Property Rights and “Green” Incentives

Economic Concepts	Environmental Context
Property rights shape incentives	Resource conservation: fisheries
Incentives
Property Rights
Tragedy of the Commons

National Content Standards Addressed:

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

Standard 10: Institutions evolve in market economies to help individuals and groups accomplish their goals. Banks, labor unions, corporations, legal systems, and not-for-profit organizations are examples of important institutions. A different kind of institution, clearly defined and well enforced property rights, is essential to a market economy.

Key Points

1. The underlying assumption with which economists approach social issues is that all social phenomena emerge from the choices individuals make in response to expected costs and benefits to themselves. (Heyne)
   • Review: Scarcity forces people to choose and to bear opportunity costs. (tie back to Bag game)
   • Review: People choose, not organizations or countries or governments.
   • Review: People’s choices reflect their perceptions of the costs and benefits of the available alternatives.
2. Incentives affect people’s choices about the environment.
   • Incentives are the anticipated rewards or punishments, monetary and non-monetary, that influence individual choices.
     • Note the word anticipated. We never know exactly what the costs and benefits are going to be; economics recognizes that people choose in light of an unknown future.
       • Illustrations: For example, the invention of the automobile – growth, convenience, and environmental impact
   • Inference: Changes in incentives result in predictable changes in human behavior.
   • Inference: If we want to change human behavior, we must change the incentives.Activity: “All the Fish in the Sea”
3. The Tragedy of the Commons – Property held in common tends to be overused because each user gains the full benefit of use while the costs of his use are shared by all other owners.
   • Common ownership rewards aggressive harvesting and premature use of the resource.
   • Common ownership promotes conflict among community members with differing values.
   • Common ownership penalizes stewardship and resource conservation.
   • Common ownership works well to preserve resources only when no one wants to use them.
   • Case: Fisheries depletion
   • Case: 19th century buffalo slaughter / 20th century buffalo destruction of Yellowstone Nat’l Park
4. The incentives associated with private property rights can help conserve scarce resources:
   • Private ownership entails penalties for premature harvesting or over-harvesting of resources.
   • Private ownership rewards community and individual cooperation.
   • Private ownership rewards conservation and stewardship behavior.
   • Case: ITQs as a tool for fisheries conservation and restoration
   • Case: Nature Conservancy
5. To act as effective incentives for resource stewardship, private property rights must be defined, defendable, and divestible.
   • Definition: The privileges and limitations of property ownership must be clearly specified and easily ascertained.
   • Defendable: Owners must have the reasonable expectation that their property rights will be protected and/or that those who violate property rights will be punished.
     • This may be through the owner’s own power or through social/governmental institutions like police and courts.
   • Divestible: Owners may freely transfer all or parts of their property rights to others.
6. Law and other social institutions affect the incentives for environmentally-friendly behavior by property rights holders.
   • Policy consequences lie in the future and sometimes well-intentioned actions produce results that are not environmentally-friendly.
     • Endangered Species Act (See Lesson 5)

Suggested Reading:
Community Run Fisheries – Avoiding the Tragedy of the Commons, by Donald R. Leal (PERC Policy Series PS-7, September, 1996) http://www.perc.org/publications/policyseries/community_full.php

Homesteading the Oceans – The Case for Property Rights in U.S. Fisheries, by Donald R. Leal (PERC Policy Series PS-19, January 2001)
http://www.perc.org/pdf/ps19.pdf
Suggested Additional Classroom Activities:
Eco-Detectives – Lesson 2: “Why Do Free Goods Disappear So Quickly?” pp. 19 -26.

Eco Detectives – Lesson 3: “Why Do We Have So Few Whales and So Many
Chickens?” pp. 27-38.