24 Jul 2008

Enviros Should Pay

In response to this post (and related posts), I got this email:
Your overarching thesis in this blog has been that free markets are the solution in dealing with allocation of scarce water resources. As a matter of fact, in today's post your faith is practically bottomless, stating that "nothing it priceless -- everything can be traded for something."

So why the punt in the context of environmental water, below? You state that it is "politically useful" to protect environmental values in the water context, even though no one would pay for them if they had to be marketized. That's an economist chickening out in favor of value choices. Lots of things are "politically useful", and it changes over time. Once upon a time it was farm water that was "politically useful" - see, for example, the Desert Lands Act of 1877, the Reclamation Act of 1902, the prior appropriation doctrine - and consigning environmental water to the realm of politics is giving it a fickle future. And, isn't the elegance of the economic solution the fact that it removes us from the realm of political conflict and places us squarely into an honest and voluntary allocation process? Isn't that the beauty of markets?

The dirty little secret of modern environmentalism is that it seeks to protect value choices that are only attainable through unfunded political mandates - exhibit one being the Endangered Species Act. If the Endangered Species Act were priced and cost-spread across the public at large that chooses its protections, it would be a heck of a lot smaller in scope. Same thing for environmental water. If, for example, everybody in California had to pay a surcharge to their water bill which was designed to "price in" the retirement of vested water rights that are being crimped by the ESA, the Clean Water Act, the Porter-Cologne Water Quality Control Act, Fish & Game Code section 5937, the "public" trust, etc., I think you'd find that your minimum environmental flows would be truly "minimal" in the proper sense of that word.

Yes, the dirty little secret of modern environmentalism is that it's not up to market challenges. Rather, it re-allocates private property through the political process, which is the only place it can survive in the form that we now see it. And the crucial mechanism is that it can use majority political power to enforce outcomes that impact minority rights - water rights and land rights. The problem with that is that the U.S. Constitution does interpose a final bulwark against that going too far - the takings clause. At some point, in theory anyway, the public has to pay for public choices.

I don't mean to carry this too far, other than to urge you not to give up on markets to protect environmental values in water. There are great environmental organizations out there that do in fact put their money where their mouths are - see, for example, the Nature Conservancy [DZ: see post above]. And markets are honest, at least if you buy into the notion that original access to money is egalitarian. Moreover, what you describe as "externalities" are within the realm of pricing. Does in-stream water create beautiful vistas? Then create a public financing mechanism for the Wild & Scenic Rivers Act. And so on. "Public" goods are eminently financeable - fire, police, military, etc. Why not the environment? Why open environmental protections up to the accusation that they're a ripoff of the minority by the majority?
[My reply was] Let me respond to the last bit (externalities) by saying this:
  1. There are public good benefits from environmental amenities.

  2. I don't think that these benefits should be "bought" for free, i.e., seized from private owners.

  3. Many would say that they were given for free, e.g., to farmers.

  4. Let's assume that those rights should be recognized and that $$ should be paid for benefits. What price should be paid?

    Now we get to the crux of the problem -- market power of those who do not want to sell and seizure of power by those who do not want to pay. If they struggle (and you know they do), the environment itself suffers -- so there's a need for one side to "win" over the other. The current trend is to give more power to enviros.

    [This is why I think that ag groups should be EAGERLY running to markets; if they do not, they will lose the water AND get paid nothing...]

  5. The real problem in paying more than zero comes from free-riding, i.e., even if you convinced enviros that it was worth paying for enviro goods, they hesitate to put up their own money (see my rant on EDF here); they prefer to use OPM (Other People's Money).
Even if I wanted to propose a market solution for enviro stuff, I'd have to go through a political process. The best version I can think of would involve a two-step decision by voters: How much $$ for the environment? How to divide that $$. Too bad that politicians and bureaucrats (and lobbyists) are making that decision FOR citizens.

Bottom Line: I'd be happy to have a "market" for enviro services, but the public good/free rider problem is too large -- that's why I just "set aside" some water and then let the market allocate the rest. TNC
is doing a great job at private transactions, but they can only make a small dent relative to gov't involvement.