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Abstract: Property rights are fundamental in economic theory. There is, however, no consensus in the economic literature about what property rights are. Economists define property rights variously and, sometimes, in ways that conflict with the conventional understandings of legal scholars and judges. This article explores several divergent economic conceptions of property rights. These conceptions promote interdisciplinary confusion and, most importantly from the perspective of economic theory, they pre-ordain suboptimal economic outcomes.
Abstract: Property rights have become fundamental in economic analysis. Given their importance, it might be expected that there would be some consensus in the economics literature about the meaning of property rights. But no such consensus appears to exist. Economists define property rights in various and inconsistent ways, some of which diverge significantly from the conventional understandings of legal scholars and judges. This paper explores ways in which definitions of property rights in the economic literture diverge from conventional legal understandings, and how those divergences can create inter-disciplinary confusion and bias economic analyses. Indeed, some economists' idiosyncratic definitions of property rights, if used to guide policy, could lead to suboptimal economic outcomes.
Abstract: The late EP Thompson described himself as "a historian in the Marxist tradition." But when he embraced the Rule of Law (in "Whigs and Hunters"), many of his colleagues on the Left ostracized him as an apostate. This essay argues that Thompson's critics have largely misunderstood what he meant by the Rule of Law. His was a minimal and historical conception, which merely sought to distinguish states whose rulers had unfettered discretion from states whose rulers were constrained by legal rules, whatever their source and contents. Also, in contrast to other radical theorists, Thompson recognized that law would be a necessary institution in any complex society, no matter what its economic basis, to mediate social relations. The essay concludes with some thoughts about the relevancy of Thompson's conception of the Rule of Law for ongoing efforts to revitalize a more "radical liberalism."
Abstract: The late EP Thompson described himself as "a historian in the Marxist tradition." But when he embraced the Rule of Law (in Whigs and Hunters), many of his colleagues on the left ostracized him as an apostate. This essay argues that Thompson's critics have largely misunderstood what he meant by the Rule of Law. His was a minimal and historical conception, which merely sought to distinguish states whose rulers had unfettered discretion from states whose rulers were constrained by legal rules, whatever their source and contents. Also, in contrast to other radical theorists, Thompson recognized that law would be a necessary feature of any complex society, no matter what its economic basis, for mediating social relations. The essay concludes with some thoughts about the relevancy of Thompson's conception of the Rule of Law for ongoing efforts to revitalize a more "radical liberalism."
Abstract: The UK's Treasury's "Stern Review: The Economics of Climate Change" (Oct. 2006) reached dramatically different conclusions and policy recommendations than most earlier economic analyses of climate change. It found that the costs of climate change, as well as the potential net benefits of greenhouse gas reductions, were much higher that previously estimated, and consequently recommended more rapid and extensive cuts in emissions than other economist analysts. The Stern Review estimated that a 1% annual investment of global GDP in mitigation could prevent a 5% (or more) reduction in annual global GDP from climate change harm, forever. A number of prominent economists, including William Nordhaus, Partha Dasgupta, Richard S.J. Tol, Robert Mendelsohn, and Martin Weitzman, have criticized the Stern Review on various grounds, including its damage estimates and the selection of parameter values (the utility discount rate and the elasticity of marginal utility), which affect the interest rate at which future costs and benefits are discounted to present value. This paper summarizes the Stern Review and its critiques, and assesses them from a process-oriented perspective to determine what they can teach us, positively and negatively, about how benefit-cost analyses (BCAs) should (or should not) be done.
benefit-cost analysis, discounting, discount rate, climate change
Abstract: Since Madison, jurists of all ideological stripes have more or less casually presumed that constitutional judicial review is absolutely necessary to protect private property rights against over-regulation by political bodies. During the twentieth century, this presumption led directly to the institution of regulatory takings doctrine. Recently, the economist William Fischel and the legal scholar Neil Komesar have raised important questions about, respectively, the utility and the sufficiency of constitutional judicial review for protecting private property. This article supports their arguments with theoretical and historical evidence that constitutional judicial review (1) is not strictly necessary for protecting private property rights, and (2) may have substantially less marginal social utility than most jurists presume. The theoretical evidence comes from positive political-economic theories of property rights, according to which political institutions can be expected to substantially protect property rights in order to secure political support and generate tax revenues. The historical evidence comes primarily from the United Kingdom, where property rights have never been judicially protected against intentional and uncompensated parliamentary expropriation or regulation, but where Parliament has imposed substantial limits, including compensation requirements, upon itself. Further evidence comes from several American states that have enacted takings statutes. The evidence presented in this article (a) supports William Fischel's normative conclusion that judicial review is more important for protecting private property against the depredations of local governments than state or federal governments; (2) provides reason to believe that property rights will be protected even if Neil Komesar is right that the courts are institutionally incapable of doing so; and (3) carries possible normative implications for regulatory takings doctrine.
Property, United Kingdom, comparative institutional analysis, judicial review, takings, regulatory takings
Abstract: Climate change presents the greatest collective action problem the international community has yet confronted. The unequal distribution of expected costs and benefits from climate change (based on mean damage estimates from probability distribution functions) creates different incentives for different countries, which can be expected to bargain in their own perceived interests. Unresolved collective action problems explain the notorious flaws in the Kyoto Protocol, and continue to impede efforts to replace or improve on Kyoto. Policy recommendations and negotiating strategies that ignore those collective action problems are likely to prove ineffective.
This paper explains why collective action problems are far more serious in the case of the Kyoto Protocol than they were in the case of the Montreal Protocol on protecting the stratospheric ozone layer, and offers recommendations for reducing those problems. In particular, due consideration of (1) low-probability, high magnitude climate changes (beyond the mean estimates of damages) and (2) the secondary effects of climate change (implicating, for example, national security interests) should better align the interests of the parties. At the very least, it should raise the lowest common denominator of the parties, resulting in a substantially stronger and more effective international climate change regime.
climate change, global warming, collective action, Kyoto Protocol, Vienna Convention, Montreal Protocol, catastophe
Abstract: When the Supreme Court announced its 2005 decision in Kelo v. City of New London, few legal scholars were surprised at the outcome, which was premised on precedents extending back to the middle of the 19th century. Legal scholars were surprised, however, by the intense political reaction to Kelo (fueled substantially by Justice O'Connor's hyperbolic dissent), as property-rights advocates, legislators (at all levels of government), and media pundits assailed the ruling as a death knell for private property rights in America. Kelo's combination of relative legal insignificance and high political salience makes it an interesting case study in cross-institutional dynamics, i.e., the study of how the combination (and recombination) of political, legal, economic, and social forces determine the content of our laws. In this case, the Supreme Court's legal ruling in Kelo generated a political controversy, which is leading to legislative changes in the law. Those legislative changes, in turn, will affect future court decisions. The primary purpose of this article is to explain the aftermath of Kelo as a socio-legal phenomenon, which is every bit as important as (perhaps more important than) the Supreme Court's ruling in the case. By paying close attention to the political and legislative aftermath of Kelo, we can understand why the Supreme Court's decision is not good news for local planners and developers, who are finding it significantly more difficult to engage in urban (re)development throughout the United States. By contrast, the plaintiffs who lost the Kelo battle, may have won the war to keep their homes. This article also has a secondary purpose, which is the place Kelo and its political reception in a larger comparative-institutional context. That context (which I develop more fully in another article, Political Institutions, Private Property and Judicial Review: A Comparative Institutional Analysis, forthcoming in 2007 in the Supreme Court Economic Review) examines how political bodies, as well as courts, substantially protect private property rights. Kelo's aftermath, along with other evidence from the United Kingdom and the several U.S. states, supports the proposition that, even in the absence of constitutional protections assiduously enforced protected by judges, the institution of private property would be substantially protected.
Law, property, takings, eminent domain, Kelo, United States, United Kingdom, legislation, politics, public choice
Abstract: Much of the theoretical literature on environmental instrument reflects a normative presumption that only "economic" instruments, such as effluent taxes or tradable quotas, can produce an efficient outcome. Other potential alternatives, such as non-tradable quotas or more general Pigovian taxes are ruled out as inherently inefficient. Moreover, most of the literature relies on an important but unwarranted presumption: that cost and benefit functions, although they may be subject to uncertainty, are identical regardless of the regime that is chosen; that is price and quota systems are assumed to face the same cost and benefit curves with the same expected values. More crucially, the models assume that no regime will be subject to greater or lesser uncertainty than another. Under these assumptions, environmental instrument choice is determined simply by the relative elasticities of the curves. The real world is far more complicated than existing models of environmental instrument choice suggest. For one thing, monitoring and enforcement costs may be quite different for one regime than another. These cost differentials may affect not only comparisons between effluent tax and tradable permit schemes, but comparisons between "economic" instruments generally and more traditional regulatory instruments, such as technology-based standards or general Pigovian taxes. In some cases, for technological or institutional reasons, economic instruments will not efficiently or effectively attain exogenously set pollution-reduction goals. This paper offers a broader framework for comparing environmental instruments. Whereas most theoretical models focus exclusively on the comparative compliance/abatement costs of alternative regulatory instruments, this paper incorporates administrative costs and residual pollution costs into what we term a "total-cost" approach. The implications of this approach for environmental policy are then discussed in the context of efforts to reduce greenhouse-gas emissions under the 1997 Kyoto Protocol. The paper concludes that the incorporation of administrative (monitoring and enforcement) costs and residual pollution costs into theoretical models can greatly enhance the utility of those models for environmental policy making.
environment, taxes, tradable quotas, nontradable quotas
Abstract: Since the signing the Kyoto Protocol, the international community has focused a great deal of attention on measures designed to reduce emissions of greenhouse gases. Much less attention has been paid to climate change adaption. This is unfortunate because, even if the Kyoto Protocol is fully implemented, climate change will generate substantial costs requiring substantial adaptation efforts, especially in the less developed countries (LDCs) of the world's tropical regions. This paper considers what those countries should be doing in preparation for the effects of climate change, and what the countries of the developed world, including the United States, can and should do to assist them. Contrary to the opinions of many economists (but consistent with the opinion of Thomas Schelling), this paper argues that the best thing developing countries can do to prepare for climate changes is to develop adaptively efficient market and governmental institutions to increase their per capita income. The wealthier LDCs become between now and the second half of the twenty-first century, the greater their capacity will be to cope with the unavoidable consequences of climate change. Of course, economic development is more easily prescribed than achieved. Few LDCs will likely be able to improve and diversify their economies without substantial international assistance. The Framework Convention on Climate Change obligates developed countries to provide both specific climate change assistance and more general economic development assistance. However, the history of economic development aid during the last half century has seen at least as many failures as successes. This paper seriously considers the problems of development assistance,and makes some recommendations based on what seems to work best: specifically targeted, tailored, and conditioned aid projects. Such projects may, or may not, be able to improve adaptive efficiency in LDCs. But they should, at least, help offset some of the expected costs of climate change.
climate change, adaptation, development, foreign aid, international law
Abstract: Benefit-Cost Analysis (BCA) is an inherently controversial practice, but it could be rendered substantially less controversial than it is at present by improving its methodological consistency. As a matter of policy, the method of BCA has improved over the past two decades, but the practice of BCA in the federal government remains inconsistent and highly influenced by partisan politics. This paper explores the recent history of BCA policy and practice in the federal government and offers recommendations for further methodological improvements. Most importantly, this paper argues that the task of determining best practices for environmental BCA should be removed from the federal agencies that produce and consume those analyses. Because of their divergent institutional missions and political predilections, those agencies are unlikely ever to agree on a single, consistently applied set of best practice standards. And, after all, society does not rely on government agencies to determine best practices in other fields such as medical practice, scientific research, or agricultural production. In those fields, best practices are determined by the respective experts, i.e., doctors, scientists, and farmers. In the field of BCA, the National Academy of Sciences or some nongovernmental organization such as the Association of Environmental and Resource Economists or a new Society for Benefit-Cost Analysis should appoint a task force of economists, policy analysts, and maybe a legal scholar or two to establish best practices. The goal would not be to establish a neutral or objective set of practices; BCA simply contains too many subjective elements to ever claim that mantle of objectivity. However, a set of (revisable) best practices established by an independent group of experts is likely to be less politicized and more legitimate than any product of the OMB or other government agency. The best practices produced by an independent group of experts would not have direct legal force. They would, instead, constitute social norms to influence how government agencies prepare and use BCAs. To the extent regulatory BCAs deviated from those norms without explanation, those BCAs would be subject to criticism. It is even possible that the federal courts could adopt an independently derived set of best practice standards for assessing regulatory BCAs in judicial review under the Administrative Procedures Act. In sum, the adoption of methodological best practices for environmental BCA could have four positive effects: (1) it presumably would reduce, at the margins, political opposition to BCA as a policy tool; (2) it would render BCAs more regular in form and format and, thus, more readily assessable and replicable by social scientists; (3) it might reduce (though not eliminate) politically-motivated, inter-agency methodological disputes; and (4) it would provide a sound, consistent and independent basis for judicial review of agency BCAs.
benefit-cost analysis, method, discounting, valuation, judicial review, OMB, EPA
Abstract: In the game theory literature, Garrett Hardin's famous allegory of the tragedy of the commons has been modeled as a variant of the Prisoner's Dilemma, labeled the Herder Problem (or, sometimes, the Commons Dilemma). This brief paper argues that important differences in the institutional structures of the archetypal Prisoner's Dilemma and Herder Problem render the two games different in kind. Specifically, institutional impediments to communication and cooperation that ensure a dominant strategy of defection in the classic Prisoner's Dilemma are absent in the Herder Problem. Their absence does not ensure that players will achieve a welfare-enhancing, cooperative solution to the Herders Problem, but does create far more opportunity for players to alter the expected payoffs through cooperative arrangements. In a properly modeled Herder Problem, defection would not always be the dominant strategy. Consequently, the Herder Problem is not in the nature of a Prisoner's Dilemma.
tragedy of the commons, prisoner's dilemma, game theory, herder problem, institutions, cooperation, communication, commons
Abstract: Law and economics scholars have written extensively about how insurance markets affect the tort system. They have noted the beneficial cost-spreading function of insurance, as well as the detrimental incentive-distorting affects of insurance, stemming from problems of adverse selection and moral hazard. Surprisingly, however, scholars have over-looked one of the most important salutary functions that insurance serves for the tort system: it provides much of the information courts need to apply the Marginal Learned Hand Formula. This paper explains precisely how insurance markets collect and disseminate information about the expected values of all three variables in the Hand Formula: the probability of accidents, the level of harm, and the burden of precaution. In the absence of the information insurance markets provide, parties in many cases would have no way of cost-effectively determining, ex ante, the proper level of care. Consequently, the Learned Hand Formula could not effectively operate. Although insurance markets cannot provide complete or perfect information for making ex ante calculations of the expected value of accidents and avoidance measures, in many (if not most) cases, insurance provides the best information available. Indeed, as a normative matter, judicial determinations of liability in accident cases might be improved by setting the burden of precaution using insurance market values as a baseline.
accidents, torts, insurance, Learned Hand Formula, information
Abstract: This paper explores the significant role Regulatory Cost-Benefit Analysis (RCBA) plays in facilitating or impeding collective action. Domestically, well constructed RCBAs have facilitated collective action by muting political opposition. RCBAs can of course be manipulated to obstruct collective action or promote inefficient policies. However, the fact that RCBAs require transparency makes those efforts liable to discovery and disclosure, as in the case of the Bush Administration's failed "Clear Skies" initiative. The paper concludes with a discussion of the role RCBA is playing today in structuring international climate change negotiations, substantially determining the bargaining strategies of various parties in accordance with their differential expected costs and benefits.
Cost-benefit Analysis, Economic Analysis, Climate Change, EPA, Collective Action
Abstract: This article proposes that constitutional judicial review should be subject to a social welfare analysis to determine when and if such review is efficient in enhancing social welfare. A model is proposed in which property rights protection is a component of social costs. Judicial review is then assumed to, on net, either add to or subtract from those costs, affecting social welfare generally. It will be shown that under realistic conditions, reflected in real instances, judicial review might not enhance economic efficiency or overall social welfare. We show that the efficiency of constitutional judicial review is likely to vary within the larger institutional context.
property, judicial review, social welfare, efficiency
Abstract: Law and economics scholars have written extensively about how insurance markets affect the tort system. They have noted the beneficial cost-spreading function of insurance, as well as the detrimental incentive-distorting affects of insurance, stemming from the problems of adverse selection and moral hazard. Surprisingly, however, scholars have overlooked one of the most important salutary functions that insurance serves for the tort system: it provides much of the information that courts need to apply the marginal Learned Hand formula in negligence cases. The Learned Hand formula is an algebraic formula (B = PL), according to which liability turns on the relation between investment in precaution (B) and the product of the probability (P) and magnitude (L) of harm resulting from the accident. If PL exceeds B, then the defendant should be liable. If B equals or exceeds PL, then the defendant should not be held liable. This paper explains precisely how insurance markets collect and disseminate information about the expected values of all three variables in the Hand formula: the probability of accidents, the level of harm and the burden of precaution. This information is available to everyone, including those who choose not to purchase any insurance. Most importantly, in the absence of the information insurance markets provide, parties in many cases would have no way of cost-effectively determining, ex ante, the proper level of care to avoid liability/harm. Consequently, the Learned Hand formula could not effectively operate. This is not to say that the insurance markets provide complete information for making ex ante calculations of the expected value of accidents and avoidance measures. But in many (if not most) cases, insurance provides the best information available. Indeed, as a normative matter, judicial determinations of liability in accident cases might be improved by setting the burden of precaution using insurance market values as a baseline.
torts, uncertainty, risk, insurance, negligence, information, learned hand formula
Abstract: The shift to competition in utility generation is likely to generate "stranded investments," which are wealth transfers between investors and utility ratepayers. Stranded investments can take either of two forms: (1) "stranded costs" are a transfer from investors to ratepayers that occur when revenues are insufficient to compensate utilities for investments approved and undertaken under the pre-existing regulatory regime; (2) "stranded benefits" are a transfer in the opposite direction, from ratepayers to investors, that occur when (a) utilities are allowed to charge market prices for electricity based on investments previously paid for by ratepayers in the regulatory process and (b) market prices exceed regulated prices. Utilities have successfully lobbied the Federal Energy Regulatory Commission and several state legislatures to permit them to recover stranded costs in the process of utility deregulation. But they have been rationally silent about the converse problem of stranded benefits, which benefits them and their investors at the expense of electricity consumers, who have had little voice in deregulation negotiations. If equity requires that utilities and their investors be compensated for stranded costs in deregulation, then equity must also dictate that ratepayers be compensated for stranded benefits. Data and forecasts from several sources provide no basis for believing ex ante that stranded costs are likely to exceed stranded benefits. Consequently, there is no reason - aside from public choice - for states to provide for stranded cost recovery while ignoring stranded benefits. As a normative matter, stranded cost recovery should be allowed only where a utility's stranded costs exceed the sum of stranded benefits and the transaction costs associated with any compensation scheme. Similarly, electricity consumers should be allowed to recovery stranded benefits when those benefits exceed the sum of stranded costs and the transaction costs associated with compensation. Where the difference between expected stranded costs and benefits is small, then the best policy may be to allow no recovery of either. Indeed, given the substantial ex ante uncertainty about who will gain and who will lose from investments stranded by deregulation, the best overall policy, from a transaction-cost perspective, may be to leave stranded costs and benefits where they fall.
Abstract: "Takings" are usually understood as government-imposed restraints on preexisting private property rights. But this is myopic. A cursory examination of actual takings cases reveals that disputes often arise where existing public and private property rights collide: where private lands meets public waters or where public wildlife have habitat on private lands. In these cases, the government is not just imposing on private property rights; it is also seeking to vindicate existing public property rights, for which no compensation should be required. This presents a boundary issue: where do private property rights end and public property rights begin? This chapter assesses the boundary problem in regulatory takings law by examining several important public-private boundary disputes, including Causby, Nollan, Pallazolo, Just, Christy, and Tulare Lake. The purpose is not to offer a comprehensive theory of when private property rights should trump public property rights, or vice versa. The boundary problem is simply too complex to permit a simple, theory-based solution. But neither can the problem be willed away - as the Supreme Court seems intent on doing - by ignoring the public property rights at stake in many regulatory takings disputes.
Property, private property, public property, takings, water, land, air, wildlife, endangered species, Supreme Court, regulatory takings
Abstract: Environmental protection and resource conservation depend on the imposition of property rights (broadly defined) because in the absence of some property system - private, common, or public - resource degradation and depletion are inevitable. But there is no universal, first-best property regime for environmental protection in this second-best world. Using case studies and examples taken from countries around the world, Professor Cole demonstrates that the choice of ownership institution is contingent upon institutional, technological, and ecological circumstances that determine the differential costs of instituting, implementing, and maintaining alternative regimes. Consequently, environmental protection is likely to be more effective and more efficient in a society that relies on multiple (and often mixed) property regimes. The book concludes with an assessment of the important contemporary issue of 'takings', which arise when different property regimes collide.
Abstract: Contrary to the conventional wisdom among economists and legal scholars, command-and-control (CAC) environmental regulations are not inherently inefficient or invariably less efficient than alternative "economic" instruments (EI). In fact, CAC regimes can be and have been efficient (producing net social benefits), even more efficient in some cases that alternative EI regimes. Standard economic accounts of CAC are insensitive to the historical, technological, and institutional contexts that can influence (and sometimes determine) the efficiency of alternative regulatory regimes. A regime that is nominally or relatively efficient in one set of circumstances may be nominally or relatively inefficient in another. In some cases, given the marginal costs of pollution control, technological constraints, and existing institutions, CAC can be the most efficient means of achieving a society's environmental protection goals. This paper reviews the empirical literature on environmental regulation and finds that CAC is not inherently inefficient or invariably less efficient that EI. In addition, the paper elaborates a model through five stylized cases, which demonstrate how alternative approaches to environmental regulation are more or less efficient depending on institutional and technological factors that affect overall regulatory costs. Finally, the model is empirically supported by a detailed history of the U.S. Clean Air Act's regulatory regime. Viewed as an evolutionary process, occurring within an institutional and technological framework, it was (nominally and relatively) efficient for Congress to rely, in the early years of federal air pollution control, on CAC regulations, and then in more recent years to begin experimenting with efficiency-enhancing EI.
Abstract: This essay examines the relationship between property rights and environmental protection. According to the 'tragedy of the commons' model, environmental pollution and resource depletion result from the inadequate specification of property rights on environmental goods. Two solutions are typically offered for averting the 'tragedy': (1) specify property rights, i.e., privatize the commons or (2) regulate entry and use. For some environmental goods, such as land, privatization has been the preferred (though not an exclusive) approach. For other environmental goods, such as air and water, regulation has been the preferred (though, again, not an exclusive) approach. Each of these approaches involves the imposition of property rights on formerly 'open access' (nonproperty) resources. Public regulations of entry and use increasingly rely on property 'rights'-based mechanisms, such as tradeable pollution 'rights', to improve regulatory efficiency. Some law and economics scholars maintain, however, that better protection could be achieved at still lower cost by replacing regulatory regimes altogether with a system of well-defined private property rights on environmental goods. They advocate a combination of resource privatization and deregulation as both a necessary and a sufficient remedy for environmental problems. This entry assesses the utility and limitations of property rights on environmental goods.
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