts now require Niagara Mohawk to pay those independent producers more than the marginal costs for power produced with natural gas. As markets have recognized that about half of every revenue dollar to Niagara Mohawk goes to independent producers and taxes, the price of Niagara Mohawk shares has plummeted. At the start of 1994, the price was over $20 per share. In May 1996, the price was around $7, a 65 percent drop in just over two years. The drop did not occur at once. Some days saw changes in expectations worse than others. In fact by early February 1997, the price had bounced back to $10.
For utility stocks in general and Niagara Mohawk in particular, the wealth losses that arise from changes in expectations have occurred whenever significant changes in political or economic facts have prompted a change in expectations about future cash flows. If we were to compensate shareholders, how would we decide which shareholders to compensate? Which investors suffered losses from an unfair roll of the dice?
Some might argue that the nature of the typical shareholder of certain kinds of stock mark those shareholders for special compensation protection. The characterization of a typical utility shareholder as an older female with blue hair may or may not have been true at one time, but it is true no longer. Stereotypes do not work as a criterion for awarding compensation. Utility stocks are now seen as risky, but the transition from the old view to the new view has involved a gradual change in expectations. At each step of the transition, the purchasers of utility stocks were making fair bets, even if they turn out to have been poor bets.
To compensate current shareholders for deregulation would be to compensate people who bought utility stocks knowing that they are more risky now than they used to be. The most conservative investors got out long ago and suffered wealth losses at that time. If compensation for "stranded costs" were to become certain today, the price of utility stocks would rise, creating ex-post gains for all those who purchased utility stocks in the face of a low probability of compensation. Those are not the people commentators have in mind when they recommend compensation.
The lesson of this analysis is that investors receive the same expected returns whether or not losers from policy changes are compensated. Asset prices will reflect either policy. However, failure to pay compensation does increase the variance of investor returns. Risk-averse investors will demand a greater return to compensate them for bearing the risk of loss from policy changes. Failure to pay compensation simply increases the variance of everyones future income without affecting the mean. The rate of return investors demand may be greater under a no-compensation regime. That, in turn, would reduce investment in industries that are subject to risks from uncompensated policy changes. Thus, the political choice of whether and how to compensate those who lose wealth when markets are liberalized seems to hinge on the cost of keeping inefficient policies in place versus the opportunity cost of deterring investments in industries that face the possibility of change.
That characterization is valid but only under limited circumstances. Investors face two types of risk. The first is systematic risk, or market risk, common to all investments. Economy-wide factors, such as inflation or interest rates, affect the value of all assets, although not to the same degree. Investors receive a higher expected rate of return to compensate them for being exposed to systematic risk.
The second type is unsystematic risk, or idiosyncratic risk, which affects only a single asset or a small group of assets. The unsystematic risk faced by a firm is not directly related to the unsystematic risk faced by other firms; thus, an investor can mitigate the effects of unsystematic risk by holding a well-diversified portfolio. Because the adverse consequences of unsystematic risk can be avoided through portfolio diversification, the market prices of assets do not reflect their unsystematic risks.
Thus, the claim that failure to pay compensation would raise the required return and decrease the price of assets in policy-privileged industries generally does not hold. If the wealth effects of the policy change are not directly related to the return on assets in the rest of the economy, then the increase in risk created by uncompensated wealth losses can be diversified away through mutual funds. For example, if the probability of change in the regulation of electricity markets is not related to policy changes that affect other markets, then investors can purchase "policy-change insurance" by purchasing stocks in other sectors of the economy. In such circumstances compensation is not necessary to achieve an efficient level of investment.
Compensating those who suffer wealth losses as the result of policy changes is never necessary to preserve equity or fairness. Market prices for assets and wages for employment are fair prices for lotteries, one component of which is policy change. After the lottery concludes, winners and losers exist because private and public changes occurred after the bets were placed. However, when asset purchases and employment decisions were made, the prices were actuarially fair representations of the future costs and benefits of holding that particular asset or job.
Compensation also is rarely necessary to promote efficiency. Not compensating for policy change increases the variance in wages for labor and returns for investors. That increased variance, however, is easily mitigated by purchasing insurance. The insurance, in this case, is not a policy from State Farm or Allstate, but a diversified portfolio of assets that insures against the risk of policy change in any particular area of the economy.
One implication of our compensation criteria is that when policy changes affect a limited number of assets whose unsystematic risks can be efficiently diversified, compensation for "windfall losses" should not even be considered. The enactment or repeal of regulations, taxes, or subsidies in those cases should be made on simple efficiency grounds.
Our criteria also suggest the circumstances under which compensation may be justified. A policy change that affects many assets is a systematic risk. For example, a change in a legal regime that made shareholders liable for corporate debts would make those shareholders candidates for transition rules.
Likewise, those who invest in assets for which it is costly to diversify would be candidates for compensation. Some assets are not typically diversified because of technical impediments or incentive problems. For example, housing ownership is not diversified. Most people have a substantial amount of their wealth in their own homes rather than a diversified portfolio of homes. That is efficient because it provides incentives for the occupant to maintain the quality of his home. Compensation to homeowners for policy changes in zoning, for example, would not be ruled out under our criteria.
Human capital is also difficult to diversify. Few people, if any, have 1 percent of their training in each of one hundred different fields. Thus, when public policies that affect only one labor market are repealed, those laborers would be candidates for compensation.
If compensation were offered, however, the difficulties created by changing prices and expectations would still have to be surmounted in order to identify which individuals should be compensated. Those difficulties are many and severely complicate the design of an efficient compensation program.
Peter VanDoren is the Cato Institute's assistant director of environmental studies. The author wishes to thank Richard Sansing, an associate professor at Yale School of Management, for his assistance with the research on which this article is based, and Casey Khan, an intern at the Cato Institute, for his excellent research assistance.
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