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Markets and government intervention in environmental conservation

(Chapter 3 in Economics of Environmental Conservation 2nd Edn)

Chapter · January 2005

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 Markets and Government Intervention in Environmental
Conservation

Chapter 3 in Economics of Environmental Conservation (Second Edition)

(2005) by Clement A Tisdell. Published by Edward Elgar, Cheltenham, UK and
Northampton, MA, USA. ISBN: 1 84376 614 0

3.1 Introduction- Choices About Resource Use And Conservation

We live in a socially interconnected world as well as one displaying environmental
interdependence. In most cases, human desires to use the Earth's available resources, including
environmental resources, exceed the capacity of these resources to satisfy human wants
completely. Thus, as pointed out in Chapter 1, a social or economic problem arises about how
to manage resources to satisfy human desires. How can available resources be managed to
regulate human conflict about their use? How can they be best managed so as to satisfy human
desires? Dealing with these questions involves many complexities of the type identified in
Chapter 1. Therefore, there are no easy answers to these questions. Nevertheless, they cannot
be ignored when considering environmental conservation. Many of the biosphere's resources
have limited capacities to satisfy human wants irrespective of whether these wants are focused
on human interests or on ecocentric objectives.
A range of social mechanisms can be applied to administer the use and conservation of
resources. They include:
1. Customs and codes of conduct. Social moral pressures may be included in this group
of mechanisms (see Etzioni, 1988). The principle recommended in Caring for the Earth
(IUCN-UNEP-WWF, 1991, p. 11) of promoting values that support the ethic for living
sustainably falls under this heading.
2. Direct controls on or prescriptions for resource-use drawn up by governing bodies (or
in a few cases, dictators) are also to be used to manage resources. The nature of these
regulations and their consequences depends significantly on the character of applicable
political systems and associated administrative systems. In arguing for increased
control over natural resources by local communities and in recommending more
alliances between nations for greater control over use of the global commons, Caring
for the Earth (IUCN-UNEP-WWF, 1991) favoured changes in governance as a way to
improve prospects for sustainable living.
3. Use of the price or market mechanism provides another method for social
administration of resource-use. The driving force of this mechanism is the pursuit of
individual self-interest, but this pursuit is constrained by competitive mechanisms and
social rules. Caring for the Earth (IUCN-UNEP-WWF, 1991) recommends greater use

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 of economic and market-based mechanisms as a means to manage the biosphere for
sustainable living.
In most societies, all of these social mechanisms operate in some combination to direct the use
and conservation of resources. They are a significant part of social capital of a nation.
Note that the operation of the price or market mechanism relies on custom and social morality,
as well as government support through the legal system. The market system would not work,
or would do so poorly, in the absence of social respect for contracts, respect for private
property, the honouring of debts and so on, and the presence of a legal and administrative
system that support these obligations.
However, even when all pre-requisites of this nature are satisfied for the operation of a market
system, not all valuable economic commodities are able to be marketed, or able to be marketed
efficiently. Market failures occur. This may happen for example, when the costs of market
transactions (that is, of exchange using a market system) are quite high, or the costs of enforcing
property rights are too high in relation to the economic benefits obtained to make it worthwhile
for owners to enforce such rights at all or to do so fully. In the latter case, the owner of property
appropriates less than the full economic value available from the property and thus does not
have an economic incentive to utilise it to provide its full economic value. Therefore, whether
or not markets work, or work well, depends upon the economics of enforcing property rights
and the level of market transaction costs.
Four special (extreme) cases can be used to identify the scope for employing the market
mechanism to administer society's resources. These are shown in Table 3.1 for a focal
commodity for dichotomous possibilities. These possibilities are classified in terms of whether
there is rivalry in the use of the commodity and whether it is possible economically for owners
to exclude others from its use. Rivalry has to do with whether the use of the commodity by one
individual utilises it in such a way that it is not available to anyone else. Bread is an example
of such a rival commodity. Non-rivalry implies that any number of persons can simultaneously
consume the commodity without diminishing its availability to others. The value placed on the
pure existence of some species of wildlife, such as giant pandas, has this characteristic.
Excludability involves the issue of whether it is economically feasible to enforce private
property rights. In the excludable case, the implication is that enforcement of property rights is
economical, but that it is not so in the non-excludable case. Alternatively, in the latter case,
while excludability would be economically possible, it may not occur because of institutional
reasons. The economics of excludability, as will be discussed later in this book, can alter as
technologies and market conditions change.
Market systems are able to operate in cases I, 2 and 3 in Table 3.1 but not in case 4. While
markets can be efficient in satisfying human wants in case 1, they are usually inefficient in
doing so in cases 2 and 3. For example, situation 2 can result in the tragedy of the commons
(Hardin, 1968) and case 3 is often associated with a private monopoly. A monopolist normally
restricts sale of the monopolised commodity in order to maximise profit. Nevertheless, on some
occasions, there is no practical nor economical alter- native to situations 2 and 3. Case 3 is
examined in relation to preservation of genetic diversity in Chapter 5, and case 2 is discussed
in Chapter 6 in relation to nature conservation. This chapter concentrates on cases 1 and 4.

2
Their implications for environmental conservation and for the possible role for government
intervention are considered.
Note that Table 3.1 displays only cases involving extreme combinations of excludability and
rivalry. Many cases arise in practice where partial excludability or partial rivalry exists. For
example, environmental spillovers from provision of private goods involve partial
excludability. Rivalry may not exist or may not become an issue in the consumption of some
goods until demand to use these becomes 'high'. For example, visitors to a natural site may not
experience rivalry until the number of visitors are large and crowding and congestion becomes
an issue. Such goods are often called quasi-public goods.
Again, some commodities are mixed goods in the sense that they have the ability to supply
both private and public goods. This is true of many environmental resources, including some
wildlife species. For example, elephants supply marketable private goods such as ivory, leather
and meat, but their mere continuing existence satisfies the demands of some individuals just
for this. Such persons are willing to pay for the continuing existence of the species independent
of any direct use of elephants by them. The existence of elephants satisfies a public good
demand.
Using the terminology developed by Pearce et al. (1989), some environ- mental assets, for
example, wildlife species, such as the elephant, have a total economic value consisting of use
value components plus non-use value economic components. They are mixed economic goods.
Often the use value of such a resource is marketable, but not always. However, non-use values
are non-marketable because they possess the characteristics of pure public goods (case 4 in
Table 3.1). As a result, market failure is liable to occur in conserving species with considerable
non-use value (see Chapter 5).
This chapter considers reasons why market systems can fail to ensure perfect economic
efficiency in the use and management of living resources. While highlighting circumstances
favouring government intervention and bringing attention to factors which ought to be taken
into account in valuing resources, it does not ignore government policy failures either.
When markets fail to ensure complete economic efficiency, market failure is said to exist.
Complete economic efficiency is achieved socially (using the standard economic test) when
resources are allocated to uses (in space and in time) such that no reallocation can make
anybody better off without making another worse off. In other words, complete economic
efficiency prevails when Paretian optimality is achieved. Conversely, economic inefficiency
exists when someone can be made better off without making another worse off by reallocating
resources. But failure to achieve economic efficiency is not peculiar to market systems.
Government, political, administrative and other institutional determinants of resource-use can
also result in economic inefficiency. Some circumstances are highlighted where this is so.
Many economists supporting government intervention in the conservation of living resources
believe that market failure is important in living resources utilisation and conservation. Those
who argue against such intervention stress the shortcomings of administrative and political
mechanisms of government. This group often favours reforms to strengthen market
mechanisms rather than a policy of supplanting ineffective market forces by government

3
controls. The views of this group have influenced the policies proposed in Caring for the Earth
(IUCN-UNEP-WWF, 1991).
Important sources of market failure in nature conservation include: (1) the presence of
externalities or spillovers, (2) the existence of public good characteristics, (3) socially
inappropriate allowances made by individuals for irreversibility of resource-use and
uncertainty, and (4) the use by individuals of an excessively high rate of interest or discount of
the future from a social point of view. Other sources of market failure in the utilisation of
natural resources include (5) the presence of monopoly rights and (6) the existence of common-
property. Let us consider each of these matters in turn and then examine possible sources of
government and institutional failure in relation to nature conservation.

Table of Contents of Chapter 3

3. Markets and Government Intervention in Environmental Conservation 52
3.1. Introduction- choices about resource use and conservation 52
3.2. Market efficiency and externalities 56
3.3. Government policies 'to correct' for externalities 65
3.4. Public or collective good characteristics associated with the conservation
of nature 70
3.5. Option demands, transaction costs, more on existence values, bequest,
irreversibility and uncertainty 73
3.6. Discount rates as grounds for government intervention 75
3.7. Monopolies and conservation 76
3.8. Common-property and intervention 78
3.9. Failure of political and administrative mechanisms in relation to
conservation 79
3.10. Concluding comment 81
References 82

List of Figures and Tables in Chapter 3

Figure 3.1 In the absence of environmental spillovers, competitive markets 57
result in supplies of private goods that efficiently satisfy human
wants
Figure 3.2 When unfavourable environmental spillovers occur, market systems 58
usually result in excessive environmental damage from a social
economic viewpoint
Figure 3.3 An illustration of some situations in which public intervention may 59
be required on economic grounds to reduce or eliminate an
environmental spillover, even though the externality is infra-marginal

4
 Figure 3.4 Illustration of divergence between social and private marginal cost 61
due to externalities or spillovers and consequent social 'deadweight'
losses
Figure 3.5 Private net benefit gained by land clearing compared with various 62
social net benefit curves with differing implications for the optimality
of the extent of private land clearing
Figure 3.6 Pursuance of private gain may result in too much natural vegetated 64
land being developed for commercial purposes. This is so if
favourable externalities arise from natural vegetation cover and a
social viewpoint is adopted
Figure 3.7 The optimal level of conservation of the population of a species 71
considered as a pure public good on the basis of its existence value
Figure 3.8 In the above case, the higher is the rate of interest used for 76
discounting the more likely development is to be preferred to
conservation of a natural resource
Figure 3.9 Monopoly in this case has no conservation advantages and results in a 77
deadweight social loss
Figure 3.10 Illustration of how majority voting may lead to insufficient or too 80
much conservation judged by the Kaldor-Hicks economic efficiency
test
Table 3.1 Four different situations involving excludability (private property
rights) and rivalry in use of a commodity. Combinations of these
factors influence whether markets can exist and whether they can
satisfy human wants efficiently

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