For problems of the commons, a solution often put forth has been privatization or assignment of
ownership rights see, for example, Anderson, 1991. With privatization, an individual will sup-
posedly act in hisher own best interests to pre- serve the resource. The argument is that an
individual who owns land for the purpose of food production should be interested in sustainable
production, unless the personal discount rate is so high that the future is ignored.
However, in spite of the best intentions, as pointed out by Larson and Bromley 1990, soil
depletion can still occur under privatization. Lar- son and Bromley developed a dynamic household
model of agricultural production that included the relation between soil quality on food production,
the effects of food production on soil, and activi- ties that improve soil quality such as allowing
land. They showed that degradation can come about — even when property rights to land have
been assigned — as a response to economic incen- tives. Furthermore, Perrings 1989 showed that
the struggle to meet food consumption needs un- der conditions of poverty or other limited re-
sources can result in degradation. Therefore, the assignment of property rights may be no panacea.
That soil erosion is a stock externality is an- other reason why privatization is not a sufficient
social solution. Soil erosion is also associated with another type of stock externality: persistent water
pollution related to fertilizers and pesticides car- ried by soil particles to water bodies. A stock
externality is a case in which decisions made at one time period have cumulative effects over time
Nordhaus, 1982; Brito and Intriligator, 1987; Ko et al., 1992. In such situations, as in the static
externality case, private decisions may not be socially efficient.
Many dynamic resource studies have focussed on existence and stability of steady-state solutions
assuming that production would be carried out by profit-maximizing institutions see, for example,
Fisher, 1981; Conrad and Clarke, 1987. In con- trast, here we are concerned with identifying the
types of policies and social organization that could satisfy social efficiency for the soil erosion
pollution stock externality. To examine alternative policies, we first define
social efficiency in a society with urban and rural sectors that engage in manufacturing and agricul-
tural production. The urban sector is assumed to be more wealthy than the rural. The types of
taxsubsidy policies examined range from central- ization with government determining taxessubsi-
dies
to complete
decentralization with
government determination of an initial entitle- ment followed by market decisions about pollu-
tion reduction. To traditional Pigouvian and bargaining solutions extended to a dynamic set-
ting, a third alternative is government as a co-pro- ducer of environmental goods.
2. Policy alternatives
2.1.
Prices and standards Tax, subsidy, and standard policies are alterna-
tives that have been considered to be equivalent in terms of efficiency for the static externality case
Baumol and Oates, 1990. Taxes and subsidies decentralize production decisions. That is, given a
tax, a producer can choose based on relative costs whether to pay the tax or to clean up emissions,
thus minimizing costs to achieve a desired level of environmental quality. However, although a tax
policy decentralizes production decisions, full pri- vatization cannot occur because monitoring and
enforcement are required. While some advocate the ‘polluter pays’ principle, subsidies may be
more appropriate than taxes when there are bind- ing income and food consumption constraints, as
in the case of soil erosion in a poverty setting.
For a Pigouvian solution, a central authority must first determine the efficient level for the tax
or subsidy — that level which leads to an efficient pollution level for the given distribution of in-
come. At an efficient level, the marginal return to pollution equals its marginal social costs Kula,
1992. Full information is needed to determine the efficient level; such a policy is practically infeasi-
ble in terms of information needed.
Regardless, economists generally prefer pricing policies taxes or subsidies to technology stan-
dards because imposed standards may be ineffi-
cient if regulators have incorrect information. An advantage of a tax over a standard is that the tax
provides incentives for technology change, since a reduction in tax cost may be obtained with an
improved technology; a standard would not provide such an incentive. See Stevenson, 1991,
for a discussion of economic instruments in envi- ronmental contexts.
2.2.
Bargaining For the static externality case, the Coase theo-
rem has been the support for a bargaining solu- tion
between polluters
and sufferers,
with government intervention limited to determining
rights. Coase suggested that an assignment of property rights can lead to a socially efficient
solution through bargaining or market transac- tions among parties concerned. An idea that has
been associated with the Coase theorem is that the nature of assignment of property rights does not
matter when there are no transaction costs. That is, the same quantity outcome may be achieved
whether polluters or sufferers are initially advan- taged by rights. Of course, the distribution of
income may differ with the assignment of rights. However Eggertsson 1990 pointed out that the
assignment of rights does matter to the outcome if preferences are not linear in money. The case of
firms maximizing profits does satisfy linearity. In many cases, preferences do not satisfy linearity,
e.g. when a smoker inflicts an externality on a person with smoke allergies. As Eggertsson
demonstrates with an Edgeworth box, different property right endowments then can lead to dif-
ferent social outcomes that are still efficient but differ in the level of environmental quality
achieved.
An entitlement is a statement of property rights Bromley, 1991. An entitlement defines the envi-
ronmental quality level to which all citizens are minimally entitled. In our context, it indicates the
starting position, or initial endowment, from which bargaining can occur. Then, a better qual-
ity could be achieved through bargaining about cost-sharing arrangements for pollution reduction
among polluters and sufferers see Loehman and Dinar, 1994, for an example. A cost-sharing type
of solution is actually being utilized by the Con- servation Reserve Program executed by the
USDA Osborn, 1994.
2.3.
Dynamic extensions Taxes and subsidies are not equivalent policy
instruments in a poverty context, as in Larson and Bromley: a pure tax can lead to accelerated
deterioration because of the need to satisfy house- hold consumption constraints. Therefore, in the
dynamic production situation studied here, a combination of tax and subsidy policies is needed
to achieve social efficiency. The appropriate tax subsidy combination would generally vary across
time with resource use. If a steady state with constant resource utilization were reached, the
associated policy parameters could then be con- stant as well.
Besides the type of policy instrument, an addi- tional requirement for the dynamic context is to
assign management responsibilities in terms of maintaining knowledge about dynamic produc-
tion relationships for environmental resources. Such knowledge does not necessarily imply own-
ership of a resources. In the static production case, the profit-maximizing firm controls produc-
tion. But, management of the biological growth relationship need not be assigned to direct re-
source users.
For example, for fisheries a typical common pool resource, the resource economics model
commonly used
Fisher, 1981;
Conrad and
Clarke, 1987 is based on a dynamic biological growth model for fish stock in which fish catch a
flow is subtracted from the stock growth rela- tionship. Depending on initial conditions, a stable
path for fish catch is sought that satisfies long- term economic efficiency conditions given the
growth relationship. Knowledge of this growth relationship, as well as application of it for man-
agement purposes, must be assigned as the re- sponsibility of some agency. A government could
be assigned the management responsibility of em- ploying the growth relationship to limit catch to
appropriate levels. Alternatively, a local body of fishermen could have management responsibility,
basing it on knowledge of the resource. Social
efficiency could be achieved by either assignment of management responsibilities and knowledge.
For dynamic resource problems, government involvement in management may be necessary at
least as a repository of knowledge about the resource see Hurwicz and Weinberger, 1990, for
discussion about the transversality condition as a reason for government involvement in dynamic
problems. Therefore, full privatization may not be possible. Below we develop this argument for
the soil erosionpollution framework.
3. Social efficiency in the dynamic system
