Law, Economics, and the Right to Pollute the Environment - Assignment Example

5th May Topic:  law and economics The phrase "law and economics" refers to the application of the methods of economics to legal problems. Air pollution is the introduction of chemicals, particulate matter, or biological materials that cause harm or discomfort to humans or other living organisms, or cause damage to the natural environment or built environment, into the atmosphere. There has always been air pollution. Whenever anything is burned or combusted, air pollution is created. Therefore, when cave men had fires in caves without chimneys (for ventilation), significant pollution was created. Air pollution first became a problem during the industrial revolution when the use of coal increased. Initially, it seemed adequate for industries to protect humans from harmful smoke emissions by building smoke stacks that delivered the smoke high into the air, away from the people. This thinking was logical at the time: if harmful smoke was emitted high in the atmosphere, then natural weather patterns such as changing wind and rain storms would disperse the pollutants throughout the atmosphere. Unfortunately, humans started to produce more pollution than natural weather patterns could disperse. Ronald Coase of the University of Chicago addressed these questions in 1960, in "The Problem of Social Cost," an article that helped win him the 1991 Nobel Prize in economics. But the most relevant parts of that paper are the least noted. The paper is most famous for what was later called the Coase Theorem. This is the idea that if making deals in the marketplace costs nothing, it wont matter how the law assigns liability. If a factory has the right to operate even if it pollutes, then people who dont want to breathe stinky air can pay the owner not to pollute. If, on the other hand, the neighbors have the right not to suffer pollution, the factory can pay them to waive that right. In either case, a deal will be made at the level that makes everyone as happy as possible. But as Professor Coase would be the first to point out, we dont live in a world where deals are free. Gathering information, rounding up all the affected parties, negotiating contracts, monitoring pollution levels and so on is all costly. These transaction costs can make such happy deals difficult, though certainly not impossible. In the real world, the ways rights are assigned to polluters or to their neighbors do matter. That makes it important to assign them correctly. What principles should we use to get the best result? Professor Coases first insight is that pollution is not a simple matter of physical invasion or evil-doing. It is a byproduct of valuable actions. Preventing those actions would also be harmful. "The real question that has to be decided," he writes, "is should A be allowed to harm B or should B be allowed to harm A? The problem is to avoid the more serious harm." The question, from a Coasean perspective, is which is the greater harm, and how should we avoid it? We have to consider both sides, and we should find the least costly remedy. The widget factory located near a residential area causes pollution that is damaging to the 100 odd residents of the area. Assessing the ramifications of the legal rules under each particular situation by shifting the rights between the factory and the residents, the legal rules being as follows:- 1) Factory has the property right to pollute  A property right is the exclusive authority to determine how a resource is used, whether that resource is owned by government or by individuals. Property rights are well defined All economic goods have a property rights attribute. This attribute has four broad components; 1. The right to use the good 2. The right to earn income from the good 3. The right to transfer the good to others 4. The right to enforcement of property rights. The costs of defining, monitoring, and enforcing property rights are termed transaction costs. The normative principle for the law as suggested by Murray Rothbard - economist, economic historian, and libertarian political philosopher is simply this: “No action should be considered illicit or illegal unless it invades, or aggresses against, the person or just property of another. Only invasive actions should be declared illegal, and combated with the full power of the law. The invasion must be concrete and physical. There are degrees of seriousness of such invasion, and hence, different proper degrees of restitution or punishment” In our case study, the Factory is polluting the atmosphere that is hazardous to the residents. The extent of damage is to be assessed. But this also leaves a large room for debate about the Factory’s right to pollute within permissible limits. i.e. we do not know if this is the socially efficient level or not. The focus of property rights theory has been on "the interconnectedness of ownership rights, incentives, and economic behavior."While this could be all encompassing, there are still a small set of alternative suggestions on Property rights that pans for thought and consideration. 2. Residents have the property right to clear air  A polluter, for example, considers air or water free. For him, dumping pollutants into the air or water is a cheap way to dispose of wastes. Yet, his actions do involve costs because he affects the alternatives that others face. The polluter may make others forego clean water. One could say that the polluter imposes some costs of production on others, although this use of the word "cost" differs from the normal meaning of cost. Those who bear this cost are not involved in the choice, and in its pure meaning cost is an alternative foregone in a choice. If no man may invade another persons "just" property, what is our criterion of justice to be? There is no space here to elaborate on a theory of justice in property titles. Suffice it to say that the basic axiom of libertarian political theory holds that every man is a self owner, having absolute jurisdiction over his own body. In effect, this means that no one else may justly invade, or aggress against, anothers person. It follows then that each person justly owns whatever previously unowned resources he appropriates or "mixes his labor with. Everyone has the right to have the physical integrity of his property inviolate; no one has the right to protect the value of his property, for that value is purely the reflection of what people are willing to pay for it. 3. Liability right assigned to the factory  Considering the case of the polluting widget factory, the factory has a fixed supply of assets used in the course of production, whose costs are internalized by the factory and accounted for when it calculates profit and loss statements (thereby measuring its efficiency). In reality, the factory also makes copious use of "clear air" during production, but the cost of this asset is external to the factory and is not (normally) accounted for. Instead, the cost created by the factorys consumption of clean air is passed on to the surrounding community in the form of pollution. Article I, Section 27 of the Pennsylvania Constitution provides: “The people have a right to clean air, pure water, and to the preservation of the natural scenic, historic and aesthetic values of the environment. John C. Dernbach, a professor at Widener University’s School of Law and constitutional researcher, points out that environmental protection is part of the constitutional purpose of state government. The environment is given the same legal protection afforded to individual property rights and, balanced against those rights, is directed toward environmentally sustainable development. The public trust part obliges the state to conserve and maintain public natural resources for the benefit of all people. The state is obligated to ensure that consideration and protection of constitutional values concerning the environment are made part of all state decision-making. Constitutional law is there to prevent environmental degradation. Citizens are entitled to a state government that accepts, as its first responsibility, the duty to carry out constitutional law. Natural resources are the common property of all the people, now and forevermore. The Government’s legal constitutional duty is to conserve and maintain those resources for all. 4. Liability right assigned to the residents  According to Coase Theorem, the recognition of "externalities" associated with private ownership, such as the polluting by-products of a private production process, has broadened the usual scope of inquiry beyond the private versus common ownership dichotomy. This broader view extends the inquiry of property rights theory into the realm of welfare theory in which the overall social implications of private choices are examined. An examination of the externalities associated with private choices in the context of their overall social effects suggests the need for some form of regulation of private choices. Whenever private choices are limited by government regulation or by societal norms, the organization and content of those constraining the laws are to be studied and considered. One normative conclusion sometimes drawn from the Coase theorem is that property rights should initially be assigned to the actors gaining the most utility from them. The problem in real life is that nobody knows ex. ante the most valued use of a resource and also, that there exist costs involving the reallocation of resources by government. Another, more refined normative conclusion also often discussed in law and economics is that government should create institutions that minimize transaction costs, so as to allow misallocations of resources to be corrected as cheaply as possible. Our Assumptions:- The factory can either pollute or install scrubbers to prevent pollution. The residents can install indoor air filters or not. Assuming each resident is equally susceptible to the damage caused by the pollution and that there are 100 such residents. Costs of each option under three different scenarios are indicated as below:- If law assigns to the residents a right to clean air protected by a liability rule, the efficient solution will take place because the factory will spend $10000 to install the Scrubbers. If law assigns to the factory a right to pollute (meaning that the residents have no legally enforceable right to clean air), the efficient solution will take place because the residents will pay the factory to install the Scrubber. Any payment from Residents to factor of between $4000 to $10000 (the cost of the Scrubber, hence the minimum offer the factory will accept) and $4000 (the total cost to the Residents of buying Air filters, their next-best solution) will be mutually advantageous to the residents and the factory. The government might put a $10000 tax on the factory to compensate for the pollution. That gives the company an incentive to eliminate the pollution by installing a $10000 Scrubber. Bur the $10000 Scrubber may not be the only or cheapest way to avoid $10000 in damages. Suppose residents could avoid the pollution for just $4000 by installing Air filters. That would be an even better approach because it would keep the overall harms to a minimum. Costs are purely subjective and not measurable in monetary terms. But once we understand that costs are subjective to each individual and therefore immeasurable, we see that costs cannot be added up. Suggested Solutions: The Coase theorem states that where there is a conflict of property rights, the involved parties can bargain or negotiate terms that are more beneficial to both parties than the outcome of any assigned property rights. The theorem also asserts that in order for this to occur, bargaining must be costless; if there are costs associated with bargaining (such as meetings or enforcement), it will affect the outcome. The Coase theorem shows that where property rights are concerned, involved parties do not necessarily consider how the property rights are granted if they can trade to produce a mutually advantageous outcome. Mine reclamation through reforestation and sustainable forest management can provide two major benefits. Financial benefits include revenue from new forests, job creation, and other impacts on local economies. Environmental benefits include storing carbon in the trees, enhancing wildlife habitat, and improving air and water quality. Carbon sequestration removes carbon, in the form of carbon dioxide, either directly from the atmosphere or at the tail end of combustion and industrial processes. CO2 removed from the atmosphere is either stored in growing plants in the form of biomass or absorbed by oceans. Sequestering carbon helps to reduce or slow the buildup of carbon dioxide concentrations in the atmosphere. For organizations interested in generating carbon credits, may provide the land necessary to plant trees. Terrestrial sequestration is a form of indirect sequestration whereby ecosystems (e.g., forest and agricultural land s, wetlands) are maintained, enhanced, or manipulated to increase their ability to store carbon. References:- Hahnel R and Sheeran KA. 2009. Misinterpreting the Coase Theorem. Journal of Economic Issues. Vol 43. No 1. March. pp 215–238.) Scrubber : From Wikipedia, the free encyclopedia Air pollution AP 42 Compilation of Air Pollutant Emission Factors From Wikipedia, the free encyclopedia Murray N. Rothbard. "Introduction by Murray N. Rothbard",Mises Institute, referenced 2009-05-27. Read More