20 Aug 2010

A big question about bad farmers

Economists often assume that people use their foresight to weight the costs and benefits from actions on their current and future selves.

For example, a farmer without neighbors* will not overdraft an aquifer today because he will want water tomorrow, for himself or his descendants.

But what if he makes a mistake and really does use the water "unsustainably"?

There appear to be three ways to respond to this mistake:
  1. He's screwed up. Let him suffer.
  2. The government should intervene, to rescue him from his folly and regulate sustainable use.
  3. Allow the market to correct the problem, so an outside buyer replaces him and restores sustainability, i.e., the long term flow of value from the land and water.
Note the problems with (2) that do not exist with (3). The government is a monolith that can make a similar mistake (intervening too much or too little or in the wrong way), but many market players compete to provide the best solution. Second, the government does not get rewarded for clever action (more profits) so there's no incentive to get things right. A new buyer, OTOH, would benefit from the profits of a good action.

What do you guys think of this problem and the solutions? Do you have example of wise governments or dumb markets? Please DO ignore problems and solutions involving property rights and/or commons.*

* I am intentionally avoiding a tragedy of the commons race among neighbors to pump before others do, etc.


waterwonk said...

The problem is that aquifers take so long to restore. We're pumping up deep water that will take 10,000 years to recharge. And in some cases, the aquifers have layers that collapse so it can never be recharged.
You have a parallel to the tragedy of the commons -- the generational tragedy. The market incentives are to not use the aquifer sustainably.
There are also issues with soil and groundwater salinity. Many soils around the world are former marine sediments, which salinize groundwater.
The usual "market adjustment" for this is a reduction in population.

Mister Kurtz said...

I think there is a public trust approach to the example. Just as you can not violate game laws, or dump mercury, on your private property, so should you not be permitted to waste a renewable resource. Of course, overzealous moralists in government could use this as an excuse to micromanage every aspect of our lives, (and many in the Eco-Taliban are eager to do so), but one has to count on the adults being in charge.
As waterwonk points out, the consequences here are very long lasting, and the market punishment for the mismanagement will not be meted out for a very long time. Similarly, poor land use planning will, over time, destroy the wealth of a community, but that does not mean we need no zoning laws; not because markets don't work, but because there is so much time between cause and effect, and because so many third parties suffer.

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