An Exchange of Views

August 27, 1974

Editor:

The address by Allen Kneese (excerpted in June, 1974, "Resources") was an excellent conceptual and historical assessment of the phenomena that induce serious pollution problems. Basically his argument is that "common property resources," primarily water and air, are left unpriced (and "unowned") so that there is every inducement to utilize these resources in detrimental, as well as, harmless ways. Other institutional inducements, such as depletion allowances and direct subsidies encourage the use of large amounts of materials. Unpriced water and air induces material waste although private production and distribution costs induce efficient use of product materials prior to disposal. I agree that some degree of coalition and cooperation is required to reduce pollution (and waste) levels. I also agree that a persistent source of the pollution and waste problem is the system of incentives promoted by tax and subsidy plans at all levels of government.

I disagree with Kneese when he goes on to say that pollution is a result of market failure and that federal laws taxing effluents and effluent-creating inputs should be enacted to somehow remove or equalize incentives for pollution and waste treatment. This proposal is like wielding an axe on the head of another axe rather than its handle. An alternative proposal readily follows from his insightful analysis.
First it must be recognized that increased pollution and waste is not an example of market failure. The inducements to exploit greater quantities of resources and to "freely" dump wastes and residuals into the air, land, and water come from government policy intervention into the market system. It is unlawful to own most waterways and airways and thus there is no private incentive to keep them clean. As owners and controllers of property, governments have been most lax. Yet governments are quick to enact laws and propose policies regarding the activity of the private sector. Most of these policies lead to "special interest" legislation. The proliferation of special interest laws and regulations has served to abrogate the efficiency of market allocation of privately owned resources. Whatever the original intent of these laws the effect has been to close markets, increase prices, increase pollution and waste, and reduce output and labor employment. To characterize present environmental (and economic) problems as market failures is to pervert the notion of the operation of free markets unencumbered by plans and restrictions.

Second, in his policy proposal Kneese determines the appropriate level of coalition to handle pollution problems. He calls for taxation at, presumably, both state and national levels. By and large the impact of pollution from stationary sources is confined to localities such as urban or extended urban areas. Since areas differ in air and water quality it is not unexpected that urban policy makers would devise different tax policies than state or national governments.

Third, Kneese points out that "common property resources" are only imperfectly reduced to and defined as private property parcels. This, of course, is supposition and denies the important function of a market which is to rearrange and adjust ownership patterns (once some initial allocation is determined) in order to gain in private welfare. That some owners of land, air, and water would allow greater amounts of pollution and waste on their property is a likely result of market allocation. Yet pollution would cost in the private market and its harmful effects would be fully compensated. What would result is a new set of prices on polluters, pollutants, and resources which would improve efficiency in waste disposal. Furthermore, the size of decision units (ownership) would emerge from efficient market processes in a similar way that economies of scale are discovered and exploited.

The proposal I would make would be to open up government held or controlled property—air, land, and water—to private ownership claims and private control and to remove existing tax and subsidy incentives already on the law-books. Only then will the market system function at its best resulting in, I suspect, greater output, less pollution, lower prices, and greater general welfare than the present situation even with the imposition of Kneese's new taxes. Market failure is generally what people posit as the source of many adverse events having large externalities. Externalities, however, can be priced away (internalized) at various levels of coalition. A free market, unlike the existing U.S. market system, induces coalition and cooperation to improve the private (and social) welfare. The freeing of markets and the extension of markets to new areas is the key policy to be proposed. It is the force of government, which is incompatible with free enterprise, that has failed in the pollution case and will continue to fail as long as government policy makers impede the functioning of the market.

Sincerely,

William K. MacReynolds
Research Associate
Center for Environmental Quality Management
Cornell University,
Ithaca, New York 14850

September 5, 1974

Dear Mr. MacReynolds:

I am pleased that you found part of my address to the Canadian Royal Society meeting insightful. I fear, however, we must continue to disagree on the policy implications of my analysis of the sources of pollution problems. I do not feel that private ownership of the air and water resources would produce desirable results.

Imagine private ownership of the New York—New Jersey Metropolitan airshed. To avoid the continuing existence of large scale externalities ownership would have to be in a single unit. Let us say that ownership implied the privilege of charging a fee for residuals discharge (and on breathing?). Since from what we know about the probable response of dischargers to such a fee, very high fees or very low fees would yield the most revenue, so the monopolist, being a revenue maximizer, would almost certainly set the price at an inappropriate level.

One could claim, of course, that breathers of the air would band together to bribe the owner to set the fee higher (if he has set it too low) but then we encounter the well known problem of the "transactions costs" involved in setting up a market.

I do not think the problem of establishing a positive and creative environmental policy can be met so easily as you suggest.

Sincerely,

Allen V. Kneese
Department of Economics
University of New Mexico,
Albuquerque, N.M. 8713