The Rule of Capture and the Economic Dynamics of Natural Resource Use and Survival under Open Access Management Regimes

By reviewing the bioeconomic dynamics of natural resource harvest under open access/rule of capture management, this article demonstrates the falsity of the widely held contemporary view that market incentives lead to unsustainable natural resource use. The formal bioeconomic models teach that it is the relative speed of market versus natural dynamics that determines when and if open access harvest leads to resource collapse. If the rate at which harvesters exit from the harvest industry when harvests are low is rapid relative to the natural rate of growth in the harvested stock, the level of both the resource stock and harvest industry both cycle around interior (non critical) levels. These very basic results from the bioeconomic literature carry fundamental lessons for resource management policies: given an open access, rule of capture regime, the best way to guarantee sustainable resource use is to encourage exit from resource intensive industries when stocks are low by subsidizing mobility, but to discourage specialization in the harvest of particular stocks or species and instead encourage generalized harvest technologies (technologies that have value in harvesting a variety of species or types of resource). Examination of the case of the Atlantic cod fishery collapse reveals that these normative recommendations are at odds with the revealed political economics of resource policy: the establishment of national property rights in coastal fisheries through the declaration of exclusive economic zones led not to rational policies, but to increased subsidies for resource specific capital investments in harvest industries, the effect of which was not only to increase harvests dramatically, but to keep harvest levels high despite rapid declines in catches and stock levels. The article goes on to argue that a dynamic similar to the bioeconomics of natural resource harvest also applies to environmental pollution and to land development. When industrial polluters\u27 productivity depends upon the level of ambient pollution (so such industries in a sense harvest clean resources), industrial migration may occur as a response to increasing levels of local pollution. Through such a dynamic, local levels of pollution may cycle around sub maximal levels, just as do more conventionally harvested resource stocks. With pollution, American environmental policies better fit the theoretical recommendations: by setting pollution reduction standards that are nationally uniform within industrial categories, the federal environmental laws lessen the economic incentive for polluters to migrate in search of clean or unharvested resources. Whether similar salutary effects can be expected from policies designed to force land developers to internalize the external costs of lost open space (a reduction in a localized resource stock, the stock of undeveloped land) are, however, unclear: even in an unregulated market, because the existence of open space is captured in higher localized land values, development is generally unlikely to eliminate all exurban open space. Inasmuch as the loss of open space or sprawl problem involves socially undesirable fragmentation of development, optimal patterns have a path dependency which may make it impossible to find a policy response that is both ex post and ex ante efficient

Not So Cold an Eye: Richard Posner\u27s Pragmatism

Over the past twenty odd years, Judge Richard Posner has established himself as one of the most creative and influential thinkers in the history of American law. His work divides into two parts: the prejudicial corpus, which is devoted almost entirely to the comprehensive economic analysis of law,\u27 and the postjudicial corpus, which treats issues involving what may be called the theory of judging and courts--that is, the normative theory of how judges should decide cases and how courts should be organized. This division is rough and wavering, for Posner\u27s work prior to his appointment to the federal bench often dealt with topics relevant to the theory of judging,\u27 and his work in law and economics has continued since his appointment. But while such a water- color boundary may fail in cartography, my purpose here is not map making but rather map reading. The map, Judge Posner\u27s recent book The Problems of Jurisprudence, ostensibly covers terrain on the postjudicial side of my imperfect border. The book is a campaign for Pragmatism in the battle against competing general approaches to the theory of judging. And it is a campaign that succeeds brilliantly in demolishing much of the cant and piety in contemporary thinking about law. When Posner raises the flag and proclaims his Pragmatist Manifesto as a general approach to law and judging, however, it is but a partial proclamation, because he announces it from within the water-color boundary between scholar and judge, between explanation and justification, and between economic theory and judicial practice. The path to this ambiguous destination begins with Judge Posner listing at least a dozen fundamental jurisprudential questions such as What is law? and Where does law come from? \u27 Jurisprudence ad- dresses questions which Posner says are the sort that an intelligent layperson of speculative bent-not a lawyer-might think particularly interesting. Then, quite rapidly, he discards both the list and the perspective of the intelligent, speculative layperson. Posner picks a new point of view, the view of the enlightened judge, interested not only in deciding cases, but in contemplating how a judge may justify these decisions and his role. This is the judge robeless, not bench proud but library bound, eyes strained and burning to see himself impartially. And from this coign of vantage, the long list of old jurisprudential questions is reduced to three very contemporary queries going to the heart of the judge\u27s vision of himself: [W]hether, in what sense, and to what extent the law is a source of objective and determinate, rather than merely personal or political, answers to contentious questions

Global Warming Advocacy Science: a Cross Examination

Legal scholarship has come to accept as true the various pronouncements of the Intergovernmental Panel on Climate Change (IPCC) and other scientists who have been active in the movement for greenhouse gas (ghg) emission reductions to combat global warming. The only criticism that legal scholars have had of the story told by this group of activist scientists – what may be called the climate establishment – is that it is too conservative in not paying enough attention to possible catastrophic harm from potentially very high temperature increases. This paper departs from such faith in the climate establishment by comparing the picture of climate science presented by the Intergovernmental Panel on Climate Change (IPCC) and other global warming scientist advocates with the peer-edited scientific literature on climate change. A review of the peer-edited literature reveals a systematic tendency of the climate establishment to engage in a variety of stylized rhetorical techniques that seem to oversell what is actually known about climate change while concealing fundamental uncertainties and open questions regarding many of the key processes involved in climate change. Fundamental open questions include not only the size but the direction of feedback effects that are responsible for the bulk of the temperature increase predicted to result from atmospheric greenhouse gas increases: while climate models all presume that such feedback effects are on balance strongly positive, more and more peer-edited scientific papers seem to suggest that feedback effects may be small or even negative. The cross-examination conducted in this paper reveals many additional areas where the peer-edited literature seems to conflict with the picture painted by establishment climate science, ranging from the magnitude of 20th century surface temperature increases and their relation to past temperatures; the possibility that inherent variability in the earth’s non-linear climate system, and not increases in CO2, may explain observed late 20th century warming; the ability of climate models to actually explain past temperatures; and, finally, substantial doubt about the methodological validity of models used to make highly publicized predictions of global warming impacts such as species loss. Insofar as establishment climate science has glossed over and minimized such fundamental questions and uncertainties in climate science, it has created widespread misimpressions that have serious consequences for optimal policy design. Such misimpressions uniformly tend to support the case for rapid and costly decarbonization of the American economy, yet they characterize the work of even the most rigorous legal scholars. A more balanced and nuanced view of the existing state of climate science supports much more gradual and easily reversible policies regarding greenhouse gas emission reduction, and also urges a redirection in public funding of climate science away from the continued subsidization of refinements of computer models and toward increased spending on the development of standardized observational datasets against which existing climate models can be tested

The Return of Bargain: An Economic Theory of How Standard Form Contracts Negotiation between Businesses and Consumers

This paper analyzes standard form contracts between firms and individual consumers (and borrowers). It presents a mix of anecdotal and empirical evidence from a large number of industries demonstrating a widespread pattern in which firms refrain from enforcing the typically clear bright line performance obligations that such standard form contracts set out (such as a consumer credit repayment terms, or a retail consumer\u27s right to return goods). Instead, firms routinely give their supervisory employees the discretion to bargain around such terms. Within a simple and informal model, the paper explains such delegated, discretionary renegotiation as a means by which firms use their managers\u27 superior information to ex post screen for consumer type. Managers forgive breaches of contract terms by high value, honest consumers, while enforcing the tough standard form terms against low value and/or opportunistic consumers. While such practices may be vulnerable to market competition in the long run (as cut rate firms eschew such costly renegotiation, lowering cost and price and attracting low value consumers), they may also be a stable competitive practice. Normatively, such ex post screening dominates ex ante screening by opening markets to consumers who would otherwise be denied goods or services provided on credit because they have low wealth and/or no established market reputation. Taking account of possible firm opportunism as well as consumer opportunism, the central normative implication for the law is to recommend that courts enforce promises by the firm\u27s agents to waive or renegotiate standard form obligations, but only if there is clear proof that such promises were actually made. The paper concludes with by arguing in favor of the judicial enforcement of standard form terms regarding the settlement of disputes such as terms requiring that disputes be resolved by arbitration. Such provisions allow consumer value, rather than ex post litigation outcomes, to be the primary determinant of firm incentives to forgive consumer breaches of performance obligations. However, because consumers remain rationally ignorant of terms regarding dispute resolution, courts have been correct to strike down terms that effectively eliminate all consumer remedies

The Promise and Limits of Voluntary Management - Based Regulatory Reform: An Analysis of EPA\u27s Strategic Goals Program

This paper presents a case study of a voluntary environmental program initiated by the U.S. EPA in the late 1990\u27s, the Strategic Goals Program (SGP). This program was intended to create incentives for job shop metal finishers, an industry of small and medium sized enterprises, to improve and even go beyond compliance with existing federal regulations by investing in pollution prevention. The SGP\u27s incentives included direct technical assistance and limited financial assistance, but the primary carrot it offered participants was more flexible regulatory treatment by state and local regulators. Although SGP clearly helped some firms discover ways to both cut their pollution and improve profitability (so-called green gold ), environmental performance of firms that participated in the SGP was not generally superior to that of non-participants. The paper explains the SGP\u27s relative ineffectiveness to the fact that the incentives it offered were relatively weak, given the cost of pollution prevention. In particular, the economic value of regulatory flexibility - such as reduced sampling or reporting requirements - appears to have been small relative to the cost of pollution prevention. The lesson of EPA\u27s metal finishing SGP is that without direct public financial aid, there is limited potential for small, marginally profitable firms facing intense foreign competition and costly regulation to continue to improve their environmental performance by investing in pollution prevention. Federal laws and regulations should either directly subsidize such investments, or use pollution allowance trading as a way to lessen the economic dislocation that results when the demand for increasingly costly improvements in environmental performance destroys the viability of such small and medium sized enterprises

Tradable Pollution Permits and the Regulatory Game

This paper analyzes polluters\u27 incentives to move from a traditional command and control (CAC) environmental regulatory regime to a tradable permits (TPP) regime. Existing work in environmental economics does not model how firms contest and bargain over actual regulatory implementation in CAC regimes, and therefore fail to compare TPP regimes with any CAC regime that is actually observed. This paper models CAC environmental regulation as a bargaining game over pollution entitlements. Using a reduced form model of the regulatory contest, it shows that CAC regulatory bargaining likely generates a regulatory status quo under which firms with the highest compliance costs bargain for the smallest pollution reductions, or even no reduction at all. As for a tradable permits regime, it is shown that all firms are better off under such a regime than they would be under an idealized CAC regime that set and enforced a uniform pollution standard, but permit sellers (low compliance cost firms) may actually be better off under a TPP regime with relaxed aggregate pollution levels. Most importantly, because high cost firms (or facilities) are the most weakly regulated in the equilibrium under negotiated or bargained CAC regimes, they may be net losers in a proposed move to a TPP regime. When equilibrium costs under a TPP regime are compared with equilibrium costs under a status quo CAC regime, several otherwise paradoxical aspects of firm attitudes toward TPP type reforms can be explained. In particular, the otherwise paradoxical pattern of allowances awarded under Phase II of the 1990 Clean Air Act\u27s acid rain program, a pattern tending to favor (in Phase II) cleaner, newer generating units, is explained by the fact that under the status quo regime, a kind of bargained CAC, it was the newer cleaner units that were regulated, and which therefore had higher marginal control costs than did the largely unregulated older, plants. As a normative matter, the analysis here implies that the proper baseline for evaluating TPP regimes such as those contained in the Bush Administration\u27s recent Clear Skies initiative is not idealized, but nonexistent CAC regulatory outcomes, but rather the outcomes that have resulted from the bargaining game set up by CAC laws and regulations

Problems of Equity and Efficiency in the Design of International Greenhouse Gas Cap-and-Trade Schemes

This article argues that international greenhouse gas (GHG) cap-and-trade schemes suffer from inherent problems of enforceability and verifiability that both cause significant inefficiencies and create inevitable tradeoffs between equity and efficiency. A standard result in the economic analysis of international GHG cap and trade schemes is that an allocation of initial permits that favors poor, developing countries (making such countries net sellers in equilibrium) may be necessary not only to further redistributive goals but also the efficiency of the GHG cap and trade scheme. This coincidence of equity and efficiency is, however, unlikely to be realized under more realistic assumptions about enforcement and monitoring. Both economic theory and evidence from the European Union’s emission trading scheme strongly suggest that under an international cap-and-trade scheme, high-marginal-cost GHG emission abaters will not face binding caps that are enforced against them by their national governments. The failure of such high-cost abaters to participate in cap-and-trade schemes causes significant inefficiencies. The prospect of enlisting the participation of such high-abatement-cost, developed-world GHG emitters and restoring efficiencies by opening up trading to include low-cost GHG abatement projects in the developing world is appealing, but ultimately doomed by the inability to verify that such developing world projects generate real GHG emission reductions. Due to inherently imperfect and limited verifiability, there is an inevitable tradeoff between efficiency and equity: the broader the coverage of an international GHG cap-and-trade scheme, the greater its potential to redistribute income to people in poor countries, but the less likely it is to efficiently generate reductions in GHG emissions

The Rule of Capture and the Economic Dynamics of Natural Resource Use and Survival under Open Access Management Regimes

By reviewing the bioeconomic dynamics of natural resource harvest under open access/rule of capture management, this article demonstrates the falsity of the widely held contemporary view that market incentives lead to unsustainable natural resource use. The formal bioeconomic models teach that it is the relative speed of market versus natural dynamics that determines when and if open access harvest leads to resource collapse. If the rate at which harvesters exit from the harvest industry when harvests are low is rapid relative to the natural rate of growth in the harvested stock, the level of both the resource stock and harvest industry both cycle around interior (non critical) levels. These very basic results from the bioeconomic literature carry fundamental lessons for resource management policies: given an open access, rule of capture regime, the best way to guarantee sustainable resource use is to encourage exit from resource intensive industries when stocks are low by subsidizing mobility, but to discourage specialization in the harvest of particular stocks or species and instead encourage generalized harvest technologies (technologies that have value in harvesting a variety of species or types of resource). Examination of the case of the Atlantic cod fishery collapse reveals that these normative recommendations are at odds with the revealed political economics of resource policy: the establishment of national property rights in coastal fisheries through the declaration of exclusive economic zones led not to rational policies, but to increased subsidies for resource specific capital investments in harvest industries, the effect of which was not only to increase harvests dramatically, but to keep harvest levels high despite rapid declines in catches and stock levels. The article goes on to argue that a dynamic similar to the bioeconomics of natural resource harvest also applies to environmental pollution and to land development. When industrial polluters\u27 productivity depends upon the level of ambient pollution (so such industries in a sense harvest clean resources), industrial migration may occur as a response to increasing levels of local pollution. Through such a dynamic, local levels of pollution may cycle around sub maximal levels, just as do more conventionally harvested resource stocks. With pollution, American environmental policies better fit the theoretical recommendations: by setting pollution reduction standards that are nationally uniform within industrial categories, the federal environmental laws lessen the economic incentive for polluters to migrate in search of clean or unharvested resources. Whether similar salutary effects can be expected from policies designed to force land developers to internalize the external costs of lost open space (a reduction in a localized resource stock, the stock of undeveloped land) are, however, unclear: even in an unregulated market, because the existence of open space is captured in higher localized land values, development is generally unlikely to eliminate all exurban open space. Inasmuch as the loss of open space or sprawl problem involves socially undesirable fragmentation of development, optimal patterns have a path dependency which may make it impossible to find a policy response that is both ex post and ex ante efficient

Signaling Social Responsibility: On the Law and Economics of Market Incentives for Corporate Environmental Performance

This article analyzes the law and economics of market internalization: the capability of markets to both penalize and reward firms for their environmental, health and safety performance. As for market sticks, the article maintains that market transactions - both private and public sales of corporate assets as well as transactions in publicly traded securities - are an important avenue through which firms realize comparative advantages in regulatory compliance, and that such transactions have the potential to significantly enhance corporate environmental and social performance. Asset transactions tend to drive environmental cleanup and transfer assets to firms that are better able to know about and comply with relevant regulatory directives. On public securities markets, the very fact that traders are imperfectly informed about firm-specific regulatory risk causes disproportionately large market reaction to the revelation of such risks. The incentive to avoid such large, negative market reactions to the revelation of negative information leads may induce a higher level of compliance than were no such market reaction anticipated. Incentives for voluntary disclosure of negative information are complex, but as is true of financial disclosure, mandatory disclosure requirements may be crucial in allowing firms to make such credible commitments. As for the potential positive rewards (in the form of price premia) that SR consumers and investor offer to firms that they perceive to be pursuing CSR, the fundamental problem is that CSR cannot be directly observed by consumers and investors. Unless firms can find a credible signal of CSR, the positive potential of the market may go unrealized. Inevitably, much corporate communication regarding CSR is (from a game-theoretic point of view) cheap talk. There is likely to an uninformative, pooling equilibrium in which only firms in industries with well-recognized, large SR impacts are likely to engage in CSR cheap talk, so that such reports do not generate information on the relative economic and social performance of firms within the category of firms that report. The article\u27s policy conclusions include the following: - The SEC\u27s standard requiring the disclosure only of those environmental regulatory costs and liabilities that are probable and reasonably estimable is sensible as tracking the market\u27s limitations in coping with risk versus uncertainty, but the SEC\u27s almost complete failure to enforce its rules regarding the disclosure of environmental risks has made it impossible for corporate managers to credibly commit to being one of the good guys by voluntarily disclosing such bad news. - As for the potential for legal liability for false assertions of CSR to deter bad companies from pretending to be good ones via their CSR communications (thus destroying the uninformative (or babbling) market equilibrium, the optimal liability system involves potential liability (because it gives plaintiffs access to civil discovery that allows for the discovery of information regarding corporate labor and environmental practices that otherwise would be asymmetrically available only to the corporate speaker), but liability that is strictly limited in amount. The market alternative of private, third party certification of CSR disclosures and assertions - a market response to SR consumers\u27 and investors\u27 demand for credible, reliable firm-specific information - is effective only if itself credible. While market reputation clearly helps ensure the truthfulness and credibility of private auditors\u27 CSR reports, the risk of collusion between audited companies and their auditors is just as great when it comes to CSR as it is in the traditional area of financial report auditing. Just as with financial reports, the threat of holding auditors legally liable for intentionally or negligently false CSR audit reports may be necessary for private CSR auditing to generate credible information

Signaling Social Responsibility: On the Law and Economics of Market Incentives for Corporate Environmental Performance

This article analyzes the law and economics of market internalization: the capability of markets to both penalize and reward firms for their environmental, health and safety performance. As for market sticks, the article maintains that market transactions - both private and public sales of corporate assets as well as transactions in publicly traded securities - are an important avenue through which firms realize comparative advantages in regulatory compliance, and that such transactions have the potential to significantly enhance corporate environmental and social performance. Asset transactions tend to drive environmental cleanup and transfer assets to firms that are better able to know about and comply with relevant regulatory directives. On public securities markets, the very fact that traders are imperfectly informed about firm-specific regulatory risk causes disproportionately large market reaction to the revelation of such risks. The incentive to avoid such large, negative market reactions to the revelation of negative information leads may induce a higher level of compliance than were no such market reaction anticipated. Incentives for voluntary disclosure of negative information are complex, but as is true of financial disclosure, mandatory disclosure requirements may be crucial in allowing firms to make such credible commitments. As for the potential positive rewards (in the form of price premia) that SR consumers and investor offer to firms that they perceive to be pursuing CSR, the fundamental problem is that CSR cannot be directly observed by consumers and investors. Unless firms can find a credible signal of CSR, the positive potential of the market may go unrealized. Inevitably, much corporate communication regarding CSR is (from a game-theoretic point of view) cheap talk. There is likely to an uninformative, pooling equilibrium in which only firms in industries with well-recognized, large SR impacts are likely to engage in CSR cheap talk, so that such reports do not generate information on the relative economic and social performance of firms within the category of firms that report. The article\u27s policy conclusions include the following: - The SEC\u27s standard requiring the disclosure only of those environmental regulatory costs and liabilities that are probable and reasonably estimable is sensible as tracking the market\u27s limitations in coping with risk versus uncertainty, but the SEC\u27s almost complete failure to enforce its rules regarding the disclosure of environmental risks has made it impossible for corporate managers to credibly commit to being one of the good guys by voluntarily disclosing such bad news. - As for the potential for legal liability for false assertions of CSR to deter bad companies from pretending to be good ones via their CSR communications (thus destroying the uninformative (or babbling) market equilibrium, the optimal liability system involves potential liability (because it gives plaintiffs access to civil discovery that allows for the discovery of information regarding corporate labor and environmental practices that otherwise would be asymmetrically available only to the corporate speaker), but liability that is strictly limited in amount. The market alternative of private, third party certification of CSR disclosures and assertions - a market response to SR consumers\u27 and investors\u27 demand for credible, reliable firm-specific information - is effective only if itself credible. While market reputation clearly helps ensure the truthfulness and credibility of private auditors\u27 CSR reports, the risk of collusion between audited companies and their auditors is just as great when it comes to CSR as it is in the traditional area of financial report auditing. Just as with financial reports, the threat of holding auditors legally liable for intentionally or negligently false CSR audit reports may be necessary for private CSR auditing to generate credible information