Property rights and environmental quality: a cross-country study.

• Jurisdiction: United States
• Date: 22 March 2011
• Author: Kerekes, Carrie B.

Public policy often regards pollution and other measures of poor environmental quality as public bads that result from market failure and require government intervention through regulatory policies and more stringent environmental standards. In this article, I argue that pollution and environmental quality should instead be regarded from a property rights perspective, in which institutions of clearly defined and enforced property rights create incentives that lead to reduced levels of pollution and an overall improvement in environmental quality. Using cross-country data, I examine the relationship between property rights and environmental quality.

This article shows that where property rights can be well defined and enforced, as with property rights pertaining to land and water, increases in the security of property rights lead to improvements in environmental quality. For instance, I find that as property fights become more secure, deforestation decreases and access to safe water and sanitation facilities improves. When property rights cannot be well defined, such as property rights over the air, increases in the overall security of property rights may erode environmental quality. For example, I find that more secure property rights are positively related to several indicators of air pollution.

The findings that more secure property rights are positively correlated with air pollution and negatively correlated with land and water pollution are not necessarily surprising given the nature of property rights over these resources. The adverse effect of property rights on air quality is also unsurprising due to the mechanisms through which property rights affect environmental quality. Property rights have both a direct and an indirect effect on environmental quality. The direct effect is that as property rights become more secure, individuals have incentives to maintain, conserve, and efficiently allocate resources. More secure property rights also lead to increases in production, exchange, and economic development, This process has an indirect impact on environmental quality: as more rapid industrialization occurs, firms may increase air pollution. Although the direct effect of more secure property rights on environmental quality is positive, the indirect effect may be negative. The net result will depend on the magnitudes of these direct and indirect effects. Several problems arise in defining and enforcing property rights over the air. Thus, it is likely that the direct effect of property rights on air quality will be small, while the indirect effect will be negative and larger in magnitude--so as overall property rights become more secure air quality may actually decrease because rights are not well defined and enforced.

Other articles have examined the impact of the level of a country's income and the inequality and distribution of power within a country on environmental quality (Grossman and Krueger 1995, Torras and Boyce 1998). However, those studies fail to take into account the importance of property rights. This article adds to the literature on environmental quality by focusing on the importance of secure, well-defined private property rights.

Environmental Quality

Environmental quality and its value have historically been difficult concepts to measure and evaluate. The term "environmental quality" itself has various meanings and interpretations. Air and water pollution are common indicators of environmental quality, as are deforestation and soil erosion.

Air pollution is particularly harmful to human health and is commonly measured by suspended particulate matter (including heavy particles and smoke), sulfur dioxide (S[O.sub.2]), nitrogen oxides (N[O.sub.x]), carbon monoxide (CO), chlorofluorocarbons (CFCs), carbon dioxide (C[O.sub.2]), methane (C[H.sub.4]), and lead (Pb). Air pollution is associated with a multitude of health problems, ranging from coughing and bronchitis to respirator'/disease, miscarriages, birth defects, retardation, and mortality. Far from a recent phenomenon, air pollution has long plagued the global environment. Air pollution reached its maximum between 1700 and 1900, after which time it has declined steadily. Possible reasons for this reduction include decreases in the consumption of fossil fuels, improved technology and equipment that reduce harmful emissions, and increased energy efficiency (Lomborg 2001). Also, improved environmental quality as measured by air pollution is associated with higher levels of economic development. Therefore, as air quality continues to improve in many developed countries, it is expected that this trend will expand to developing countries as incomes rise.

Water pollution is another indicator of environmental quality. Measures of water quality include the level of dissolved oxygen, pathogenic contamination, and the concentration of heavy metals within a body of water. Water pollution can reduce the aesthetic and recreational quality of bodies of water and may pose hazards to health if individuals consume contaminated fish or other marine life. Pathogens pose a significant health problem by spreading serious, and sometimes fatal, diseases. Such diseases include dysentery, typhoid, cholera, and hepatitis. The literature uses concentrations of fecal coliform (bacteria found in human and animal feces) as a measure to indicate the presence of pathogens (Grossman and Krueger 1995). Heavy metals include lead, cadmium, arsenic, mercury, and nickel, and are associated with a large number of health risks. As with air pollution, water pollution is also decreasing over time, including concentrations of fecal bacteria. Similar to air pollution, fecal pollution in rivers increases with income to a certain point, after which it decreases with further economic development. Also, oxygen levels in water increase with improvements in economic development (Lomborg 2001).

In addition to air and water pollution, indicators of land pollution are also important for examining environmental quality. Land pollution can be measured by such factors as deforestation, soil degradation, industrial waste, and loss of biodiversity. Obviously, tropical forests are a valuable asset because of the timber they provide.

In addition, deforestation occurs in the developing world as individuals use wood as a source of fuel. Forests are considered a valuable natural resource that provide timber for a multitude of products, offer recreation and aesthetic value, prevent soil erosion and reduce flooding, and increase biodiversity by acting as a home to animals. The theory then is that higher levels of deforestation are harmful to the environment and are less desirable. Soil degradation refers to erosion and the depletion of minerals and nutrients present in soil. Soil degradation reduces the biological and economic productivity of land, thus it is also undesirable.

Although pollution is declining in developed countries, air and water quality are still difficult to ensure due to problems arising from the assignment of liability for pollution. Primarily, it may not be easy to identify polluters, the rights to clean air and water are not vested in particular individuals, and the costs of pollution can easily be passed on to other individuals (Anderson and Leal 1991). Large numbers of individuals make it difficult to define and enforce property rights and to assign liability for pollution. As the number of parties affected by pollution increases, the damage each individual faces is likely to be small. Free-rider problems occur, with individuals having little incentive to take action against the polluter. Likewise, large numbers of polluters make it difficult to find the source of pollution and to assign liability. In summary, an increase in the number of individuals increases the cost of internalizing externalities (Demsetz 1967).

For these reasons, regulatory policies are often advocated to correct perceived market failures and to address the public good properties of environmental quality. The result is a second-best solution, which includes selecting a level of pollution to be attained at as low a cost as possible (Anderson and Leal 1991). There are problems with implementing this second-best solution, including informational asymmetries, knowledge of the lowest-cost technologies to reduce pollution, and political pressure from special interest groups to achieve specific outcomes. In light of these problems, this article maintains that secure property rights are still the preferable alternative to regulatory policies in order to promote environmental quality.

Property Rights

Recent literature illustrates the importance of the relationship between institutions and economic development. Douglass North (1990) argues that institutions are the "underlying determinant" of economic performance, and defines institutions as constraints created to reduce uncertainty in exchange by structuring political, economic, and social interaction. Property rights in particular are important for economic development. The important role of secure property rights for successful economic growth has long been emphasized by many economists (Montesquieu 1748, Hayek 1960, Smith 1776). More recently, Acemoglu and Johnson (2005) find evidence of a positive correlation between private property fights and economic growth, investment, and financial development. Several other studies also analyze the relationship between property rights and economic growth (Besley 1995; Knaek and Keefer 1995; Leblang 1996; de Soto 1989, 2000; Acemoglu, Johnson, and Robinson 2001, 2002; Rodrik, Subramanian, and Trebbi 2004; Kerekes and Williamson 2008).

Recent literature also examines the impact of property fights on natural resources and the environment. Demsetz (1967) offers a theory of property rights and argues that one of the fundamental functions of these rights "is that of guiding incentives to achieve a greater...