On Earth Day the op-ed pages remind me of “Groundhog Day.” Environmentalists argue we need stricter environmental regulation. Business interests argue such regulations reduce economic growth and cost the economy jobs. Each also invokes “sound science” as an adjudicator of the conflict. Environmentalists invoke “science” in the case of CO2 emissions and effects while business interests invoke “science” in the case of traditional pollution emissions. Each year we wake up and the same movie plays out.
The scientific validity of people's preferences plays no role in the market's delivery of private goods. Markets can and do supply organic lettuce regardless of whether it is really "better" for your health. The scientific validity of people's preferences is irrelevant.
Air- and water-quality environmental disputes are more challenging to analyze than the supply of organic lettuce for two reasons. First, while property rights exist for lettuce, they often do not exist for air and water. Thus, environmental politics involves continuous struggle over implicit property rights and the wealth effects that flow from such rights. Second, both conventional air and water quality are "local" public goods (club goods) rather than private goods, thus individual differences in consumption, the primary method of reducing conflict associated with private goods, are not possible. Instead, everyone's varied preferences for environmental goods can only result in one jointly consumed outcome.
One possible impediment to the implementation of market-like solutions to air and water quality is that the initial ownership of property rights to air or water emissions not only has wealth but also efficiency effects. That is those particular property rights (the right to a pristine environment) are so valuable relative to other assets that their initial allocation alters the willingness of people to pay for them and thus affects how much pollution exists. In such cases the initial distribution is the whole ballgame because it determines the resulting air- and water- quality levels.
Under many circumstances the initial allocation of property rights does not affect the evolution of trades and thus does not affect efficiency. For example, analog cellular phone licenses were given away by the FCC in a lottery. The licenses that were won by non-telecom companies were quickly sold to telecom companies that then built cellular phone networks. The wealth distribution rather than the efficiency of the cellular phone market was affected by the arbitrary initial allocation of property rights.
But air quality may be different from the cellular-phone example. Initial ownership by environmentalists of air and water quality rights might reduce activity in industrial society significantly because the environmentalists would not accept money in return for allowing Los Angeles to exist (or at least L.A. with its current air quality) because the Sierra Club members value environmental quality much more than other people and much more than the other assets that they possess.
Conversely, if polluters had unlimited rights to pollute, pollution levels might remain much larger than they would in the Sierra Club scenario because the willingness of environmentalists to pay polluters to restrict emissions could be much less than the compensation they would demand if they owned the initial rights. Thus the initial allocation of air- and water-quality rights may have large consequences on the resulting level of air and water quality.
Although scientific studies and cost-benefit analyses do not resolve environmental policy disputes, they do serve an important function. They demonstrate the possibility of large gains to trade. For example, let us consider studies that demonstrate that cleaning up Superfund sites or arsenic contamination of water supplies is very expensive relative to the number of lives saved (valued at the conventional estimate of a statistical life) and not worth the benefits.
The conclusion that one should draw from such studies is not that the preferences of environmentalists (who want contaminated abandoned industrial sites to be cleaned up or arsenic removed from water supplies) should be different. Instead one should conclude that the implicit property rights given to environmentalists by Superfund and arsenic regulation have created the possibility of large gains to trade. Because compliance with Superfund or arsenic regulations is so expensive relative to the benefits, those who bear the costs of the regulation would pay a large amount to avoid cleanup, and the alleged "victims" of pollution may well accept such a payment rather than accept the regulated status quo in which litigation is much more common than clean up.
The initial allocation of cellular phone rights also was "irrational" because rights were given away to people who did not know how to build a cellular phone system, but the irrationality only affected the wealth distribution rather than the development of cell phones because the rights were easily traded to phone companies. No scientific studies were commissioned to demonstrate that the allocation of cellular phone rights wasn't "sound science" because trading eliminated the irrationality of the initial allocation.
Thus the main impediment to the resolution of environmental policy disputes may be the unwillingness of the participants to accept any definition of initial property rights. Instead they prefer to use the political system to engage in continuous wealth and property rights disputes. The difficult task is to channel the energies of environmentalists and polluters into creating and then trading emission rights rather than publishing pamphlets and lobbying.