Environmental Economics

From Forbes.com:

Commentary


Environmental Economics

Art Carden, 04.21.09, 01:45 PM EDT

Invoking private property and prices to regulate land use and recycling.







There is an Earth Day poster in the elevator down the hall from my office that says: "Someone Is Killing the Earth."



Underneath this caption, my friend and colleague Mike Hammock wrote, "It was Art Carden!"



This inspired me to think hard about the relationship between economics and the environment, and I wrote a short essay entitled "Economic Calculation in the Environmentalist Commonwealth."



That essay inspired the article you're now reading. I consider myself an "anthropocentric environmentalist," which is a fancy way of saying that I care about environmental issues because I care about human flourishing.



This doesn't come at the expense of economic reasoning, though, and economics leads us to surprising and often counterintuitive conclusions. Economics shows how appearances can be deceiving, and I find a lot of environmental initiatives are like rotten Granny Smith apples: They're green on the outside, but they're brown on the inside. Here's how and why.



Private property is essential to a well-functioning social system because it allows that system to generate prices. Prices provide the crucial information people need to make rational decisions, but prices do not mediate all environmental conflicts because some things are not owned. When resources are not owned and therefore outside the price system, the information we would need to evaluate the costs and benefits of different environmental initiatives literally does not exist.



I stress that it is not just that environmental issues are difficult or complex. The problem is that--given the absence of prices, profits and losses--we do not have the information we need to articulate what responsible environmental stewardship would mean, much less exercise it.



Endless debates about land use illustrate this principle. Development is opposed by people saying that we owe it to our children to conserve our precious natural resources, but University of Rochester economist Steven Landsburg asks the right question. Who are we to say that our children will prefer an old-growth forest to the income produced by a parking lot or high rise?



Without private property rights, the information we would need to make a judgment cannot exist. If it is more profitable to build a high rise, then we can reasonably infer that our children, on net, would prefer the income from a high rise. If virgin wilderness is more profitable, we can reasonably infer that our children would prefer the income from a forest.



Even if we're repulsed by this reasoning, who are we to substitute our judgment for that of our friends and neighbors? I borrow an insight from Sheldon Richman at the Foundation for Economic Education: If we don't think others can be trusted with liberty, on what basis do we expect them to trust us with power?



Land-use restrictions also have unintended consequences that have to be considered. Harvard economist Ed Glaeser cites California as an example. Restrictions on land use in California drive up the price of housing there, causing people to move to less energy-efficient places--Houston's suburbs, for example.



A great irony of land-use restrictions is that they encourage people to take land that is much more wisely used for housing and grow crops on it--and vice versa, inducing people to take land used to grow crops and build housing on it. Ironically, probably the "greenest" thing we could do is totally eliminate building restrictions.



We can also reevaluate what we think about recycling. If there's a problem, it's that something valuable exists but isn't owned or priced. A quick Google ( GOOG - news - people ) search turns up endless debates about the merits and demerits of recycling, and it is an argument that will never be resolved as long as it is outside the price system.



Where recycling is worthwhile, people earn profits doing it. Just because it is unprofitable now does not mean that it is not worthwhile, but the information we would need to evaluate recycling literally does not exist because the act of recycling is mediated by politics rather than prices.



The Energy Information Administration reports that using recycled aluminum uses 95% less energy than mining aluminum from raw bauxite. The fact that firms aren't falling over themselves to use recycled aluminum suggests that something in the accounting is incomplete. After all, what greedy capitalist wouldn't jump at the chance to save 95% on a key input? It may be that using recycled aluminum uses less energy but is more expensive on other margins.



We recycle because we assume we will run out of our finite resources if we don't--but the problem isn't that our planet isn't made up of a finite number of atoms. The problem is that a lot of those atoms are not owned by anyone. Therefore, we have no incentive to use them wisely. People have incentives to conserve that which is privately owned, and rising prices that result give people incentives to develop substitutes.



Just because it's been thrown away doesn't mean it is lost forever. Non-biodegradability can be a virtue: disposable plastics sequester carbon for centuries and may even someday provide a source of energy. My friend and co-blogger Michael Munger hypothesizes that, someday, people will be mining old landfills for petroleum products that can be turned into fuel. We aren't yet there technologically. But if you're looking for earth-friendly ways to use your time, finding ways to turn garbage into energy is probably more effective than badgering your friends about whether they are using too many napkins.



Private property rights also allow us to solve problems of environmental justice. To use another example, environmental amenities are capitalized into real estate prices. Harm can be identified--and blame can be assigned--when rights are clearly defined.



Finally, when measuring costs and benefits, we must always ask, "Compared to what?" It is true that smog is noxious, but it's a great improvement over the pulverized horse manure that filled city air just a few generations ago.



Economic analysis is indispensable to sensible environmental policy. It shows that a lot of what we think is "green" really isn't. We have the opportunity to better the world for ourselves, our friends and our neighbors by seriously considering what careful economic analysis can teach us about the importance of private property rights and prices.



Art Carden is an assistant professor of economics and business at Rhodes College in Memphis, Tenn., and an adjunct fellow with the Oakland, Calif.-based Independent Institute. He is a regular contributor to Mises.org, Lifehack.org and Division of Labour.