Chapter 20 General Policy Design Principles • 369

indirectly limit demand at the source, and source owners would feel the
pinch of scarce sink capacity—the scarcity of one complementary factor
reduces the value of the other. This may appear less an infringement on
the property rights of the source owners, since they have no claim to the
sink, and it is the sink that is being directly limited. But the sink limit on
the throughput is surely translated back to the input end. And since that
sink limit will be experienced by source owners indirectly, even if we put
the limit directly on the sink, why not go ahead and put the limit on the
source in the first place? That would be the more efficient place to put it,
even if it is the sink that is most scarce.
The other possibility noted is to fix prices through taxes and allow the
market to set the corresponding quantity. Once again this is more effi-
ciently done at the depletion end rather than the pollution end, but both
are possible. The tax may be levied at the input end even though its basic
motive is to limit the output. The advantage of taxes is administrative
simplicity—we already have a tax system, and altering it is less disruptive
than setting up a quota system with auctions. This is a significant advan-
tage. On the other hand, taxes really do not limit quantities very strictly,
and they maintain the false perception that there are no quantitative lim-
its as long as one pays the price. As long as we pay the price plus a cor-
rective tax, the message conveyed is that we can get as much as we want,
individually and collectively. The quota, by contrast, makes it clear that
the total quantity will not increase, and that all the price is doing is to ra-
tion the fixed quantity among competing users. The latter seems a more
honest and truthful perception, since we are dealing with a scale-limited
physical throughput, not income or welfare.

■ Policy and Property Rights

Before we begin to examine specific policies for achieving a more sustain-
able, just, and efficient world, we must discuss one of the core features of
any policy: property rights. Concern over scale is concern over sustain-
ability, and what is sustainability but the right to resources for future gen-
erations? If we believe there is a need for improved distribution, we are
basically questioning the existing endowments of property rights. Finally,
markets cannot efficiently allocate nonexcludable resources, and exclud-
ability is nothing more than a property right. Policy is largely concerned
with creating, redefining, and redistributing property rights.
Property rights and excludability are not inherent properties of goods
or services. No good is excludable, and no one has property rights unless
a social institution exists that makes it excludable and assigns property
rights (though we also know that it is not possible to make all goods ex-
cludable). A property right for one individual simultaneously imposes a
370 • Policy

duty or obligation on other individuals to respect those rights. For exam-

ple, if person A has the right to breathe clean air, then person B has the
corresponding duty not to pollute that air. The state ensures that person
B will fulfill her duty. Property rights are therefore a three-way relation-
ship between one individual, other individuals, and the state.3
In the absence of property rights we have privilege, or presumptive
rights. If one person has privilege, he is entitled to behave as he pleases,
and others have no rights. If a factory owner has privilege with respect to
the atmosphere, he can pollute the air as much as he pleases. If others suf-
fer from this pollution, then they must seek to change the prevailing lack
of property rights.
When human populations and impacts were small relative to the sus-
taining ecosystem, the use of natural capital was appropriately character-
ized by privilege. Why not allow industries or individuals to pollute if few
people lived nearby to be affected by that pollution? Why not allow in-
dustries or individuals to harvest fish or harvest trees if they existed in
abundance? Why not give away rights to minerals to those who discov-
ered them, as long as seemingly limitless virgin lands remain for future
exploration? It makes little sense to establish property rights to super-
abundant resources.
However, as we know, the world is no longer so empty. The privilege
to extract and pollute now imposes cost on others. This creates pressure
to develop environmental policies that assign or modify property rights.
Those who have privilege to extract or pollute are likely to defend the sta-
tus quo, claiming that privilege as a right, when in reality it is an absence
of defined rights. As we pointed out in Chapter 10, many economists have
argued that it does not matter to whom rights are assigned; as long as
rights are assigned, the market can efficiently allocate resources. We main-
tain, in contrast, that while the distribution of rights may not matter in
terms of Pareto efficiency (i.e., Pareto efficient outcomes are possible for
any distribution of property rights, though it will be a different outcome
for different distributions), it matters profoundly for equity. We take the
position that property rights belong to the people, as represented by the
state, until otherwise assigned, and their distribution should be decided
by a democratic process that respects future generations.
There are three important types of property rights, or entitlement rules,
and rights to a specific piece of property may be affected by any combi-
nation of these.
1. An entitlement known as a property rule holds if one person is free
to interfere with another, or free to prevent interference. For exam-
3D. Bromley, Environment and Economy: Property Rights and Public Policy, Oxford, England:

Blackwell, 1991.
 Chapter 20 General Policy Design Principles • 371

ple, an individual may own a piece of land. If he has the right to

build a landfill that destroys the neighbors view, or to prevent the
neighbor from walking across the land, he is free to “interfere” with
the neighbor. Nor can the neighbor interfere with the landowner’s
landfill operation. If the neighbor wants to walk across the property
or prevent the landfill from being built, the landowner’s consent is
required.
2. An entitlement known as a liability rule holds one person is free to
interfere with another or prevent interference, but must pay com-
pensation. For example, the landowner might be free to build the
landfill, but by law he is then forced to compensate his neighbor for
the smell, loss of view, and other disamenities. At the same time, the
state could call on its right of eminent domain to take away the land
from the landowner to build a highway and pay compensation at
fair market price.
3. An entitlement, known as an inalienability rule, holds if a person
is entitled to either the presence or absence of something, then no
one is allowed to take away that right for any reason. There may be
certain types of chemicals or products that are absolutely not per-
mitted in the landfill, regardless of compensation. The negative im-
pacts of these products are so severe that present and future
generations have an inalienable right not to be exposed to them.
Dioxins and radioactive waste would fall into this category.
Finally, we must remember that property rights need not be private
property rights. Property rights can belong to individuals, communities,
the state, the global community, or no one. While many conventional
economists favor private property rights, we have already learned that pri-
vate property rights are not possible in all circumstances (e.g., the ozone
layer). In addition, many cultures have successfully managed common
property resources for millennia. Almost all nations have certain resources
owned by the state; recently, international agreements, such as the Mon-
treal and Kyoto protocols, have recognized the need for ownership and
management of some resources by the global community. The search for
suitable policies neither can nor should be limited only to those that re-
quire private property rights.
Now that we have discussed basic principles of policy, appropriate pol-
icy sequence, high-leverage points of intervention, and the relationship
between property rights and policies, we turn our attention in the next
three chapters to some specific policies. We will more or less follow the
policy sequence suggested above: scale, distribution, then allocation.
However, while in most cases we cannot hit two birds with one stone,
some of the policies we look at are really a bundle of policies affecting all
372 • Policy

three goals. Other policies may hit one goal squarely while having an im-
pact on another policy goal as well. Our division of the discussion is
therefore not exclusive: All three goals will be discussed in each chapter,
and policies are grouped only according to their dominant impact. Our
three independent goals require three independent policy instruments in
the same sense that solving three simultaneous equations for three differ-
ent variables requires three independent equations; that is, one equation
must not be derivable from the other two, and one variable cannot be the
same as another, just expressed differently. Three simultaneous equations
in three unknowns form a system, so clearly all three variables are
interrelated—they are not independent in the sense that a change in one
has no effect on the others (i.e., isolated) because they are clearly parts of
an interdependent system. But they are independent in the sense in which
each independent variable in a set of simultaneous equations requires an
independent equation if the system is to be solvable.

BIG IDEAS to remember

■ Six policy design principles ■ Price vs. quantity as control
■ Proper sequence of instrument
policies ■ Circularity of internalizing
■ Source vs. sink as scale or distribution in prices
throughput control point ■ Property rights