People or prairie chickens: the uncertain search for optimal biodiversity.

• Author: Thompson, Barton H., Jr.
• Position: Baxter Symposium

A quarter century ago, Professor William F. Baxter authored a widely read and influential book on the law and economics of pollution control. In People or Penguins: The Case for Optimal Pollution, Professor Baxter argued that environmental policy must take account of both the benefits and costs of pollution abatement in order to avoid wasting scarce societal resources. In this article, Professor Barton H. Thompson, Jr. criticizes the Endangered Species Act for failing to incorporate the lessons of People or Penguins. Recognizing the difficulties that the government would face in measuring and balancing the costs and benefits of regulatory actions under the Act, Professor Thompson suggests an alternative hierarchy of governmental policies. First, the government should eliminate public subsidies that encourage the economically inefficient destruction of valuable habitat and should promote markets in the "natural services" of species and ecosystems. Second, the government should establish a system of taxes and subsidies that incorporates the values of species and ecosystems not reflected in the markets for their natural services. Although quantifying such values would be difficult, the task would be simpler than a full cost-benefit comparison. Finally, and only where these steps are inadequate, the government should consider using the Endangered Species Act to directly regulate activities harmful to biodiversity. Use of the Act should reflect a balancing of both the benefits and costs of biodiversity protection (taking full account of uncertainties, irreversibilities, and intergenerational tradeoffs).

A quarter century ago, Professor Bill Baxter published a short polemical book entitled People or Penguins: The Case for Optimal Pollution.(1) Despite its age and its challenge to many sacred environmental precepts, the book remains one of the most widely read and influential texts in the environmental field. No one seeking an enjoyable and straightforward explication of the law and economics of pollution regulation need look further. For this reason, many environmental anthologies still include excerpts from People or Penguins, virtually all of the major environmental law casebooks either quote or reference it in their sections on environmental economics, and scholarly articles and books continue to cite it.(2)

Baxter framed his analysis of "optimal pollution" around the biological concern in the early 1970s that DDT use was causing damage to the world's penguin population.(3) The logic of People or Penguins was simple. First, penguins and other environmental amenities are worth saving not for their own sake, but only if and to the degree that they are important to people for aesthetic or other reasons. Second, eliminating pollution is costly; it consumes resources that otherwise could be used to provide more housing, medical care, can openers, and operas. The pollution issue therefore involves a tradeoff between the anthropocentric benefits of lower pollution and the costs of reducing pollution to that level. Third, the free market cannot ensure that society makes an optimal tradeoff (as it might in other contexts) because the air, water, and other media into which we dump our pollutants are "commons" that everyone can use without paying for the cost of the negative "externalities" imposed on others. Finally, the solution follows from the problem: Government should find an administratively simple means of internalizing the externality. Both class actions and effluent taxes can meet this bill, but taxes are preferable because class actions remove victims' incentive to avoid injury (e.g., by residing in an area with less pollution) by ensuring they will be compensated for any damages they incur. Under either mechanism, the government need only calculate the cost of the externality and impose that cost on the polluter. The polluter will then determine the "optimal" level of pollution based on the relative marginal costs and benefits of various levels of pollution reduction.

Baxter ended the normative analysis of People or Penguins wondering why, despite the strong merits of a tax or class action approach, the nation was pursuing a "tailormade command approach" to the control of pollution.(4) That question remains alive and relevant today. Although the United States has used taxes occasionally to try to reduce the production of harmful pollutants (such as the current federal tax on chlorofluorocarbons and other ozone-depleting substances),(5) most domestic efforts to impose pollution taxes have gone down to stunning defeat. Both the Federal Superfund program(6) (which holds waste generators, disposers, and transporters liable for the cost of cleaning up contamination) and the Federal Oil Pollution Act of 1990(7) (which holds owners and operators of vessels strictly liable for oil spills) are imperfect cousins of Baxter's "class action" approach.(8) But the tailormade command approach remains the nation's predominant means of addressing pollution.(9)

In People or Penguins, Baxter suggested--or perhaps hoped--that the environmental legislation passed up to that point had eschewed his preferred tax approach in favor of tailormade commands because legislators had not yet "carefully thought through environmental problems in any very analytical way" and were reluctant to delegate the power to set tax rates to an administrative agency.(10) If and when legislators thought carefully about the pollution problem, they would recognize that taxes are more likely to ensure an economically optimum level of pollution, require less information to implement than tailormade commands, and place no greater power in the hands of administrative agencies than the "enormously powerful and potentially destructive power" of regulation.(11)

In hindsight, the obstacles to effluent taxes seem far more intractable. At root, none of the major organized interest coalitions in environmental politics generally favors taxes, and none probably ever will. Although taxes give industry the flexibility to choose an economically optimal level of pollution, they also redistribute income away from industry. Tailormade commands, moreover, can and often do provide current members of an industry with a useful trade barrier against new entrants. Most environmental groups do not like the explicit message of taxes that environmental harm can be monetized and traded off against commercial costs. Although taxes are no more "licenses to pollute" than tailormade commands (which are simply free licenses to pollute), most environmental groups prefer statutory schemes that speak largely in health and welfare terms and only secondarily, and behind the scenes, permit economics to be factored into the ultimate regulatory commands. Choice of regulatory mechanism also impacts which congressional committees have principal authority over legislation; environmental groups not surprisingly have preferred to avoid tax committees, which are notoriously conservative.

Although there is much to be gained from a closer examination of the reasons that United States legislatures have not looked fondly on effluent taxes and brainstorming how obstacles to their future adoption might be removed,(12) I would like to use this tribute to Professor Baxter to see what insights his simple but elegant theorems shed on another environmental issue--preservation of biodiversity. From a "Baxterian" perspective, our domestic approach to biodiversity, as embodied legislatively in the Federal Endangered Species Act (ESA),(13) seems even more wrong-headed than our efforts to regulate pollution. Not only does the ESA forsake taxes and other market approaches in favor of tailormade commands, the Act also rejects virtually any role for economics in the determination of how much biodiversity to preserve. Yet biodiversity policy is in far greater flux than the more mature and calcified pollution field and thus holds out greater hope for societally valuable reform. In short, biodiversity policy is a field crying out for a little Baxterian common sense, and would likely benefit from it.

Part I starts with the same "modest proposition" with which Baxter began People or Penguins: "that, in dealing with pollution, or indeed with any problem, it is helpful to know what one is attempting to accomplish."(14) The vast majority of books and articles about the ESA simply assume that the nation must save any and all endangered or threatened species without detailing why. Baxter suggested that we need a set of meta-principles before we can examine specific environmental policy questions and argued that one of the most important is that we try to maximize the value, necessarily to humans, of our limited resources. Baxter called this his "no-waste criterion."(15) Applying this criterion to the biodiversity context requires us first to determine why preserving species is of any value to humans. Explanations, when provided in the current literature, typically read like laundry lists with no effort to prioritize, weigh, or scrutinize the various values suggested; these lists typically include the aesthetic or cultural value of endangered species, their potential medical or industrial value, the "natural services" that they and the ecosystems of which they are part provide us, and their ecotourism value.(16) As I will explain, the natural service values are probably the most important and should drive biodiversity policy. The existing literature also typically ignores the other side of Baxter's "no-waste criterion": cost. Ensuring the optimum use of society's resources requires not only identifying the value of endangered species, but weighing that value against the value of the other uses to which we could put the resources necessary to save endangered species.

Parts II and III critique current United States biodiversity policy from the standpoint of the principles set out in Part I. Part II outlines the basic...