Incentives Change With the Rules of the Game

Economic Concepts	Environmental Context
regulation shape incentives	Endangered species
unintended consequences
incentives
command and control
markets
voluntarty exchange

National Content Standards Addressed:

Standard 4: People respond predictably to positive and negative incentives.

Standard 5: Voluntary exchange occurs only when all participating parties expect to gain.

Standard 7: Markets exist when buyers and sellers interact. This interaction determines market prices and thereby allocates scarce goods and services.

Standard 16: There is an economic role for government to play in a market economy whenever the benefits of a government policy outweigh its costs.

Standard 17: Costs of government policies sometimes exceed benefits. This may occur because of incentives facing voters, government officials, and government employees, because of actions by special interest groups that can impose costs on the general public, or because social goals other than economic efficiency are being pursued.

Key Points

1. 1. You can’t do just one thing. Government policies shape incentives for behavior that affects the environment now and in the future.
      • Review: Environmental amenities are scarce. People must choose among alternative uses.
      • Review: Choice imposes opportunity cost. There are no costless decisions about the environment.
      • Incentives influence people’s choices.
      • Government policies affect the environment by shaping incentives.
   2. Public policies dealing with environmental issues fall into 3 categories:
      • Moral suasion
        • Don’t Mess With Texas”
      • Command and control
        • Clean Air Act
        • Clean Water Act
        • Endangered Species Act
      • Market policies based on voluntary exchange can lower the costs and/or increase the benefits of environmental amenities.
        • While economists believe market policies have the greatest potential, they are the least used.
        • Successful use in pollution control (See Lesson 7)
        • Successful use in habitat and species preservation
          • Example: wolves

Case Study

1. The Endangered Species Act exemplifies the incentive problems that can be created by command-and-control legislation.
   • Brief background and overview of ESA
     • 1973 – motivated by concern for Bald Eagle
     • 40 page legislation with over 200 pages of implementation guidelines
   • ESA website overview: http://ecos.fws.gov/tess_public/TESSWebpageUsaLists?state=all
   • Endangered species information for seminar location state
     • designations: E, T, X
   • Evaluation of endangered species preservation efforts under ESA
     • Data: # on list, # removed, how removed
     • Sample studies
2. The failure of the ESA to protect and restore threatened populations is the result of the perverse incentives created by the legislation.
   • • Affected individuals bear huge costs to protect endangered species or habitat and derive very little benefit.

   Activity: EcoDetectives, “Lesson 6: How Can We Help Endangered Species?” pp. 57-70. (Activity 6.5: “Would We Still Love Cocker Spaniels If They Were Endangered?”)

3. Market-based policies that rely on voluntary exchange create positive incentives for habitat and species protection.
   • • Review: “Bag and Baggage” Game – voluntary exchanges moved “pollution” away from those who valued cleanliness most
     • Case: Ducks Unlimited
     • Case: the American bison

   Activity: “Policy Analysis” (Activity 7.2 from EcoDetectives, “Lesson 7: Can Incentives Protect Endangered Species?” pp. 71-86.)

4. Market-based proposals using “willing buyer” / “willing seller” exchanges show great promise in habitat-preservation efforts that are the key to successful endangered species programs.
   • Connect concepts from sessions 3 (voluntary exchange) and 4 (incentives)
   • Case example: Nature Conservancy – Chiricahua Leopard Frog
     http://nature.org/wherewework/northamerica/states/arizona/press/press1522.html
5. Conclusion: The ESA will continue to have little success as long as people are not rewarded for protecting endangered species.
   • Government based policies have expected benefits and expected costs. The real costs and benefits come when the policy is implemented. In the case of the ESA, the real costs were higher than expected and the real benefits were lower

Reading Assignment:
“The Secret Lives of Lobsters,” Square One Vol 4 #1, November, 2002. http://www.perc.org/pdf/sq1_nov02.pdf

Additional Suggested Readings: Fischer, Carolyn. “Trading in Endangered Species – Legal Sales Versus Total Bans,” Resources, Spring, 2003, pp. 12-14.

McConnell, Margaret Walls and Elizabeth Kopits. “A Market Approach to Land Preservation,” Resources, Spring, 2003, pp. 15-18.