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ECON 260
Chris Bidner

Econ 260 Chapter 10 Liability Laws, Property Rights, Moral Suasion, Green Goods • This chapter is about ways citizens can deal with environmental problems with minimal government involvement.  Decentralized techniques Liability laws  people solve problems through the courts Property rights  people solve problems by negotiating with each other Moral suasion  people try to persuade others to change their behavior Green goods  people can buy or sell goods that help the environment 1 Liability Laws • People who harm the environment are held liable for their actions according to established laws  the perpetrator(s) must pay for damages they cause. • People who incur damages must take the perpetrator to court. Example 1: A dam breaks near Oliver, BC, causing a mudslide. Damages: • 3 homes destroyed • 14 agricultural properties can no longer be productive. • Damages not covered by home insurance Liability laws can mean that whoever is responsible should have to pay. It is not, however, always clear who is responsible. 2 From CBC news: “Elkink [the land’s leaseholder] said he is not worried about the liability, because the lake is on provincial Crown land, and many agencies and the public used the road across the dam. As well, many groups contributed to it's maintenance, he said. Provincial officials see it differently, saying Elkink's company is responsible for the maintenance and inspection”of the dam. Example 2: A pulp and paper factory damages the local salmon fishery. $ MD c a b MAC E* Emax • Without any liability laws, the polluter will emit E maxbecause he/she has no reason to abate. • The salmon fishery incurs costs of total damages at E max= a + b + c 3 • A liability law would require the polluter to compensate the fishery by the amount a + b + c = TD. • For the polluter MD = marginal compensation costs and TD = total compensation costs. • The polluter can choose to either pay a + b + c or reduce emissions, thereby paying abatement costs but less TD. What will the polluter choose to do? • At E maxthe marginal cost of compensation is higher than the marginal abatement cost, so the polluter will abate as long as MD ≥ MAC, or until MD = MAC. • The polluter minimizes costs at E*. • Total costs to the polluter = TD + TAC = a + b 4 Things to consider: • There are two types of liability laws: strict liability and negligence liability. Strict liability means the perpetrator is responsible no matter what the circumstances were. Negligence liability means the perpetrator is only responsible if they were not doing everything possible to prevent the damage. Example 3: BP oil spill in the Gulf of Mexico The U.S. Migratory Bird Treaty Act states that BP would be liable for damages to birds, even if damages were accidental  strict liability The U.S. Clean Water Act states that the government would have to show negligence in order to seek compensation for damages  negligence liability 5 Example 4: Over 200 ducks died recently in Northern Alberta when they landed in the Syncrude oil company’s tailings pond (left over water from separation process for oil sands – contains toxic bitumen). From the Globe and Mail: “An ice storm may have forced the birds to seek refuge on the pond, despite the presence of advanced radar and sound cannon systems” The Alberta government must decide whether or not Syncrude was being negligent or if the ice storm was the sole cause. If Syncrude is found to not have been negligent they will not have to pay for damages. 6 Issues with Liability Laws 1. Who bears the burden of proof? • Do polluters prove they did not cause damage, or do pollutees (the injured party) prove they were damaged? • In Canada, it is up to the pollutees to prove pollution caused damages and prove who is responsible for the pollution. • Potential problems:  Proving the pollutant caused damage. Sometimes a causal link can be difficult to prove. Example: Do salmon farms harm wild salmon populations? Sea lice and pesticides flow through the net into the ocean, possibly harming wild salmon, but nothing has been proven.  Proving who is at fault. • Oliver mudslide example • Non-point source pollutants make for difficult cases since the source is ill-defined. 7 2. Courts and economists have different ideas of value –standing vs willingness to pay. o WTP can be any value, big or small. o Courts will only hear cases in which the damage is a significant value, otherwise the case does not achieve standing. 3. Transaction Costs: o Your neighbour’s dog is driving you crazy – would you take your neighbour to court?  can be expensive! o What would transaction costs include?  Lawyer fees  Costs of gathering evidence  Time o The more difficult it is to prove, the more costly it will be. Summary: • Liability laws work best if few people are involved, causality is clear, and damages are easy to measure. 8 Property Rights The establishment of property rights can allow people to solve problems through negotiation. When a person or group of people have property rights over an environmental good the owner(s) have the authority to make decisions about the use or maintenance of the property. The owner(s) pay all costs to maintain the environmental good, but also retain all the benefits. E.g. Butchart Gardens in Victoria, BC Establishing property rights over the environment has two main requirements: 1. Defining boundaries:  Easy for land, not so easy for water or air. 9 2. Deciding who has the rights:  For land it is whoever purchased the property.  For water or air the question might be does a polluter have the right to pollute, or do the pollutees have the right to a clean environment? • If these two requirements can be met, property rights can help ensure an efficient use of resources or level of emissions.  Why?  Property owners consider all the costs and benefits of their actions toward their environmental good.  If they take care of their property and invest in it, they will be rewarded by a higher valued property.  If they do not take care of their property it will lose value. 10 Example: A chemical factory and a fishery are located on a lake. Emissions from the chemical factory are causing the fish to die. $ MD MAC E E* Emax • If one person owned both the chemical factory and the fishery, what level of emissions would they choose? E* because they would pay TD + TAC, which is minimized at E*. • What happens if the two businesses are owned by two different people?  Negotiation!  It must be established which business has the “rights” to the lake, the polluter or the pollutee.  Whoever has the rights has the authority to decide on the allowable level of emissions. 11  If the chemical factory, the polluter, has the right to pollute they will choosemax  If the fishery, the pollutee, has the rights they will choose E = 0.  At that point the business without the rights can offer compensation in exchange for a change in the level of emissi
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