Externalities and the Environment

Property Rights Protect the Environment

Ms. Santoriello is a student, and Dr. Block a professor of economics, at the College of the Holy Cross in Worcester, Massachusetts.

We operate under a free enterprise economic system that produces plastic milk jugs and redwood picnic tables. The market is therefore responsible for such environmental problems as too much plastic trash and too little conservation of forests. So goes a common belief, anyway. In fact, it is governmental failure to maintain and defend the institutions of a free market that is responsible for the environmental damage caused by private businesses.

In the case of solid-waste management, plastic companies and their customers escape from the cost of disposing of plastic after the consumer is finished with it.[1] This is because most garbage collection is organized through the public sector. The cost of disposing of the plastic and the other waste is undertaken by the government, and a citizen is typically taxed without regard to the amount of trash he generates. Once the citizen pays his taxes, he has no incentive to choose environmentally sound goods because disposal costs are in effect free to him.

If, instead, there were complete privatization of the garbage disposal industry, those who generate trash would directly pay for disposal costs. The owner of a private dump tends to charge tipping fees that vary with different kinds of trash. The price will be significantly higher for material that creates toxic waste[2] because the dump owner will be liable for any harmful leaks from his site. The hauling firm, which collects the garbage from the homeowner and must pay the tipping fee, will pass the price onto consumers. Consumers, knowing that they will have to pay more for the disposal of more plastic, will tend to substitute toward less costly, and thus more environmentally sound, containers. In the jargon of economists, the negative externality will disappear; the cost of trash disposal will be internalized, brought to bear on the responsible parties.

It is clear from this example that the negative externality currently related to solid-waste management is a governmental failure, rather than a market failure. By not allowing the free market to operate, the government pushes the costs of waste disposal onto the taxpayers. In a free market the price system accurately enables us to compare resources to determine which courses of actions are most economically and ecologically sound.[3]

Critics argue that the market fails to consider environmental concerns. In Making Peace With the Planet, Barry Commoner insists that the free-market system conflicts with a social concern for environmental quality, and thus argues that ecologically sound production decisions must be implemented through planning.[4] Commoner fails to realize that when we turn away from the market, we are unable to compare resources and their values. Nor does he realize that the incentive structure in the political sector fosters an economically unsound approach to the environment.

The distorted incentives that operate in the public sector are responsible for many of our forest removal and logging problems. The difficulty stems from the fact that 42 percent of all U.S. land is owned by government.[5] The public forestry services do not operate by maximizing the value of their resources. Rather, they subsidize special interest groups who in turn support public ownership. For example, the U.S. Bureau of Land Management (BLM) uses a method known as chaining, which uproots trees, leaving holes and unsightly tracks, to remove trees from grazing lands. Although this costly method is seldom practiced in the private sector, the BLM has no incentive to minimize costs. It maximizes its budget by providing subsidized grazing rights for ranchers who in turn lobby for BLM expenditures.[6] The U.S. Forestry Service subsidizes logging companies to cut down trees on public lands by building logging roads for them.[7] The private firms thereby shift some of the costs of logging onto the public. Again, prices do not reflect the full costs of environmental destruction. Certainly if the business firms actually owned the land, they would better care for it because abusing it would reduce their prospects for future income.[8]

Government ownership of so much land artificially encourages logging for another reason as well. Private firms with large landholdings are discouraged from using them for hunting or recreational purposes; the government provides parks for these purposes at a zero or nominal price. In the national forest surrounding Yellowstone National Park, the Forest Service charges no user fee for elk hunting. This reduces the value of elk resources on private land and discourages private firms from devoting their forests to hunting rather than logging. The low level of private development of recreational land is likewise due to the minimal prices the federal government charges for use of its recreational facilities.[9]

Unfortunately, because the federal government owns the land, environmental groups generally have to work through the political sector. They lobby to persuade the government to preserve land, in conflict with the opposing special interests of logging, ranching, and extraction industries. If the demand for environmental amenities were instead channeled through the marketplace, tremendous progress would be possible.

Voluntary trade allows for creative deals in which all parties gain, or else the trade does not take place. If current leasing arrangements were changed, environmental groups could bid to purchase or lease public resources.[10] On land that becomes their property, they can either preclude development entirely, or sublease the land for development on their own terms. When natural gas was discovered in the national Audubon Society’s Rainey Wildlife Sanctuary in Louisiana, for example, the group itself faced the tradeoff between strict preservation and drilling income, and struck a balance that allowed drilling under specified environmental conditions. The Audubon Society received royalties, which gave them the funding to purchase still more land for preservation.[11] In this case both the Consolidated Oil and Gas Company and the Audubon Society gained. Economic efficiency and environmental interests were both served.

The key to environmental protection is a free market with defendable and transferable property rights.


1.   William Rathje, Rubbish, Atlantic, December 1989, pp. 99-109, calls this assumption into question.
2.   Walter Block, Resource Misallocation, Externalities, and Environmentalism: A U.S.-Canadian Analysis, Proceedings of the Twenty-Fourth Annual Pacific Northwest Regional Economic Conference, 1990, p. 93.
3.   Walter Block, Environmental Problems, Private Property Rights Solutions, in Block, ed., Economics and the Environment: A Reconciliation (Vancouver, B.C.: Fraser Institute, 1990), p. 287.
4.   Barry Commoner, Making Peace With the Planet (New York: The New Press, 1992), pp. 223, 227.
5.   Progressive Environmentalism Task Force Report, p. 27, National Center for Policy Analysis, Dallas, Tex., 1991.
6.   John Baden, Crimes Against Nature: Public Funding of Environmental Destruction, Policy Review, Winter 1987, p. 38, cited in Walter Block, Environmental Problems, Private Rights Solutions, pp. 296-297.
7.   Joseph L. Bast, Peter J. Hill, and Richard C. Rue, Eco-Sanity (Chicago: The Heartland Institute, 1994), p. 203.
8.   Terry L. Anderson and Donald Leal, Free Market Environmentalism (San Francisco: Pacific Research Institute for Public Policy Research, 1991), p. 71.
9.   Ibid., pp. 60, 62.
10.   Ibid., p. 93.
11.   Ibid., p. 90.

Further Reading

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