Evolutionary Phases in the Development of Property Rights:
Access to the Commons with no Rivalry
The Tragedy of the Commons
Laws and Regulations
Private Property Rights
By the late 1960s, it was obvious that the United States had moved into the second phase of property rights: the tragedy of the commons. Environmental degradation had spread beyond isolated cities like Gary, Indiana, and Pittsburgh (which, incidentally, have both made great strides toward improved air quality). Congress more formally delineated rights to use the environment by enacting environmental legislation for both water and air.
Arguments about environmental regulation can be rancorous. Environmentalists are often accused of shunning cost-benefit calculations in favor of rigid regulations requiring greater purity. Many environmentalists complain that bureaucrats fail to aggressively combat pollution. For example, turmoil at the EPA in the 1980s reflected outrage that regulators were selling out to polluting industries. This rhetoric has been counterbalanced: firms faced with high costs of cleaning up oppose EPA regulations by loudly criticizing the ineptitude of environmental managers. In spite of this furor, environmental policy appears to follow a smooth and predictable path.
The first step in moving past common, unrestricted use of the environment entails identifying causes of such problems as air pollution. Smog was first noticed in the 1940s as a haze against foothills east of Los Angeles. Smog was first thought a passing thing, but pressure slowly mounted to clean the persistent brown cloud. One problem was that no one could identify the nature of smog, that is, where it came from or what its effects might be. By 1951, however, a Cal Tech study fingered auto emissions as the major culprit.
When the EPA was first charged with responsibility for environmental quality, it viewed mandatory cleanup by all polluters as the only practical approach. Abatement was initially treated on a case-by-case basis, but uniform rules seemed necessary on two grounds. First, the EPA expected its mandates to be easily monitored. Second, uniform standards legally treat the affected parties equally and are nondiscriminatory constitutionally, even if they dictate unequal burdens of pollution control.
During this period of uniform pollution control, society learned more about pollution and how to measure it, paving the way for marketable pollution rights to emerge. At the same time, political obstacles shaped mandatory rules and standards. Special-interest groups lobbied for rules to benefit them. Surprisingly, special-interest groups frequently pressed for increased environmental purity; it is a mistake to think that regulations harm all firms. Some are harmed and some are not. For example, control over pollution in steel making entails substantial economies of scale. Thus, big firms tend to advocate tough rules that drive their smaller competitors out of business. The demise of small firms promotes environmental quality. Firms in polluted regions want pollution control requirements to be as burdensome on firms in cleaner areas. This also enhances environmental protection, but at significant cost. In most cases, special-interest pressures have caused inefficient regulation.
Despite special-interest groups, there has been a steady movement toward more convenient and transferable environmental property rights. The EPA allowed the bubble concept to be implemented in many situations in the 1970s. “Bubble” refers to a performance standard imposed for the area surrounding a plant or a group of adjacent plants, as opposed to the standards that were originally imposed on each specific source within a plant.
The bubble concept allows firms to transfer pollution rights between sources within a plant as long as a prescribed standard of environmental quality is met.
There is a continuing evolution from the bubble concept to pollution rights that are marketable between plants. The gains from exchange that exist within a plant are also available between plants. Some permits to pollute are also now marketable.
An offset policy allows a new firm to enter an overpolluted area by inducing other firms to reduce emissions. Air quality must show a net improvement, and the new firm must meet all individual standards imposed on existing firms.
What this means is that a new entrant can bargain with existing firms, paying them either to shut down or to employ better pollution controls. For example, a California firm was permitted to build a 40,000-barrel-per-day oil terminal after paying $250,000 for an offset created when a local chemical plant closed. Such offsets are now advertised for sale in the Wall Street Journal. The 1990 Clean Air Act specifically permits coal-burning utilities to overcomply with sulfur dioxide standards and then sell their extra pollution rights. Recently, Northeast Utilities of Connecticut donated to the American Lung Association the company’s pollution rights—rights to release 10,000 tons of acid-rain creating chemicals. A recent extension of offsets is described in Focus 3.
Although market solutions have crept into the regulatory postures of agencies like the EPA, there are still many inefficiencies that exist only to enhance the wealth of special interests. For instance, the bubble concept applies only to old plants, not new ones. New-versus-old disparities in environmental controls are a recurrent theme. Another example of special-interest effects is that the net improvement in the environment necessary to qualify an offset as legal is a political football often kicked from one end of the field to the other. Firms with offsets for sale commonly try to influence regulators to require great improvements in environmental quality before allowing a new firm to enter a blighted area; this drives up the value of existing rights to pollute.