Market Failure

In our politics, there is a much discussion of property rights but too little discussion of an obscure economic concept known as an externality.

An externality is a real cost, arising out of the production of goods or delivery of services, that is neither reflected in the price paid by purchasers nor the expenses incurred by the producer or provider. Since the existence of externalities is evidence of market failure, the remedies - if remedies there are to be - must take non-market forms.

A simple example of an externality is the creation of local air pollution and, hundreds of miles down wind, acid rain as a result of burning coal to generate electricity without either removing the sulphur prior to combustion or capturing the sulphur dioxide at the smokestack. Costs were inflicted on the world without any payment by those who caused the problem. Nor, since there was no cost to the utility, was there any market incentive to desist.

In the USA in the early 1990s, that issue was addressed by a combination of regulation and market forces. A 'Cap and Trade' program was established regulating the total permitted emissions of sulphur dioxide and allowing emitters to buy and sell emissions permits. Each year the total allowed emissions were reduced. Since the program was introduced, the production of acid rain, traceable to power plants in the USA, is much diminished. Without government action, however, the problem would still exist.

Many externalities involve using the commons - air, water, land - as free or cheap dumping grounds for pollutants. Those who pay little, sometimes nothing, for the privilege of disposing of excess fertilizers, sediments, sewage and other by-products contained in untreated or only partially treated storm water degrade the environment. In addition, there is so-called non-point source pollution. In plain language that means fertilizer that was applied far in excess of actual needs. Farmers spend a bit too much, which they think is their right, but the nation suffers greatly.

If that does not meet the definition of an externality - and therefore market failure - what does?

Homeowners, drivers, cities, States, farmers and all who discharge waste have little or no market incentives to reduce their impositions on the rest of us. As a result, the only entity capable of exercising ownership rights over these resources is government, representing the People.

If government were merely to charge a price for discharging these pollutants, it is all too likely that there would be no significant change in behavior. Perhaps the cost of living would increase modestly but no effective market signals would be sent to polluters. The situation where sellers have largely unlimited power to pass costs to buyers, as would be likely in this situation, is another form of market failure.

A classic case of so-called property rights versus the environment involves the Chesapeake Bay. Between storm water run-off from roads, parking lots and housing developments, discharges from poorly designed and maintained septic systems, and overloaded municipal sewage treatment plants as well as the leaching of fertiliser and manure from farms in the watershed, the Chesapeake Bay is in poor health.

The cause is not just the direct poisons (industrial waste, oil and rubber from roads, air pollutants dissolved in rain water) that find their way into the water. As much as anything, it is farmers who, collectively, are a very large contributor to the problem.

Fertilizer (which includes manure) helps things grow and fertilizer is cheap. Unfortunately, farmers - like alcoholics - seem to believe in the idea that, if some is good, more must be better. The result is that excess fertilizer leaches out of fields and into the waterways that feed the Bay. Poorly designed manure piles from dairy farms and, even worse, the industrial grade chicken producers on the Eastern Shore of Maryland also provide additional natural organic nutrients to the Bay.

So what is wrong with additional nutrients? Don't they help things to grow in the Bay?

Indeed these nutrients encourage growth. Unfortunately, the species that feast upon the overdoses of fertilizer are algae which both block sunlight - therefore stunting the growth of underwater grasses - and consume far more than their fair share of oxygen. The lack of grasses and oxygen leads directly to the disappearance of oysters, crabs and fish. Sometimes, these conditions lead to anoxic decay with the production of foul smelling - even flammable - gases.

Last year, the U.S. Environmental Protection Agency - after too many years of ineffective activity - finally came to a comprehensive agreement with the States bordering the Chesapeake Bay. There was much grumbling over the cost but all , including the District of Columbia, agreed to take serious actions that would result in restoration of the Bay.

Now, however, the American Farm Bureau and the Pennsylvania Farm Bureau have filed suit in Federal Court to overturn the regulations. According to a report in the Washington Post - http://tinyurl.com/4sm9b8e - they claim that the costs of the cleanup will devastate farms and possibly drive them from the region.

In reality, they are claiming the right to dump THEIR rubbish into OUR Bay at no cost to themselves but at much direct cost to the watermen of Maryland and Virginia as well as to all of those who use the Bay for recreation. The costs of a dying or dead Bay are not particularly easy to quantify (at least not without starting a serious argument) but they are undoubtedly substantial.

Fortunately, the Federal Government, on behalf of all citizens, has asserted our collective ownership rights to the Bay. Since setting a price on these discharges would be unlikely to provide the desired result, regulation is the choice. Farmers must accept their collective responsibility and, if they can not manage the slightly increased cost, go out of business. Farmers, like all other businesspeople, must operate efficiently if they wish to prosper - or even survive.

Their property rights (the term of art is 'right of innocent enjoyment and use') can be assured but not to the extent that their activities result in degrading our common property together with our right to enjoy it or to make a sustainable living from it.

There is civil society and there is selfish society. Your correspondent much prefers to live in a civil society where there is respect for the rights of others. Sadly, it appears that these farmers, or their representatives, are consumed with short term and selfish desires. Our rights, in their opinion, must be subordinated to their desires.

That vast sums of taxpayer money are used to subsidize farmers only adds insult to injury.