1. Decentralized Policies: Liability Laws, Property Rights, Moral Suasion
Lecture 16

2. Policies that allow individuals to work it out themselves
Assume lake water being used by different industries
Food processing industry (Water as an input)
Other industrial operation (Lake for waste disposal)
Informal negotiations or formal interaction to work out the level of e*  MD = MAC
The parties involves are those that are suffering and producing the environmental damages
They best know the information enveloping the abatement costs and damages incurred

3. Liability Laws Notion of liability and compensation?
When external costs become private costs for current and would-be polluters through policies such as ‘liability laws’, various environmental issues could be tackled
Emissions = e1
Damage compensation: b + c + d
As the emissions move closer to e* …?
Damage compensation payments reduces but abatement costs increase

4. Common Law
Rely on court proceedings where claims and counter claims are made
Difference between negligent liability and strict liability
Outcome affected by
Proper dose-response function is proved and causal link of the damage function established
Source – Pollutant – Damage
Transaction costs  costs of gathering evidence, presenting case and so forth
SIZE!!!

5. Statutory Law Another way to structure liability system
Laws are set to compensate those that suffer damages as a result of pollution
Example
Japan: The law for the Compensation of Pollution related Health Injury
Designated areas
Officially designated pollution-related disease

6. Statutory Law Cover medical expenses and loss of earnings
Compensation funds collected by taxes levied on polluters such as SO2 emissions
Possible challenges and drawbacks
Determining pollution-related health damages
Compensation levels
Doesn’t cover all the damages

7. Property Rights
When a resource has no owner, nobody has an incentive to take care of it
Assume Firm B  Owner
Firm B (MAC)
Firm A (MD)

8. Property Rights
Firm A
Firm B

9. Property Rights
When a resource has no owner, nobody has an incentive to take care of it
Assume Firm A  Owner
Firm B (MAC)
Firm A (MD)

10. Property Rights
Firm A
Firm B

11. Property Rights Coase Theorem Decentralized bargaining
Property rights must be well-defined
Reasonably competitive and efficient system in place
Owners should be able to capture all the social values associated with the use of environmental asset

12. Transaction Costs
Suppose the negotiations are between Firm B and a community of people
The negotiations costs are huge then and matters are worse when there are many firms B polluting the lake
Possibility of private ownership of the lake in one person and bargaining with users of lake is virtually impossible
According to Coase, party that would have the cheapest means of avoiding the external costs would be held liable

13. The Absence of Markets
In Kansas, a person owned an 80-acre piece of land (Virgin Land)
Lot of ecological and historical values but how could these values be captured?
If the land is preserved, how much is your WTP? Free- riding problem in case of public goods!
Instead, how could you capture the value if owner opts for any development project?

14. Moral Suasion
Programs that appeal to the sense of moral values and prevent people voluntarily from degrading the environment
“Don’t be a Litterbug”
Widespread spillover effects as people with strong sense of civic virtue
More effective if info regarding the level of emissions and changes in them are made available
Burden of the policy will fall on those sensitive to moral arguments and this might create free-rider problem and devalue the policy in the long-run