Nonseparability and the voluntary approach to externality problems

Ronald Coase asserted that voluntary two-party bargaining with zero transaction costs results in an optimal resource allocation, which is invariant with respect to the liability rule. It has been argued that nonseparabilities destroy the validity of Coase's theorem. In this paper it is shown that this criticism is based on implausible assumptions about the externality-receivers adjustment to the externality level.     

Incentives to diffuse advanced abatement technology under environmental liability law

Polluting firms with advanced abatement technology at their disposal have incentives or disincentives to share this technology with other polluting firms. The ‘direction’ and extent of those incentives depends on the liability rule applicable and the way technical change impacts marginal abatement costs. We establish that incentives for diffusion are socially optimal under strict liability and socially suboptimal under negligence if technical change lowers marginal abatement costs for all levels of abatement. Negligence may, however, induce better diffusion incentives than strict liability if technical change decreases (increases) marginal abatement costs for low (high) levels of abatement.     

Dynamic incentive regulation of diffuse pollution

Diffuse pollution from agriculture and extractive industries reduces air and water quality and contributes to climate change. We consider a setting in which a regulator must incentivize unobserved abatement given that firms have limited liability, and when they can enter and exit. We demonstrate that a simple dynamic incentive scheme can solve this difficult regulatory problem: firms pay a constant tax and receive rebates following periods of low pollution. We apply the model to water pollution from a fracking operation and simulate the contract to explore the volatility of the firm's payments and the costs of limited liability.     

Bargaining over natural resources: Governments between environmental organizations and extraction firms

We consider the resource-extraction policy of a government that is lobbied by an environmental organization and an extraction firm from foreign countries. To analyze this situation, we propose a sequential Nash bargaining solution: The government bargains with both lobbies simultaneously. Should this trilateral negotiation fail, it chooses one lobby for a bilateral negotiation. The disagreement point then is to bargain with the other lobby. Finally, should this second bilateral negotiation break down, the government chooses the welfare-maximizing policy.As long as cumulative extraction is low, such that stock-dependent extraction costs are also low and extraction profits are high, the environmental organization has a weak bargaining position, but it takes influence to reduce extraction. Once that cumulative extraction has increased so much that extraction profits are below a threshold, the bargaining positions change, and the environmental organization gets compensated by the extraction firm for not letting the trilateral negotiation fail.     

Coasean bargaining in the presence of Pigouvian taxation

Coasean arguments against the Pigouvian perspective are well established. A central tenet in this criticism argues that a Pigouvian tax may be a source of inefficiency: if parties were to bargain in the presence of a Pigouvian tax, (allocative) inefficiencies would occur—the so-called Buchanan–Stubblebine–Turvey Theorem. By analyzing a Coasean environment where the appropriation of property rights is costly, we show Coasean bargaining in the presence of a pre-existing (Pigouvian) tax may be superior. This has implications for policy where dual regulatory environments exist, such as regulation at the state and federal level, as well as environmental liability and litigation.     

Liability Funding and Superfund Clean-Up Remedies

The debate about Superfund liability has treated financing as a distinct issue from the efficiency of clean-up. However, this paper presents a model of EPA decision-making in which liability funding may increase or decrease the extent of clean-up. It then estimates this effect using data on remedies selected at National Priorities List sites and on the characteristics of liable parties. The results suggest that the EPA responds to concentrated private interests, selecting less extensive clean-up when liable parties are expected to bear a large share of costs. This effect should be considered in evaluating liability approaches to environmental protection.     

A note on Prudencio's experimental tests of the coase propositions

The purpose of this note is to review Prudencio's recent experimental test of the Coasian propositions of neutrality and efficiency. His conclusion that the propositions are statistically supported by the experimental results is not substantiated. A careful examination of the design and methodology of the experiment leads to the conclusion that the experimental bargaining cannot be considered voluntary, and that the results are likely to be influenced by hypothetical bias. Other problems with the representativeness of Prudencio's participants are also discussed.     

Instrument Choice When Regulators and Firms Bargain

We compare outcomes with an emissions tax and an emissions standard when a firm and regulator engage in cooperative bargaining over the stringency of the regulation. Bargaining is motivated by giving the firm a choice of abatement technologies. If the firm's preferred technology differs from the regulator's, the first-best outcome is not an equilibrium of the traditional noncooperative game in which the regulator is a Stackelberg leader. The regulator may therefore choose to offer the firm a more lenient regulation if it agrees to switch technologies. We find that the resulting bargaining outcomes differ for a tax and a standard even though information is symmetric, and we identify conditions under which each instrument yields lower social costs.     

Liability for groundwater contamination from pesticides

This paper considers the extent to which farmers should be held liable for groundwater contamination from agricultural pesticides. The problem is first viewed as a standard tort and then as a case of product liability, where the question of shifting liability to the manufacturer of the pesticide is considered. The results suggest that, when the problem is viewed as a case of product liability, farmer exemptions from liability can still lead to efficient levels of pesticide use, provided appropriate application methods keyed to site characteristics can be ensured through regulation or other means.     

Why does environmental compliance cost more than penalty?

In the environmental protection field of China, due to “lower law-breaking cost but higher law-abiding cost”, it is a common case that the enterprise chooses to break through the law on purpose. The punishment to the unlawful practices by the law directly decides the law-breaking cost of the enterprise, furthermore, influences the willingness to abide by the law and the trend to break through the law. The law-breaking cost of enterprises is jointly decided by the administrative liability, civil liability and criminal liability. However, in China, the enterprises breaking through the law are mainly penalized for the administrative liabilities, focusing less on the civil compensation liability on the environmental damage and criminal liabilities on the environmental crimes. Nevertheless, a complete environmental liability system is composed by administrative punishment, civil compensation and criminal sanction, none of which is dispensable. Therefore, the three layers defense could be established on punishing and deterring the environmental law-breakers. Considering all three aspects, administrative liability, civil liability and criminal liability, this paper analyzes the systemic disadvantages of the current environmental administrative punishment, civil compensation and criminal sanction in China, and investigates the legitimate reasons for the higher law-abiding cost compared with the law-breaking cost, and it is finalized with the measures and suggestions to solve this problem.     

Restoring Natural Resources with Destination-Driven Costs

Economics typically assumes that injured natural resources are restored along a fixed path of increasing marginal costs. By contrast, many restoration efforts—such as cleaning a contaminated aquifer or replacing the sand on an oil-tarnished beach—are characterized bydestination-driven costs, which depend mainly on final quality, not the prerestoration quality. Given the resulting nonconvexities in cost, the optimal level of restoration may be a discontinuous and nonmonotonic function of post-injury quality. Regulatory rules should reflect these patterns, as should liability rules, since restoration plans and costs determine the expected cost of putting a resource at risk.     

Decentralized mechanisms for river sharing

We study decentralized implementation of efficient outcomes through multilateral bargaining in the river sharing problem. We introduce a class of mechanisms in the form of two-stage games in which agents first announce consumption levels and then bargain over monetary compensations. The defining characteristic of a mechanism is the way it assigns bargaining power to agents as a consequence of their locations, inflows, and consumption decisions. We first determine which mechanisms give incentives to always allocate the water efficiently, in the sense that, regardless of the agents' benefit functions, equilibrium play always yields an efficient outcome. Among these, we take an axiomatic approach to single out three mechanisms that guarantee a fair division of the welfare gain obtained through cooperation along the river.     

Mapping the economic costs and benefits of Coral Triangle Initiative (CTI) and Mangrove Rehabilitation Projects (MRP) in Solomon Islands: a study of two MPAs and one MRP

This paper reports a study of costs and benefits of Coral Triangle Initiatives (CTI) and Mangrove Rehabilitation Projects (MRP) in the Solomon Islands. It was observed that the communities have different attitudes and perceptions toward climate change challenges. The different scales and magnitudes of climate change impacts that are perceived at these sites, and the different subsistence realities make them have varied responses and points of view regarding such impacts. For instance, respondents from Oibola experienced the most adverse impacts from climatic change events compared to those living in the Naro and Sairaghi sites. Introduction of CTI and MRP has driven the villagers to travel out far from their traditional fishing grounds to catch enough fish to sell and support their families. This implies higher fishing costs and time for commute. From a social perspective, this weakens the communal bond in the community. In spite of these trade-offs, the respondents expressed satisfaction with the level of benefits received from the projects, which included the rehabilitation of the ecosystems and breeding grounds for fish and habitats around the area. We mapped the costs and benefits of these projects to the villagers, and although no amounts or figures were disclosed, the benefits are compared against corresponding costs. One key factor for the success of the initiatives was the cooperation and involvement of recipient villagers, and even including the management MPAs.     

Risk Premiums for Environmental Liability: Does Superfund Increase the Cost of Capital?

Superfund liability may impose financial risk on investors and thereby increase firms' costs of capital. We analyze monthly stock returns for 73 chemical companies using several measures of Superfund exposure. Additional exposure appears to increase costs of capital for larger firms, but perhaps not for smaller firms. From 1988 to 1992, we estimate an average increase in cost of capital for 23 larger firms of between 0.25 to 0.40 percentage points per year. The social cost of Superfund-related financial risk in the chemical industry may be as high as $800 million annually or enough to clean up about 20 sites.     

Why Economics Matters for Endangered Species Protection

Abstract: We offer three reasons why economics matters more to species protection than many people think and what this implies for the ongoing debate over the reauthorization of the Endangered Species Act of 1973. Economics matters because (1) human behavior generally, and economic parameters in particular, help determine the degree of risk to a species; (2) in a world of scarce resources, the opportunity cost of species protection—the costs of reduced resources for other worthwhile causes—must be taken into account in decision making; and (3) economic incentives are critical in shaping human behavior, and consequently the recovery of species. Endangered species protection that explicitly addresses these basic principles can avoid wasting valuable resources that yield no gain in species protection.     

Cost-Effective Policies to Improve Urban Air Quality in Santiago, Chile

This paper examines the applicability of market-based incentives for controlling emissions of particulate matter from fixed sources, in a developing-country context. It uses Santiago, Chile as a case study. A linear programming model has been developed to establish the costs of achieving different air quality targets using marketable permits and command-and-control (CAC) policies. The main conclusion is that an ambient permit system (APS) substantially reduces compliance costs of achieving a given air quality target at each receptor location in the city. Consequently, the use of permits is warranted. However, spatial differentiation of permits is required, thus complicating the design and use of such an instrument. Moreover, the reduction in compliance costs under APS is significantly less when the air quality targets imposed for each receptor location are the same as those achieved by other CAC policies.     

The additionality problem with offsets: Optimal contracts for carbon sequestration in forests

Carbon offsets are a frequently discussed tool for reducing the costs of an emissions reduction policy. However, offsets have a basic problem stemming from asymmetric information. Sellers of offsets have private information about their opportunity costs, leading to concerns about whether offsets are additional. Non-additional offsets can undermine a cap-and-trade program or, if the government purchases them directly, result in enormous government expenditures. We analyze contracts for carbon sequestration in forests that mitigate the asymmetric information problem. Landowners are offered a menu of two-part contracts that induces them to reveal their type. Under this scheme, the government is able to identify ex post how much additional forest each landowner contributes and minimize ex ante its expenditures on carbon sequestration. To explore the performance of the contracting scheme, we conduct a national-scale simulation using an econometric model of land-use change. The results indicate that for an increase in forest area of 61 million acres, government expenditures are $5.3 billion lower under the contracting approach compared to a uniform subsidy offered to all landowners. This compares to an increase in private opportunity costs of just $110 million dollars under the contracts. Thus, the contracting scheme is preferable from society's perspective.     

Optimization model for a wolf-ungulate system

Public outcries against predator control create a need to devise management policies that optimally balance the cost (managerial and environmental) of predator control against the benefit of ungulate harvesting. To address this problem, an optimization procedure utilizing stochastic dynamic programming is described. Through this approach, optimal feedback strategies for a wolf-ungulate system in Alaska are estimated. The dynamic predator-prey model used in the analysis is based on parameter estimates from data collected over an eight-year period in Denali (Mt. McKinley) National Park. Stability analysis of the system revealed that stability properties depend on predator search efficiency. The effects of random fluctuations in winter severity and alternative objective functions are considered in the estimation of optimal feedback strategies. Optimal moose harvesting strategies appear to be dependent on wolf control costs. If no wolf control cost is assessed, optimal moose harvest is independent of wolf density. Optimal wolf control strategies are completely insensitive to moose density. The strategies are compared to current and simplified management policies.     

Environmental federalism and environmental liability

Environmental federalism considers what level of government should optimally regulate pollution. This paper addresses this question for accidental pollution, which government regulates through the ex post liability regimes of either negligence or strict liability. We find that decentralizing the choice between these regimes does not, in general, induce the socially optimal outcome. When firms can pay all damages, all regions may choose negligence and impose an overly strict standard of due care. When firms may be bankrupted by damages, all regions may choose strict liability, which induces too little care. In addition, asymmetric equilibria are possible in which some regions choose negligence, others strict liability. Combining negligence with a Pigovian tax, or strict liability with a bonding requirement can align regional authorities' incentives with those of a central government.     

A note on environmental risk and the rate of discount: Comment

The sign of the adjustment to the riskless discount rate for environmental risk depends on whether the price of avoiding the consequences of the externality is seen as reducing expected net benefits or increasing expected costs. The conclusion is that the risk adjustment is positive when the externality is defined as reducing expected net benefits.