Environmental Problems Abound

In the early years of white settlement in Australia, the environment was seen as a factor limiting the development potential of the nation. Tracts of forest had to be cleared for agriculture, mountain ranges conquered by roadways to permit expansion and rivers dammed to provide the water necessary for both rural and urban growth. Today the environment continues to be troublesome. Rather than the oversupply of yesteryear, we now observe pressures of excess demand in key areas. The environment is now subjected to demands from a growing range of sources both for development and conservation purposes. So the forests of South East NSW are in demand not only for timber production but also as nature reserves to ensure the survival of native plants and wildlife. Remnants of bushland in the cities are demanded for residential development and also as open space. Even the waters of Sydney's beaches are in demand not only for surfing but also as a waste disposal site.

Such environmental problems are not limited to this country. Worldwide, pressures on the environment are receiving attention - rainforests in South East Asia, the spotted owl in North America, the air in Eastern European cities and indeed, the atmosphere around the whole globe are all seen, at least in some circles, as being subjected to "excessive" demands from development uses.

Much of the environment has therefore reached the stage of being classed as a scarce resource. Such are the demands being placed on it, that the available supply cannot satisfy all.

A Role for Economists

All too frequently, environmental problems are blamed on economists. The economics profession is often seen as the "lackey" of those seeking to use environmental resources for developmental purposes. The role of economists, according to those holding this view, is to extol the virtues of development so that policy makers will pursue development not conservation goals. This is a fundamental misunderstanding of the economics discipline. My aim in this paper and indeed the aim of the book being launched here, is to dispel this view and to demonstrate that economics can play an important role in the resolution of environmental problems to the betterment of our society.

The basis of the argument to be advanced is that the environment is a scarce resource. It is capable of yielding value to the community, just like a deposit of gold, agricultural land or a manufact-

uring plant and is therefore in demand. However its supply, like the supplies of gold, land and capital, is limited. Because of this relative scarcity it is therefore necessary for choices to be made: which of the competing demands for the environmental resource should be satisfied? Because the environment holds this status as a scarce resource, the logic and techniques of economics can be applied to the analysis of environmental issues, just as legitimately as it can be used to analyse gold mining, farming or manufacturing. After all, economics is defined as the study of allocating scarce resources amongst the myriad of demands placed upon them.

This is not to say that economists know all about the physical relationships that go to make up the environment. Economists do not claim to be ecologists. Nor do they claim to be geologists, agronomists or production engineers. What economists can do is to analyse the choices made when resources which are limited in supply are also in demand. This type of analysis requires, as an input, information regarding the character-

istics of the resource in question. That is best provided by the geologist or ecologist, etc. But the consideration of the ways in which society arrives at resource-use decisions and their consequences for the people involved, is the province of the economist.

The Politicization of the Environment

Given that the environment is a resource just like any other, why have environmental resource allocation questions achieved such a high policy profile? Why do questions like "to what end purpose should a tropical rainforest be allocated?" and "how much pollution should be released into a waterway?" incite such passions, whilst questions like "should a farm be used for growing wool or wheat?" and "should the wheat be used for bread or pasta?" are answered continuously and satisfactorily in our economy without any apparent social upheaval.

The answer is that most environmental choices have been largely taken out of the market place and put firmly into the political arena. The wool/wheat, bread/pasta type questions are addressed in markets where buyers and sellers compete for the resources involved, with the forces of supply and demand determining the allocation. However, with environmental questions, supply and demand are not normally permitted to allocate the rights to use resources. Rather, because the resources are available through the political process, those interested in using the resources - say developers and conservationists - compete for them in the cut and thrust of lobbying politicians, protesting, issuing press releases etc.

This political process of allocation has proved highly divisive, confrontationist and largely inefficient. Not only have resources been misallocated by the process, but great efforts have been devoted to the largely unproductive activities of lobbying and protesting. No wonder that politicians have grown to feel uncomfortable with the process. The politicized environment has the potential to cause strong and unpredictable shifts of support and involve policy-makers in costly contradictions through time.

If markets are used successfully for the allocation of most other resources in the economy, and the political process has so many problems, why not use markets to assist in making environmental choices? The traditional answer to this question has been that the market cannot work to allocate environmental resources. Because the market is alleged to have failed, it is contended that there is a role for the government to step in and control the use of environmental resources directly. There are, however, two critical fallacies in this traditional approach.

Market Failure?

One reason why markets "fail" to allocate the rights to use environmental resources is that these rights have not been established by law. Unless rights are defined, divestible and defendable in court, trade in markets will not be able to take place. It is therefore not appropriate to blame such inadequacies on the market. The source of the problem is better described as "institutional failure" - the legislature and legal systems have left a void which markets are not capable of filling.

Hence, if the rights to clean water in a waterway are not defined in law then the water becomes available to all at no charge. Over-use in the form of excessive levels of pollution, congestion amongst swimmers and sailors or even depletion of fish stocks will be the result. This is not because of any failure of a market process but rather is because of the absence of legal water rights. Similarly, if there are no ownership rights to wild elephants, they will be harvested for their ivory on a first-come first-served basis to the point of extinction.

Government Fix?

When governments step in to correct "market failure" by directly administered allocation, there is no guarantee that an improvement in resource allocation will result. In fact, many of Australia's environmental catastrophes have been at the behest of government. For example, efforts to protect the westem districts of NSW from the pressures of agricultural land use led to a policy of leasehold titling. This form of tenure, because of inadequate buy-back provisions and the short-time frame of leases, was the cause of much overgrazing. Drought time feed subsidies, closer settlement incentives and water subsidies are other examples of land degrading government policies.

Similarly, bans by governments on the sale of ivory have made the plight of elephants worse because the black market prices for tusks are even more attractive to poachers.

Market Environmentalism

Given the failure of the government fix approach to environmental resource allocation and the efficiency of markets elsewhere, there seems even less reason to by-pass the market as a vehicle for conflict resolution. This conclusion is now being drawn by more and more policy advisors and policy makers.

The first element in any move toward "market environmentalism" is the extension of private property rights to incorporate as many of the now open-access environmental resources as is technically possible. These resources would include environmentally sensitive lands, waterways and even species of plants and animals.

To continue the waterway example, if the resource rights were sold by the state to a private owner, for anyone to use that resource - be it for waste disposal, recreation or fishing - a price would have to be paid. The highest bidder would gain the rights to use the waterway. It would of course be necessary to have in place the appropriate technical and legal facilities to ensure the punishment of those using the resource without permission and payment. So the right to sue for trespass by an upstream polluter would need to be established along with the technical elements of proving a case.

For many natural resources, there are mechanisms already available to ensure that rights could be enforced. For others, where technologies have yet to be devised to ensure the exclusion of users who don't pay, the very act of establishing rights would give a strong incentive for the development of new technologies. For instance, if private property rights over waterways were introduced, there would be a strong incentive for private owners to devise methods of tracing the source of pollution - say by chemical "tagging" - so that they could take legal action against polluters who do not pay for the right to use the water.

Even areas currently under consideration for National Park status could be allocated in this manner. Those interested in the future use of the area in contention could be asked to bid for the private property rights over the area. Ownership would then be a simple matter of which group could offer the highest bid.

Critics of this approach argue that conservation interests would never be able to compete against the interests of big business seeking to develop environmental resources. There is substantial evidence to suggest that the conservation interest could be competitive. First, it is evident from Australian and overseas fund raising efforts that substantial sums could become available for conservation bids. This would be especially true if conservation-minded people knew that "the government" would not step-in to "save the (endangered species of your choice)". Furthermore, experience in the US suggests that private organizations are set-up specifically to pursue conservation goals. For instance, the Nature Conservancy privately funds the purchase of ecologically sensitive areas. Many of its assets are gained as a result of bequests. With the consent of the beneficiary, bequeathed property is sometimes sold so that other, more desirable areas can be purchased. The Audubon Society is also in the business of wildlife reserve ownership. On one of its sites, it permits drilling for oil. Whilst this does not detract from the site's function as a bird sanctuary, it does supply funds for the purchase of other refuge sites.

If governments were still sceptical about the ability of private groups to provide the amount of conservation society as a whole considered optimal - perhaps because of free-riding behaviour - they may wish to supplement these groups resources. One way this could be achieved is through the granting of some rights to Park areas at no cost. The group could then determine its optimal holding of assets through trade.

There is a strong need for the identification of cases where such private provision measures can be adopted in Australia. Market allocation has the potential to make a substantial contribution to the resolution of conservation/development choices. This contribution involves the prospect of an improvement in the conservation and development status of the country. More resources could be devoted to both, because less resources are "wasted" in the lobbying and protesting of the political allocation process.

Market Limits

Despite its potential, there are limits to the extent to which markets can be expected to provide solutions for environmental resource use. For some resources, property rights will be impossible to define or enforce. Altematively, the costs of organizing matters under private property rights may be simply too high to warrant potential buyers or sellers seeking each other out. In these circumstances, markets will not form. The biodiversity of an ecosystem and the upper atmosphere of the globe are examples of open-access resources for which no market can form.

In other cases, private ownership of resource rights may be politically untenable given that voters hold a strong attachment to the open access status. For example, the future use of Sydney's beaches may not be decided in a market because the political decision to convert the open access resource to private property may not be forthcoming, for purely political reasons.

In these types of circumstance, a communal, political approach must be considered. The most common communal approach is through the action of government. But even here, economics can play a very useful role. There are two roles for economics in this process. First, economists have devised policy measures which, whilst not directly involving market allocations, use features of markets or indirect markets to assist in the efficient allocation of resources by governments. Secondly, economists can assist in making sure that government intervention does lead to improved efficiency of resource use.

Government Policy Options

The level of use of open access resources may be determined directly by a government (for instance, the level of nitrous oxide emissions in an industrial region) or a consortium of govemments (for example, the level of CFC emissions world-wide as set out by the Montreal Protocol). The allocation of the allowed level of pollution can then be allocated by a market. The market in this instance is not for the open access resource as such, but rather is for the right to use that resource, via the legal entity of a pollution permit. Because trade in these permits is allowed, the polluters who most value the permits - those who have the highest costs of abatement - buy them and the polluters who have the lowest costs of abatement choose to control their pollution in preference to buying permits. Hence, the pollution-abatement goal is reached at the lowest cost. This system achieves desired pollution levels at a far lower cost than the traditional command and control approach of governmental environmental agencies.

Monitoring Govemment Action

To ensure that govemment intervention does not cause less efficient resource allocations, economic techniques can be used to monitor the actions of government. Where properly administered, techniques such as benefit-cost analysis and cost-effectiveness analysis can be used to check if environmental choices made by governments increase the well-being of the economy.

This monitoring process could also be built into a process of government reporting to Parliament to ensure a commitment by government to their electorate in a way which parallels the reporting responsibilities company directors have to their shareholders. Just like the management/owner-

ship division within a firm, there is a division between voters and politicians. To ensure a commitment on the part of managers to goals of shareholders, the company code sets out certain fiduciary duties including the task of reporting. The company annual report is independently audited. So, a report to Parliament by government could also be audited. This could involve independent "watchdog" organizations ensuring that the information provided is accurate. To some extent this has been part of the role played by the Industries Commission in other areas of public policy. It could be a function of a reshaped Resource Assessment Commission. It is clear though that the independence of the organizations involved must be assured and their mandate closely specified. Clearly, the danger of imposing yet another layer of bureaucracy must be avoided.

Conclusions

It would be of no great surprise if, in a word association game the majority of Australian citizens would link the words "economics" and "development". "Markets" would probably fit well in that association. It would also be expected that most citizens associate "environment" with "government". These are associations which the book Reconciling Economics with the Environ-

ment seeks to dispel. In this paper some of the arguments advanced in the book have been broached. Markets can ensure a more rational provision of environmental goods, whereas governments do in fact cause environmental degradation. A new way of looking at environ-

mental choices needs to be considered and economics has something to offer. Our efforts should now be directed to the investigation of novel ways of increasing the role the market can play in environmental resource allocation.

The full range of property rights solutions should be explored. That includes utilizing private property rights and common property rights. The latter involves groups of people, who are organized within their group, owning resource rights. It also includes the use of covenants or easements on private titles to ensure the continued provision of environmental goods with open access characteristics. For instance, a sensitive ecosystem may be given private property status, but certain elements preserved under title.

Where private or even common property rights cannot or will not be established, the opportunities provided by volunteers should be investigated. Management functions in key national parks can for instance be effected by groups of interested citizens. An example in operation already is the Kosciusko Huts Association, which is a group of interested individuals who perform a valuable role in maintaining the heritage aspects of the Kosciusko National Park through their care of the high country huts.

If direct govemment involvement is the only means left to address an environmental issue, economics can still provide some assistance in the pursuit of furthering the nation's well-being. Innovative schemes are available to harness the incentives of the market in the pursuit of environmental goals established by governments. Some tools of economics can be used in the role of watchdog over government policy choices.

Economics has an integral role to play in the pursuit of environmental goals. The shackles of traditional thinking on environmental issues need to be shaken free and creative thinking directed toward a new approach - one which sees economics and the environment reconciled.

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