Trust-Based Property Rights

Trust-based property rights, an explanation by Peter Barnes

URL = http://onthecommons.org/node/685

"For decades, economists have agreed we'd be better off if businesses `internalized' their externalities -- that is, paid in real time the costs they now shift to others. The problem is, there's no one in the market to set prices and collect them. In 1920, British economist Arthur Pigou suggested that government might play this role: it could tax unwanted activities such as pollution, thereby raising their prices and discouraging them. The trouble is, this has turned out to be politically impractical. Think of a real example here: carbon taxes. A tax on carbon emissions could, in theory, reduce global warming. But in order to make a difference, the tax would have to get extremely high. This means Congress would have to raise the prices of gas and electricity year after year, hitting every business and consumer in the pocketbook. That's an improbable scenario.

In 1960, University of Chicago economist Ronald Coase came up with another idea: use property rights to set prices for externalities. For example, if pollutees had a right not to be polluted, they could cut deals with aspiring polluters: for such-and-such a price, we'll accept so much of your pollution. Government's job would be to create the appropriate property rights, then let markets set pollution levels and prices. In my view, Coase's approach is the way to go; the trick is getting the property rights right. Individual pollutees are in no position to negotiate with corporate polluters. The right not to be polluted needs to be a collective right, and pollutees -- both present and future -- need to be represented by competent agents.

Those agents, as I suggested earlier, ought to be trusts accountable to future generations and living citizens equally; what are now unstoppable externalities would become property rights owned and managed by such trusts. The trusts would set steadily lower pollution levels and collect the fees paid by polluters. They'd then divide that revenue among pollutees and/or invest it in public goods. Prices of pollution-laden goods would rise, but so would the incomes of consumers. Those who avoid pollution-laden goods would come out ahead; those who indulge in such goods would pick up the tab. What better or fairer set of incentives could we devise?" (http://onthecommons.org/node/685)