I have copied here a brief essay I published in the US Society for Ecological Economics newsletter. I had hoped to expand more on these ideas in this blog, but have not had time — I elaborated my views on information, but did have a chance to address ecosystem services, which I also believe are inefficiently allocated by market forces. This summarizes my overall view, but some parts are redundant with what I’ve posted before. I am happy to e-mail a copy with complete references to anyone who requests it (email@example.com).
Economics has been defined as the science of the allocation of scarce resources among alternative ends. This means that the three tasks of the economist, in order of importance, are to determine what are the desired ends, what are the scarce resources required to meet those ends, and finally how can resources be allocated to attain the best combination of those ends. Over the past 200 years, markets based on private property rights have become increasingly accepted as the most efficient mechanism available for allocating resources towards desired ends.
However, over those same two centuries, there has been a fundamental shift in the relative scarcity of resources required to attain our desired ends. As ecological economists recognize, natural capital (goods and services produced by nature) has become scarcer and hence more valuable at the margin, while the market goods and services produced by humans have become more abundant and less valuable at the margin. At the same time, the importance of information in our economy appears to be increasing.
Considerable scholarship is currently re-examining whether growth in GNP and ever greater material consumption are suitable desirable ends. Is it also time to ask whether markets based on private property rights are an efficient allocation mechanism for natural capital and information?
Certainly economists already recognize the problem of non-excludability that characterizes so many ecosystem goods and services . When property rights do not or cannot exist, market forces will lead to over-exploitation and/or inefficient levels of production. Garret Hardin’s description of the ‘tragedy of the commons’ drew considerable attention to the problem of rival (use by one person prevents use by another) and non-excludable resources. He proposed as a solution private property rights or ‘mutual coercion mutually agreed upon’. Moving from theory to practice, economists have used individually tradable quotas to create private property rights for waste absorption capacity (e.g. CO2 and SO2) and fish harvests. Long before Hardin, patents and copyrights were used to establish private property rights to information.
However, markets in rival and excludable waste absorption capacity for CO2 or SO2 are not the same as markets in non-rival and non-excludable climate stability or clean air, as they do not allow individuals to choose how much of the latter to consume. Private property rights to fish, forests, and other structural components of ecosystems offer no incentives to provide desirable levels of the ecosystem services to which these resources contribute. For example, private ownership of mangrove ecosystems favors conversion to shrimp aquaculture, sacrificing the well documented ecosystem services of intact mangroves. Ironically, shrimp aquaculture systems may ultimately produce less seafood than intact mangroves, which serve a vital role as a nursery to many commercial seafood species, so the inefficiency is particularly evident . Private property rights to information lead to other obvious inefficiencies. AIDS drugs are priced much higher than the marginal cost of production, and as a result are used much less than they otherwise would be. As a result, the virus (which is a purely non-rival, non-excludable public bad) remains more prevalent in the human population than it otherwise would be, and all of society suffers. According to the bible, Jesus Christ performed a miracle by feeding the multitudes with a single loaf of bread and a single fish. Patents seem to perform the satanic inverse of this miracle by making a naturally inexhaustible piece of information artificially scarce. In short, even when they are possible, markets based on private property rights can be highly inefficient.
The problem is that economists seem to pay inadequate attention to another key characteristic of information and of most ecosystem services–the fact that they are non-rival. The use of a non-rival good by one person does not affect use by another (though some non-rival resources, such as roads, become rival at high levels of use). Unlike excludability, rivalness is a physical characteristic of a resource and not a policy variable. The marginal cost and hence efficient price for using an existing non-rival good is zero, because a positive price reduces use and hence benefits without reducing costs. Market allocation of non-rival resources leads to sub-optimal consumption, thus reducing economic surplus.
Elinor Ostrom , Daniel Bromley , Fikret Berkes and others have pointed out that many societies have developed institutions based on common property rights that avoid the tragedy affecting rival, non-excludable resources, showing empirically that common ownership can be an effective solution. Is it possible that common property is the only efficient solution to the allocation of non-rival resources? Many existing environmental markets actually operate on this principle already. For example, it is the polity that determines allowable emission levels for SO2 and CO2 and the total allowable catch in fisheries using individually tradable quotas, not the market. The polity could not set supply if the resource were not common property. Shared production and shared ownership of information would also be more efficient than private ownership. Publicly funded research with results freely available to all would increase the economic surplus from information, and there is no plausible reason that salaried scientists would work harder for the private sector than the public sector or produce more socially valuable information.
In sum, private ownership of non-rival resources or resources that generate non-rival benefits seems to generate a tragedy of the non-commons, and the relative importance of non-rival resources seems to be increasing. Paradoxically, social ownership may be necessary for creating markets, as seems to be the case for waste absorption capacity. Perhaps the appropriateness of socialism and capitalism or of common property and private property should not be questions of ideology, but rather objectively determined by the physical nature of a resource as non-rival or rival. This certainly appears to be a worthwhile topic for ecological economists to investigate.