PRIVATIZATION AND ITS LIMITATIONS
If it is feasible to establish a market to implement a policy, no policy-maker can afford to do without one. Unless I am very much mistaken, markets can be used to implement any anti-pollution policy that you or I can dream up.
(Dales, 1968:100, italics in original)
The two chapters by Tietenberg and Rose challenge an influential body of literature that suggests privatization as a solution for commons dilemmas (Gordon, 1954; Dales, 1968; Hardin, 1968; Crocker, 1966; Montgomery, 1972). In theory, for private goods, markets efficiently determine what, how much, how, and for whom to produce in the current period and over time. Tietenberg and Rose argue that it is difficult to privatize common-pool resources in the real and messy world when property rights are not easily defined and enforced, a prerequisite for efficient market functioning. Tietenberg recommends how and when institutions for privatizing common-pool resources, specifically tradable permits, can be developed. Rose, on the other hand, identifies conditions under which common-pool resources are managed more effectively as common property regimes than by tradable permits.
Chapter 6, by Tietenberg, provides lessons on how and why the optimism about the use of tradable permits in the 1980s changed to a more realistic approach to studying the conditions under which they may bring about a given level of environmental protection at the lowest cost. The chapter examines two aspects of “result efficiency” of this policy instrument: environmental effectiveness and economic effectiveness. However, it also points out the importance of “implementation feasibility.” Tradable permits are considered to perform better for com-
mon-pool resources with limited negative externalities, a finding echoed by Rose in Chapter 7.
Chapter 7 examines hypotheses regarding the relative performance of common property regimes and tradable environmental allowances, operationalized in terms of their adaptability to (1) changes in resource demand and (2) variability of the resource. The institutional performance is hypothesized to depend on the following factors: (1) size and complexity of the common-pool resource (2) its use (extractive versus additive); and (3) characteristics of resource users and their interactions.
If the problem of common-pool resource overuse lies in ill-defined property rights, then defining property rights would solve the problem. Questions then arise as to what bundle of rights (specifically the right to manage and alienate the common-pool resource) provides the necessary incentives for owners to invest resources to prevent common-pool resource overuse, and who can define property rights and allocate them among individuals. Tradable permits and common property regimes differ across these dimensions.
The level of detail of the right definition and the ability of the regime to vary rates of resource use over time differ significantly between these regimes. Rights can be more detailed and flexible in common property regimes than in tradable permit regimes because they are not traded in the market. In fact, in resources that are complex (exhibit important interactions among various aspects of resource use) and vary over time, Rose points out that common property regimes outperform tradable permits, especially when the users belong to a close-knit, high-trust community.
Tradable permit regimes, on the other hand, develop uniform rules that offer security in market exchange, even allowing for trades among strangers. Therefore, they perform better for large-scale, but noncomplex common-pool resources. However, for complex common-pool resources, Tietenberg points out how rules can be designed to ensure effective working of tradable permits and prevention of resource overuse. He also deals with another criticism of tradable permit regimes: that they sacrifice equity and environmental effectiveness. He suggests that if a society wishes to prevent a concentration of permits in the hands of some resource users, it may limit transferability of the quotas, of course at the cost of lowering economic effectiveness.
Tietenberg examines cases in which a local, state, or national government assigns property rights and allocates them among common-pool resource users. The users are not allocated the complete bundle of rights, but usually only the right to withdraw from the resource (or deposit pollutants into the resource) and the right to sell their allocations to others. Because users do not influence total allocations, the total level of common-pool resource use—and therefore deterioration—depends on governmental decisions. In the case of common property regimes, users usually do not have the right to sell their individual allocations. They can, however, jointly decide the aggregate level of common-pool resource use.
Having said this, it is important to realize that identifying the maximum sustainable use of the resource—a function undertaken by a government in tradable permit regimes and by the user community in common property regimes—is both scientifically difficult (see Wilson, this volume:Chapter 10) and politically sensitive (see McCay, this volume:Chapter 11).
Tietenberg’s and Rose’s chapters agree on several issues. First, tradable permits perform better for managing simple common-pool resources with few negative externalities. Second, the allocation of rights is a difficult political process that has to be solved in any environmental regime. The allocation process, therefore, deserves special attention in the analysis of “implementation feasibility.” Third, both chapters point out the crucial importance of monitoring and enforcement for any institutional arrangement governing common property resources. However, given that tradable permits offer important financial rewards when sold in market, their institutional design must provide for additional monitoring of not only resource use, but also the number of permits and their transfers. This increases the monitoring costs.
In sum, these chapters make a significant contribution to the understanding of under what conditions common-pool resources are better managed through alternative institutional mechanisms. Specifically, they carefully examine the strengths and weaknesses of tradable permit regimes and common property regimes in managing common-pool resources.
Crocker, T.D. 1996 The structuring of atmospheric pollution control systems. In The Economics of Air Pollution, H. Wolozin, ed. New York: Norton.
Dales, J. 1968 Pollution, Property, and Prices. An Essay in Policy-Making and Economics. Toronto: University of Toronto Press.
Gordon, H.S. 1954 The economic theory of a common property resource: The Fishery. Journal of Political Economy 62:124-142.
Hardin, G. 1968 The tragedy of the commons. Science 162:1243-1248.
Montgomery, D.W. 1972 Markets in licenses and efficient pollution control programs. Journal of Economic Theory 5:395-418.