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In both cases attention is diverted from those who are party to the conflict and toward finding a "value" maximizing allocation or resources. But from an Austrian perspective this is not a tenable goal as it necessarily involves interpersonal utility comparisons and unreasonable assumptions about human knowledge and the static nature of the world Cordato For example, it is unlikely that a Pigouvian tax, even if it could be appropriately calculated, would do anything to solve the "Austrian" problem.

For similar reasons, the same would be true if a Coasean judge decided to allow a pig farmer to continue to emit odors into local housing developments because the homeowners are the "least cost avoider. For Austrians then, public policy in the area of the environment must focus on resolving these conflicts over the use of resources that define pollution, not on obtaining an ultimately unobtainable "efficient" allocation of resources.

The traditional Austrian approach to property rights analysis in this area can and should be seen in this light. While property rights are equally important for Coaseans and Austrians, their normative goals are significantly different. For Austrians, whose goal is to resolve conflicts, the focus is on clarifying titles to property and rights enforcement.

If a pollution problem exists then its solution must be found in either a clearer definition of property rights to the relevant resources or in the stricter enforcement of rights that already exist. This has been the approach taken to environmental problems by nearly all Austrians who have addressed these kinds of issues see Mises ; Rothbard ; Lewin ; Cordato This shifts the perspective on pollution from one of "market failure" where the free market is seen as failing to generate an efficient outcome, to legal failure where the market process is prevented from proceeding efficiently because the necessary institutional framework, clearly defined and enforced property rights, is not in place.

A pollution problem then can take one of two forms, either titles to the relevant resources are clear but the rights to use that property by the title holders are not being enforced, or titles to a resource are not clear and two or more parties wish to use the resource for conflicting purposes. Obviously, each of these would require a different approach to solving the problem.

But in each case the solution should focus on resolving the conflict and therefore allowing for the efficient formulation of plans by all parities involved. The polluter pays principle 4. In environmental policy the polluter pays principle is an outgrowth of Pigouvian welfare economics. The optimal price-output combination will arise in a market when external pollution costs are reflected in the marginal cost of production, i.

In other words, if the polluter is made to "pay" a dollar amount that is equivalent to the marginal social costs associated with the pollution that he is generating, "efficiency" will prevail. Generally speaking there are two approaches to applying the polluter pays principle. The most traditional and straightforward is the Pigouvian excise tax.

In this case the polluter is forced to "pay" either through a tax that is equivalent to the "pollution costs" per unit of output or per unit of effluence. The second is through tradable emissions permits. In this case an "efficient" level of pollution is determined and permits to pollute which total to this efficient level are bought and sold in the marketplace. The polluter is forced to pay either explicitly by having to purchase permits in the market or implicitly by having to forgo selling the permits that he holds.

There are two fundamental problems with these approaches to "making the polluter pay. Most specifically, a central authority must know in advance what the efficient outcome is. In the case of the tax, a central authority must know in advance the exact amount of the externality costs being imposed by the polluter, and the correct price and output, not only for the good in question but, since efficiency only makes sense in a general equilibrium context, for all other affected goods and services.

In the case of tradable permits, the knowledge requirements are essentially the same. This is because the central authority must first determine the "efficient" level of emissions for the particular pollutant, which also must be determined within the context of a general equilibrium solution. Whether or not the costs that third parties bear are eliminated or compensated for or the intrusion into their plan formulation process is ended is incidental and ultimately irrelevant. This is particularly obvious with respect to the tradable permits approach where an efficient level of pollution is chosen and potential polluters are issued permits to, in the aggregate, emit that level.

From an Austrian perspective, after implementing such a policy you are still likely to be left with a pollution problem, all-be-it a possibly less severe one see McGee and Block In spite of these problems the polluter pays principle should not be jettisoned. When all property titles are clearly delineated, a reconstructed polluter pays principle that is rooted in the strict enforcement of property rights makes sense.

A polluter is someone whose production byproducts are seeping onto the property of others and interfering with plans that they may have for the use of that property. By interfering with these plans the polluter is reducing the efficiency by which the victim of the pollution can pursue his or her goals. There is a conflict over the use of a resource. The source of that conflict is the generation of a production byproduct that crosses from property that is owned and controlled by the generator of the byproduct to property that is owned and therefore should be controlled by a nonconsenting party.

The responsibility for ending the conflict lies with the polluter who should be responsible for truly internalizing the costs of the conflict generating activity. In this case, internalizing the costs of the pollution does not simply mean facing a new supply curve that has shifted to the left by the right amount.

For the polluter it instead means eliminating the costs of his polluting activities to those whose property usage is being curtailed. This might be done by eliminating the emissions, confining them to his own property, or by compensating the victims of the polluting activity by an amount that fully addresses the grievance.

The second scenario under which a pollution problem can arise is when property titles and therefore property rights are unclear. A and B are attempting to use the same resource for conflicting purposes, with neither A nor B nor anyone else having clear rights to the use of the resource.

A typical example might be where effluence is being discharged into a river that is being used for fishing or recreational purposes further downstream. First of all, it should be made clear that in this type of case, the effluence is not really the problem. The problem that is generating the conflict is the lack of property rights definition.

Environmental Economics

Typically, it is the scenario described by Menger where use of an otherwise noneconomic good becomes injurious to others and therefore, at least in that use, moves from noneconomic to economic. Unlike in the former case where the goal is to insure that "the polluter pays," in this case the goal is to determine who has the right to use the resource.

It should be noted that we cannot determine, as Coaseans might insist, that the rights go to the person whose use will maximize the overall value of production.

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There is no methodologically sound way of making such a determination. It also means that we cannot determine, without injecting a sense of personal aesthetics, that a more pristine resource, a portion of a river that is used for swimming or fishing, is preferable to a less pristine resource, the same area used as a waste receptacle. In other words, the responsibility for internalizing costs does not automatically go to the person generating the production byproduct.

In such a case, a solution might be to use the principle of first come first served see Rothbard This has several virtues from the perspective of an efficient running market process. First it can reduce the possibility that a conflict will arise in the first place, or it might generate a negotiating process that could resolve potential problems before they arise.

Environmental Economics and Management: Theory, Policy, and Applications

With the knowledge that a first user rule is likely to be upheld by the courts someone who desires to use a resource in a way that conflicts with a known first user will either decide not to go ahead with his plans or will go to the first user to negotiate a compromise. Such a rule would also increase the efficiency of the market process by reducing overall uncertainty in the plan formulation process by enhancing both the amount and quality of information that is captured in relative prices see Cordato Thus far we have avoided any detailed discussion of Austrian welfare economics.


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This is primarily because the theory that is outlined here does not hinge on acceptance of one or another of themore general standards for assessing social welfare found in the Austrian literature. As such, this theory is consistent with all three of these approaches to social welfare. The starting point for all Austrian welfare economics is the goal seeking individual and the ability of actors to formulate and execute plans within the context of their goals.

Furthermore, in all three approaches, social welfare or efficiency problems arise because of interpersonal conflict. This prevents a demonstration of true preferences, moving one to a lower level of utility than would otherwise be achieved. For Kirzner interpersonal conflict that cannot be resolved by entrepreneurship and the market process gives rise to a lack of plan coordination and therefore social inefficiency.

BSc Environmental Policy with Economics

And for Cordato, conflict, that similarly cannot be resolved by the market process, gives rise to catallactic inefficiency by preventing useful information from being captured by prices. A theory of environmental economics and pollution that evolves from problems associated with human conflict then would be a natural implication of each of these welfare standards. In addition, these standards would argue that irresolvable inefficiencies, i. In a setting where rights are clearly defined and strictly enforced, plans may conflict but the resolution to that conflict is embedded in the exchange process.

In other words, conflict may arise at the planning stages but is resolved before the actors proceed with implementation of those plans. For example, persons A and B may have conflicting plans with respect to resource X, but if ownership to X is clearly defined as being in the hands of A, B, or a third party C, then there will not be a conflict over the actual use of X.

ENR-21306 Environmental Economics for Environmental Sciences

It will be understood by A or B that before proceeding with their plan they must gain rights to X. For Kirzner especially, the entrepreneur plays a key role in resolving this potential conflict by bringing together those who may have plans with respect to the use of certain resources and the resource owners. In the absence of clearly defined and strictly enforced property rights this process breaks down and the conflict becomes irresolvable through the market process. Under all three Austrian approaches to welfare economics, therefore, the solution to pollution problems, defined as a conflict over the use of resources, is to be found in either clearly defining or more diligently enforcing property rights.

Not surprisingly this is the approach that has been taken by nearly all Austrian economists who have looked at the issue dating back to Menger. The purpose and one hopes the contribution of this paper, has been to reconstitute both positive and normative environmental economics "from the ground up" using the praxeological method of Austrian economics. As noted at the outset, this exercise is more about pulling together building blocks that are scattered throughout the Austrian literature than fashioning a completely new set of building materials.

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By defining such problems in these terms, both the nature of pollution and the definition of a polluter take on new meaning. Environmental problems are brought to light as striking at the heart of the efficiency problem as typically seen by Austrians, that is, they generate human conflict and disrupt inter- and intra-personal plan formulation and execution. This is in contrast to either Pigouvian or Coasean environmental economics, which defines pollution problems primarily in terms of resource allocation. It is also demonstrated that the property rights approach to policy analysis taken by Mises and Rothbard is not only conceptually different from the approach taken by Coase, but is a natural outgrowth of, and directly follows from its praxeological roots.

The role of property rights in environmental economic analysis is integrated into the Mengerian role of property rights more generally. For Menger, the social purpose of private property is to resolve interpersonal conflicts and allow for the peaceful pursuit and fulfillment of plans.

In pursuing this analysis modern Austrian discussions of environmental issues are seen as part of an historical continuum, starting with Menger. The confusion that currently surrounds the formulation of environmental policy is an outgrowth of a theory of environmental economics that is fundamentally flawed. The standard approach is rooted in indefinable concepts of social cost and general equilibrium and implies policies that cannot be implemented in the real world. In light of this most economists have accepted the idea that their role is to devise efficient methods for achieving politically determined pollution or emissions targets.

As noted by Lloyd Orr,. The proposed solution establishes. Orr , p.