The Common Cure For the Common Inversion

As I was wandering around Las Vegas and enjoying their 70-degree weather I found myself contemplating the inversion here in Logan. As a result I kept coming back again and again to the idea that there really is no way to create the proper incentives for people to internalize the externalities created by driving their vehicles around on red burn days. Any Pigouvian type regulation would result in more unconstitutional inefficiency, which is never desirable (unless of course you are the one receiving the free lunch).

For me personally this is the fundamental problem with environmental policy. I believe that the choice that we have to make in environmental politics is between freedom and the pigouvian chains that cause inefficiency. I would rather live free, responsible for my own actions and breath bad air then have good air and forgo even a small portion of my efficient freedom. Thus, it seemed that I was destined to live with bad air.

Then, as with other class reading selections, I was reading through Hill's and Meiner's text and had yet another epiphany. I realized that the solution to the infamous Cache Valley inversion was staring me in my face (and had since last semester). The whole incentive thin was just a game anyway. The first objective then would be to identify the players of the game and define the property rights they possess. This would eliminate the transaction costs (the costs of dealing with everyone in the valley) that have kept the inversion an unresolved issue. Further after reading about Coase we know that in order for any efficient resolution to the existing negative externalities to be reached the transaction costs must be next to eliminated. Identifing players of the game accomplishes this task.

The players of the game could be identified in three groups; A) those who drive inefficient petroleum burning vehicles, B) people who desire clean air and are willing to pay for such air quality, and C) those who legitimately have no feelings one way or the other.

After the players of the game have been identified property rights need to be assigned (obviously this is the essential key, these rights need to be clearly defined, defendable and divestable for this solution to work). Those who would have claim on a property right would be players in Group A and Group B. Group C would not have a claim because there is no expectation from them for the clean air since they have no preestablished expectation for any outcome, simply put any solution they are happy. They will not loose or gain any benefit from either conclusion. But for the sake of argument lets say that this group consists of exactly one person out in Hyrum (named Mr. Nader), thus the group is not a large enough player to swing the outcome either way.

On to the property rights. The rights need to be defined in one of two ways, because both parties impose externalities on the other, (The people who value clean air place Pigouvian taxes on those who drive while those who drive their vehicle place pollutants in the air) who gets the property right does not matter (that is a debate for another forum) the outcome will be optimal either way. This is because the "previous units of [air or fuel] used provide positive, but declining benefits." Thus for every mile you drive or every additional breath of clean air you take the marginal benefit decreases.

The first option is giving the property right to Group A. In this scenario Group A would be able to drive as much as they wanted even on red burn days. Group B does have capital however. Because the optimal level of pollution is not zero, they could organize and agree to pay Group A a certain amount to not drive or reduce their pollutants by the same amount, (this solution would only work if the benefit they received from the reduced emissions was greater than the cost spread amongst the members of Group B). Thus because the value of driving for Group A is determined by what associated costs follow from what the next mode of transpiration is (walking, car pooling, mass transit, etc); if Group B could pay sufficiently and eliminate the unwanted cost of the alternatives there would be a net societal gain from the trade.

Group A would be willing to reduce their driving and thus emissions during the inversion while Group B's marginal benefit would rise. If the inceitves given from group B were suffeceint some memebrs might even switch sides. Both players would be made better off (even Mr. Nader could free ride with out imposing costs). The benefits exchanged for Group A not driving could be used for any purpose and create a positive utility, social cost would be eliminated since everyone was happy with the amount driven and the responding air quality would reflect the actual cost and subsequent supply of the polluting good.

The other option is to give the property right to Group B. In this situation the residents of Cache Valley have the right to breathe clean air. They can dictate how much Group A can drive and at what cost. Like the previous scenario, Group A also has capital. They could organize and communicate their interests to Group B. By doing so an agreement can be made in which Group A buys certain rights to pollute the air from Group B, thus the optimal level of pollution based upon cost and demand is once again reached. The air quality would accurately reflect demand.

With restrictions on activities and incentives internalized ingenuity would flourish. Ways to pollute less would be thought of because everyone is interested in reducing the costs they are forced to pay to achieve their goals. Thus in either scenario it would be beneficial to come up with new better technology. The incentive for fuel efficiency is created by these rules. What is ironic is that in either situation the incentives created are based on the self -interest of each player. Selfishness allows for progress and prosperity.

Of course the government would play a role, it would be limited to one of contract enforcement however. If one side broke their part of the contract there would be legal recourse the other side could engage in. Just like Postrel's piece, contract enforcement is key for this game of rules to flourish, otherwise each side would break their word at will. These contract enforcements would be the only fetter the market place would have.

All of this however depends on flexible rules. Every community has different values and environmental concerns, each concern with just as individual solutions. These communities need a basic framework to handle matters like contract enforcement although it is just as essential that they are allowed to create their own rules of the game. (For more on this see my previous post "The Real Relevance of Modern Regulatory Practice")

With Limited government interference we can all reach the beneficial living conditions we seek as well as allowing for the prosperity and ingenuity that sustains life.

P.S. I personally would want to see those in Group A get the property right because they would be more willing to compromise without overly sticking it to the other group as Randall O'Toole so adequately pointed out.