Saturday, June 7, 2008

Coase Theorem and PES

People on the Resource Econ list-serve recently had a discussion of real world examples of Coase Theorem and Tim Habb recorded some points here.

One point he didn't record was the connection between Coase Theorem and PES, as Bruce Aylward pointed out,

"Yet the idea behind the theorem holds those working in the field of payments for ecosystem services in thrall - though many are not aware of the linkage back to Coase...Examples of where a downstream user receiving disbenefits produced by upstream landowners (having de facto property rights to pollute) enters into voluntary payments to reduce the pollution load seem to fit the Coasian bill. Many downstream users (such as municipalities) will simply purchase the land in the watershed and make the problem go away - this is probably not optimizing behavior. But, simply paying for only the service(s) desired and for the amount desired is probably a lower cost option for the downstream actor and may be optimizing behavior? Given transaction costs and the difficulty for a firm of knowing what is optimal, would this qualify do you think?

As you point out regulations that compel payments are not examples of Coase. Oftentimes the threat of regulation spurs such behavior. Would this be an example of the Coase theorem? Because of this caveat about the role of regulation many cases of payments for ecosystem services simply represent cases where government taxes and then subsidizes better land management (think CRP or Costa Rican/Mexican PES programs). Nothing remarkable there. But the question is could these voluntary agreements have more applications in the watershed case? If transaction costs were lowered and how would we do that?"

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