Private property and the politics of environmental protection.

• Author: Merrill, Thomas W.

Private property plays two opposing roles in stories about the environment. In the story favored by most environmentalists, private property is the bad guy. (1) It balkanizes an interconnected ecosystem into artificial units of individual ownership. Owners of these finite parcels have little incentive to invest in ecosystem resources and every incentive to dump polluting wastes onto other parcels. Only by relocating control over natural resources in some central authority like the federal government, can we make integrated decisions designed to preserve the health of the entire ecosystem. For these traditional environmentalists, private property is the problem; public control is the solution.

There is a counter story, told by the proponents of what is sometimes called free market environmentalism. (2) In this story, private property is the good guy. Environmental degradation is a problem because of incomplete property rights. If all resources were privately owned, then no one would be able to impose externalities on anyone else; potential polluters would have to purchase the right to pollute first. Similarly, if all resources--including habitats of endangered species and other ecologically sensitive resources--were privately owned, then owners would have incentives to invest in the preservation of these resources, and would use their ingenuity to get persons who care about environmental protection to pay for it. For free market environmentalists, public control of resources is the problem; private property is the solution.

Both sides in this debate are only half right. The traditional environmentalists are closer to the mark in their diagnosis of the problem. Property rights are always and inevitably incomplete, as it is costly to set up and enforce any system of private property. Because property rights are incomplete, owners of resources that are subject to private ownership--such as parcels of land devoted to productive uses--will always have incentives to disregard the costs they impose on common resources that are not subject to private ownership. Sometimes creating new types of property rights can help the situation; more often, however, the only cost-effective solution to these sorts of spillovers is government regulation.

On the other hand, the free market environmentalists are closer to the mark in devising a solution to the problem. Missing from the traditional account is any credible theory of how we can generate collective action to protect sensitive ecosystem resources. Bursts of collective altruism do happen, but they are difficult to sustain. Witness the history of socialism, or, more pertinently the history of environmentalism. (3) What is needed is an institutional arrangement that generates private incentives supporting collective action that will protect the environment. The best such arrangement is the widespread private ownership of land. In this sense, the free market environmentalists are closer to the mark in their prescription of a cure than are the traditional environmentalists, with their call for a bigger government.

I.

Casual empiricism strongly suggests that private property is good for the environment. Eastern Europe in the 1980s offered a kind of natural experiment about the effects of different property regimes. (4) An iron curtain ran through Eastern Europe from the Baltic to the Mediterranean. West of the line, real property was predominately subject to private ownership. East of the line, real property was owned by the state. The results were plain for all to see: while towns and villages on the west side were typically neat and clean, with well-scrubbed streets and colorful boxes of flowers in the windows, towns and villages on the east side were drab and dirty, with plaster falling off the walls and no flowers to be seen anywhere. These paired communities were generally composed of buildings of the same vintage and style of construction and were populated by families having the same ethnic background and cultural traditions. The only difference was that for forty years the communities in the west had been under a regime of private property, while those in the east had been under a regime of collective ownership.

Clearly, there is some kind of relationship between private property and environmental amenities. But what exactly is the causal mechanism that leads from private property to increased environmental protection?

Undoubtedly, part of the explanation has to do with what might be called the private law incentives created by a system of private property. As Harold Demsetz pointed out many years ago, private property is a powerful mechanism for internalizing externalities through private law. (5) Private property does this in two ways. First, private property allows one unique owner to capture improvements in the quality of the resources that are privately owned. If there were no private property in resources, any improvements would be experienced mostly as external benefits by others, and hence improvements would be under-produced. Second, by designating one person as the owner of resources, private property makes contracting about the use of resources easier--including contracting to reduce externalities. If these resources could not be privately owned, contracting about their use would be incredibly complicated and would almost never take place.

Without denigrating the importance of these private law forces, I would stress something else: that widespread ownership of private property transforms public law as well as private law. It does so through the creation of what might be called the private property lobby. This immensely powerful lobby creates a political culture that favors the regulation of uses of private property that diminish the value of other private property.

The public law impact of private property may be more significant than the private law effect, in terms of generating significant protection for the environment. To see this, consider three effects of private property...