Who owns the land? That question proves to be relatively straightforward to answer, at least currently in the United States. Private individuals and firms own the majority of land—68 percent. The federal government owns 30 percent, mostly in the western states, and state and local governments own the remaining 2 percent. As the legend goes, however, Native Americans sold Manhattan Island, the heart of New York City, for some beads—or was it 60 guilders? Clearly, when they did so the Native Americans had a different idea of selling land than “now you can build a city here and we can never return.”

Who owns the water? Now we’re getting even more complicated. Technically, each of the 50 states has primary ownership of waters within its borders, but many individuals and institutions have a vested right to use the water in certain places and in specific ways.

Who owns the air or the deer in the woods? Well, no one; the Latin legal term is res nullius.

Property is a critical concept in natural resource management because it governs the outcomes of resource use by humans—efficiency, equity, and sustainability. So at risk of rubbing shoulders with lawyers—after all, property is a fundamentally legal concept—let’s take a look.

The Idea of Property in Natural Resources

What does it mean to “own” land, water, air, minerals, fish or game? This turns out not to be at all as simple as you own the shirt you’re wearing. In fact, it constitutes an entire branch of law whose written materials would fill many rooms. Ownership of natural resources entails a set of specific rights and responsibilities, like a bundle of sticks.

Let’s start with something you may have thought was simple—privately owned rural land. A rural land owner has the right to clear vegetation and plant crops in the soil on his or her land, that is to farm it, but does (s)he have the legal right to allow soil, fertilizers, and pesticides to run off the land into streams, aquifers, and public water supplies? In general, the answer is yes, and that is problematic. Does (s)he have the right to drain wetlands, thereby releasing carbon into the atmosphere, destroying wildlife habitat, increasing flooding, and deteriorating water quality downstream? The answer was yes before 1972, then no when the Clean Water Act section 404 came into effect, but is now incrementally shifting toward yes due to recent court opinions. Does (s)he have the legal right to pump groundwater from beneath the land to irrigate crops, even if the water table is falling? In most states, the answer is yes. Does (s)he have the right to mine minerals or coal or pump oil and gas from beneath the land? In most states the answer is no—underground mineral rights are held separately from ownership of the land surface. If a farmer relies on bees living in an adjacent forest to pollinate crops, does (s)he have the right to stop a neighbor from cutting down that forest to turn it into cattle pasture? The answer is nearly always no. If it is determined that reforestation is the most cost-effective manner in which to remove carbon from the atmosphere, does (s)he have a responsibility to plant trees instead of crops? The answer is no. If the farmer is receiving public farm subsidies, can the government attach strings to them to prevent soil erosion, polluted runoff, wetland drainage, and so forth? The answer is yes, but the strings are rarely pulled. Watch out! I’ve already got you thinking like a lawyer!

Land at least stays put, but how about water, which evaporates, infiltrates, and runs downhill to the ocean? Here the states claim ownership and distribute usufructuary rights—permission to use the water. In the eastern states and most of Canada, precipitation exceeds evapotranspiration on average, and so Thornthwaite (see Chapter 3) would identify a water surplus—just like in drizzly England where the riparian water rights system was developed. Anyone with land adjacent to the water can put it to reasonable use—a term so vague that many lawyers can find employment interpreting what it means in specific cases. Is it “reasonable” for the burgeoning metropolitan area of Atlanta to take increasingly large amounts of water from the Tallahassee and Flint Rivers in Georgia, despite an ongoing drought, so that the vibrant oyster fishery in Apalachicola Bay at the mouth of the river in the panhandle of Florida is ecologically degraded? The answer to that question has been taken all the way to the U.S. Supreme Court. Is it “reasonable” for New York City to tunnel beneath the Catskills Mountains to bring Delaware River water to the Big Apple? You betcha. Is it “reasonable” for Chicago to get its water supply from relatively clean Lake Michigan, then reverse the course of the Chicago River so that its sewage goes down the Illinois River to the Mississippi? Yes, but it counts against Illinois’s share of withdrawals from Lake Michigan water in a treaty with Canada governing the Great Lakes.

When settlers went west following Lewis and Clark, they found a dry land where potential evapotranspiration greatly exceeds precipitation and only high snowy mountains give rise to permanent streams. Crops require irrigation to thrive, but there is only enough water available to irrigate a few percent of the land. So who gets the water? At first, settlers would leapfrog one another upstream to get at water for irrigation or mining, but that’s a terrible system of resource allocation leading to a chaotic race up the mountains. So the courts developed a system of prior appropriation—prior meaning “before” and appropriation meaning “diverting for economic use.” This means that whoever is first to pump or channel water from a stream and put it to a beneficial use (usually meaning an economically productive use) gets that amount of water in perpetuity—for that use in that location as long as they keep using it. If not, the use it or lose it rule applies. They have vested senior rights that no one else, not even the government, can take from them. Later settlers may get junior rights, lower in the priority list, until all the renewable water flow is appropriated. The states may then grant even more rights to appropriate water unsustainably.

The prior appropriation system worked to encourage rapid settlement of the West and turn the region’s limited water supplies into a factor of economic production, especially in irrigated agriculture. But what if Las Vegas or Phoenix, exploding with population and economic development, can put the water to a higher and better use? What if the water is needed in the stream channel to support an endangered species of fish, such as the Rio Grande silvery minnow of the Klamath River Chinook salmon? Can the system reallocate water from historic uses to current needs? That is the central dilemma of water resources management in the western prior appropriation states.

How much did you pay for your oxygen supply today? How much did you pay to release carbon dioxide into the atmosphere when you exhaled, or drove your car, or used electricity? Who controls the release of unhealthy air pollutants like sulfur oxides, carbon monoxide, ozone, or second-hand smoke? Often the answer is the federal government, which assigns the task to the Environmental Protection Agency (EPA) to establish regulations. Do greenhouse gases fall into this category? In the U.S. in 2006, they did not. On April 2, 2007, the U.S. Supreme Court ruled that the EPA must regulate greenhouse gases if they pose a threat to human health. In December 2009, the EPA found that they do. See how important the judicial branch of government is? Judges’ decisions set precedents that accumulate over time to form the Common Law upon which property rights are based. The EPA is part of the executive branch and they implement statutes—laws and acts—passed by Congress—the legislative branch.

So at this point you’re likely scratching your head and canceling your plans to go to law school. That’s fine (we have enough lawyers), as my purpose has been to raise questions rather than to provide answers. Institutional economics is about understanding how specific definitions of property rights to natural resources and the environment and specific public policies affect the incentives, the carrots and sticks, to which resource owners and users respond. One set of property rights or policies may lead to long-term sustainability while another may lead to a chaotic race to exploit natural resources before someone else does. We will certainly want to know the difference, so let’s dig in.

The Tragedy of the Commons

Let’s begin with the famous “The Tragedy of the Commons” that, in 1968, catalyzed an ongoing debate on how the functioning of social and economic structures, what the essay’s author Garrett Hardin called “the remorseless working of things,” lay at the heart of problems of natural resource depletion and environmental degradation. Hardin described a common pasture open to anyone who wanted to graze cows on it. What would happen, he asked? Everyone can profit from more meat and milk from their cows, so each villager puts a few more cows on the pasture. Soon the grass is gone, and all the cows starve. Moreover, the soil erodes away, making it difficult to ever restore a fertile pasture. We have a tragedy of the commons. This metaphor remains potent as an explanation for some problems of overconsumption of resources, such as the collapse of fisheries or overpumping of groundwater, that are held as a common pool.

Let’s go back to the pizza slices in Chapter 6. What if a dozen slices of good, hot pizza were simply laid on a table outside the lecture hall with a sign saying “first come, first served”? They’d disappear in seconds, perhaps with a few landing facedown on the floor (the 5-second rule only applies if the slice lands crust-down and no one steps on it!). This kind of free-for-all will generally lead to rapid resource depletion, and it can also lead to overuse of environmental sinks for waste absorption, like a watershed’s capacity to process nitrogen fertilizer, or the atmosphere’s capacity to cycle carbon emissions. It’s like a trash can at an outdoor concert or fair that gets overfilled and spills all over. In this way, two of our most intractable environmental pollution problems—polluted runoff and climate change—can be usefully conceived as tragedies of the commons. Garrett Hardin lives on; “The Tragedy of the Commons” is the most often cited paper in natural resource and environmental economics.

As influential as Hardin’s thesis has become, however, it is also flawed. Hardin’s pasture was not really a commons, it was a free-for-all, open-access, res nullius, like air. A better example of a commons is the course you are currently taking and the classroom it meets in. It is not a free-for-all because you have to enroll and pay tuition—others are excluded from participating. The classroom has rules of conduct—no disruptive chatting and cell phone use, raise your hand to be called upon for comments and questions, engage with what’s being presented (after all you’re paying for it and other’s aren’t). A commons is a shared resource with rules governing its use to prevent a “tragedy.” Hardin’s thesis is therefore better thought of as the following logical if-then statement:

If:

• a resource is open-access,
• benefits derived from using the resource are private property,
• and the resource has a limited carrying capacity,

Then:

• self-interested users will over use the resource,
• and the long-term carrying capacity of the resource may decline.

If open-access resources are such a dilemma, then why not make them all private property and allocate them through markets, which neoclassical economics purport work so well? The problem is that many environmental resources are common-pool—once they have been created by society or by nature, it is difficult to deny their use to anyone in the affected geographical area. You can put a fence around your land, but can you put one around your clean air? Once money is spent to improve the quality of the air, everyone simply breaths it, whether they contributed to the clear air fund or not. No one is standing at the cash register, collecting tickets at the door, or calling names from a class list of those who have registered and paid tuition. Once wetlands are restored, everyone on the floodplain downstream has less flood risk and better water quality. Once carbon emissions are reduced or sequestration accelerated, everyone suffers fewer impacts of climate change. These services are non-excludable.

The average, slightly selfish, person might reason, if I’m going to get it whether I pay for it or not, why not just keep my money? Many of you have probably behaved this way with respect to internet sites and software. Economists call this person a free rider. The counter measure to the free rider problem is—you guessed it—taxes. Government forces everyone to pay for a share of what everyone enjoys—national defense, roads, public schools. These are called public goods. If privatization often leads to inequality, however, with a few owning much and most owning little, increasing governmental control of common-pool environmental resources often leads to resource mismanagement borne of bureaucratic detachment from local ecological realities. They just don’t get it like those who have lived there all their lives. So Hardin’s remedies for the tragedy of the commons —privatizing the commons or have government take over and ration its use—have their own problems.

Nobel prize-winning political scientist Elinor Ostrom has been a leader in arguing that local, self-organized common property institutions can often be the best solution to managing natural resources. The most cited example is the Maine lobster fishery where a community of trappers actively discourage new fisherman and collectively manage the available resources in a sustainable manner. But common-property solutions don’t always work either. An effective commons requires a number of key elements; by identifying these, we learn a bit more about real-world problems of natural resource sustainability.

1. There is an appropriate geographical definition of the common-pool resource being governed, from the global atmosphere to small-scale watersheds and grazing, fishing, or hunting grounds.
2. There is a scientific capacity to observe and measure changing resource conditions on an ongoing basis so that answers are known to questions like: How many fish are in the lake or deer in the national forest? At what depth does the water table now lie? What is the nitrate concentration in the water? What is the current atmospheric concentration of carbon dioxide? How fast is sea level rising? Where are visitors to the national park going?
3. Social capital—interpersonal relationships in which trust develops over time through collaboration—among resource users is strong enough to enable community members to develop and support their own rules for resource monitoring and use and thereby view these rules as legitimate and help to enforce them against outsiders and selfish renegades (e.g., free-riders) within the group. There is a sense of “our” resources, shared by “us,” but not by “them.”
4. Larger-scale institutions such as governments and corporations support and legitimize these rules and institutions rather than supplant them with bureaucratic approaches or exploitive takeovers.
5. There is a system for imposing appropriate sanctions for violations, from a “slap on the wrist” or a hint from an elder for minor infractions, to fines or a loss of reputation for moderate ones, to arrest or social ostracism for severe infractions. Procedures for conflict resolution, especially those short of lawsuits (litigation), are established.
6. Outside influences, especially global economic driving forces and technological advances, are understood, and management of the common-pool resource can adapt to them.
7. Governance institutions utilize a variety of mechanisms—such as quotas, time and space restrictions on use, fees, or tradable permits—to prevent resource use from exceeding the carrying capacity and are able to raise revenue as needed through such means as taxes, user fees, or voluntary contributions.

Clearly, building institutions that contain each of these elements is a steep challenge; in fact, rarely are all of these conditions fully met. This makes the real world of local resource management institutions a very complex one with a range of successes, failures, and partial successes struggling to become more fully successful. More than in the U.S., where legal and market institutions dominate, it is in developing countries that Ostrom-like local common-property institutions proliferate. Hundreds of thousands of local groups have formed worldwide since the early 1990s for the management of watersheds, irrigation, forestry, and agricultural production.

The Problem of Externalities

Let’s return to the legal issues of land ownership raised above. Exercising his or her property rights as a landowner, a corn farmer’s eroded soil, fertilizer, and pesticides run off the land, polluting the water downstream, with a resultant loss of ecosystem service values and an increase in water treatment costs. The farmer does not pay these costs—society does. This is an example of a negative externality—these water pollution costs are not part of the farmer’s cost of production for growing corn.

Another farmer preserves or restores wetlands on the lowest-lying third of his or her farm. These wetlands absorb eroded soil, fertilizers, pesticides, flood waters, and atmospheric carbon, and provide wildlife habitat. The farmer doesn’t sell these ecosystem services, however. They are positive externalities—benefits produced but not compensated.

The economic result is that, relative to the level of production that maximizes net benefits, goods with negative externalities are overproduced and those with positive externalities are under-provided. This is not the efficient and sustainable outcome we’d want from markets. One answer is to impose pollution fees and offer ecosystem service credits to correct market failure.

Given this discussion of institutional economics, why are ecosystem services declining? The answer lies in what my colleagues and I have termed, following on Hardin, the “tragedy of ecosystem services.” Let’s proceed like a doctor from diagnosis to potential remedy.

The Diagnosis: Why Ecosystem Services are Declining

The findings of the Millennium Ecosystem Assessment and the 2019 United Nations study on biodiversity and ecosystem services discussed in Chapter 4 show that services that are derived from private property and result in goods that are bought and sold in markets (e.g., crops, livestock, aquaculture fish) are increasing—this is called economic growth. When the natural capital from which the services are derived lacks clearly defined property rights, however, services are decreasing. This includes provisioning services such as fish caught from the ocean and other wild foods, fuel wood, genetic resources, and fresh water. Most nonmarketed, regulating services are also declining: air quality, regional and local climate, erosion, pest, and natural hazard regulation, water purification, and pollination. So even though the neoclassical “economy” is growing, the “ecological-economy” may be shrinking, at least in some places.

In diagnosing this disease, let’s think through the way different kinds of natural resources are used—their utilization regime across the column headings of Table 9.1. Private goods (Column 1), such as barrels of crude oil or bushels of corn, are rival; once someone has “consumed” the good, it is not available for another person. Private goods are also excludable; it is possible to prevent those who have not purchased the good from having access to it. In contrast, public goods, such as improvements in air and water quality, are non-excludable; it is not possible to prevent people from having access to the good once it is provided. For some of these goods, like the psychological enjoyment of knowing that millions of species, the Grand Canyon, and other natural wonders still exist, utilization has no effect at all on the natural resources remaining. For others, like breathing oxygen, it does, but the supply so overwhelms the demand that we can ignore the effects of consumption. For these, utilization is non-rival (Column 3). For other non-excludable goods, utilization is congestible—it becomes rival when the carrying capacity is approached. The course you are taking, theater and sports arena seating, roads, parks, and bridges are congestible common pools. Among natural resources, so also are water in rivers and environmental pollution sinks (Column 2).

Now let’s scan down the row headings on the left-hand side of Table 9.1. Here we see four different types of property – private (owned by individuals and firms), public (owned by national, state, and local governments), common (owned by groups) and open-access (owned by no one). We must recognize that, to a property lawyer, these would be just four points along a complex continuum. What are the market outcomes and governmental responses in the resulting dozen boxes?

Neoclassical economic analysis of markets is primarily focused on Box 1A where we saw how well it allocates pizza slices but also cars, houses, and most of the goods we buy in stores or online that are rival and excludable. Hardin’s tragedy of open-access, one example of market failure, takes place in Boxes 1D for harvestable resources like fish and 2D for overused environmental sinks. See if you can figure out why.

In Box 2A and 3A, however, the market under-provides public goods like ecosystem services because they are non-excludable and therefore vulnerable to free riders. The producer is unable to take full advantage of their value by charging for them. Rather, potential users have free access to these common-pool resources. This is the case for roads or scientific research, for example, but, unlike ecosystem services, massive institutions provide these public goods.

Similarly, owners of natural capital such as land have the potential to provide ecosystem services, but it is difficult to charge the beneficiaries for them. The landowner usually has no financial incentive to continue providing them and so rarely does, except incidentally. Few invest in improving Hardin’s pasture. Few restore fish habitat or wetlands. Few sequester carbon. This is true even if the value to society of the ecosystem services that could be produced exceeds their economic costs to the landowner because most ecosystem services are positive externalities.

There is also a legal dimension to this tragedy of ecosystem services that seals the deal. Those who benefit from ecosystem services generated on other’s land have no legal recourse if these are no longer provided. If you depend on pollinators harbored in your neighbor’s forest, tough luck if (s)he cuts it down for grazing land or housing and your crops don’t mature. If you depend on coastal wetlands to absorb storm surges, tough luck if they disappear and your house is flooded in a hurricane. If you tried to sue, a lawyer would say you don’t have a case because you had no right to those services in the first place. Moreover, few counterbalancing measures have arisen to enable or require property owners to protect or enhance the continued flow of essential services from ecosystems on their properties. As a result, floodplains, wetlands, and forests that provide carbon storage, wildlife habitat, pollination, water purification, and flood control services are too often drained, cleared, and planted to crops, converted to pasture for livestock, harvested for timber, or urbanized.

So now we have a diagnosis of the disease. Are there available cures?

Government’s Environmental Policy Toolbox

When the market systematically fails to allocate natural resources efficiently, equitably, and sustainably, when there is a market failure such as the tragedy of the commons, under-provision of ecosystem services, or externalities, government can step in and alter the rules of the game. Consider an example from my favorite sport of basketball. In the 1950s, when Wilt Chamberlain and Bill Russell started guarding the rim and blocking every shot, the goaltending rule was imposed—you can only block shots on the way up near the shooter, not on the way down toward the hoop. A half-century later this insightful rule change is still in effect because it prevented basketball from becoming a contest of tall guys swatting away every shot with their hand in front of the rim. Natural resource sustainability is a lot more important than basketball, so let’s see if policy can modify the rules to produce a more sustainable game of natural resource use. Just like the basketball gurus, who have a set of rules they can modify to solve problems that emerge in the process of competition, so governments have a set of policy tools they can hone to address natural resources management problems that arise as technology and the nature of capitalist competition evolve.

The first tool set is voluntary measures, such as information dissemination, public service campaigns, technical assistance, and, not to be underestimated, getting people together in a room to talk about it (best if food is served). These light-handed approaches can sometimes be effective over time, such as in encouraging conservation tillage by farmers, reducing cigarette smoking, and replacing littering with recycling. They generally only work, however, if it is in the recipient’s self-interest to make the asked-for changes and they are empowered to make them.

The second set is positive economic incentives, such as government purchasing of recycled paper or tax credits for electric vehicles or solar panels. Government-sponsored research and development into subjects such as energy efficiency, new energy sources, and refrigerants to replace ozone-depleting CFCs is another example. Governments can also invest in public transit or in pollution control infrastructure such as water and wastewater treatment plants. They can provide subsidies for best management practices. An example of this policy tool is the Conservation Reserve Program where farmers are paid to retire highly erodible or streamside land from crop production to control soil erosion and enhance ecosystem services. Resource users usually support these types of measures, but they are financed by taxpayer dollars. They also assume that resource users are not required by law or by the structure of their property rights to conduct the activities government is paying them to implement. Paying for carbon sequestration is a new policy of this type now under consideration.

A third set is negative economic incentives, such as pollution fees or tradable pollution permits as we explored in Chapter 6. A variant is cross-compliance where, in order to remain eligible for government subsidies, farmers must not drain wetlands or allow soil to erode at excessive rates. When these tools are used, taxpayers do not pay the bill, resource users do, which often leads to their opposition unless the incentives are replacing more expensive direct regulations. It also assumes that the activities being charged for fall outside the realm of property rights.

A fourth set is what we usually think of first—direct regulation of practices and technologies. This is government telling resource users what they cannot or must do when using public resources, especially air and water as pollution sinks. The Clean Air Act, Clean Water Act, Endangered Species Act, Resource Conservation and Recovery Act, Superfund, and other environmental laws you may be familiar with are primarily regulatory. Resource users often claim that this policy tool is bureaucratic, limits firms’ freedom of action, and imposes high costs that make their products less competitive—all legitimate complaints. Analyses such as cost-benefit analysis have generally shown, however, that the costs are less than expected and the resulting environmental improvements or avoided degradation are enormously valuable. Still, the economist’s argument that negative economic incentives can accomplish many environmental goals more cost-effectively than direct regulation deserves careful consideration.

With our environmental policy toolbox now partially filled with hammers, screwdrivers, wrenches, and saws, let’s take a closer look at how these tools can be applied to overcome declining ecosystem services.

Policy Tools to Address the Tragedy of Ecosystem Services

The diagnosis presented above identified under-provision of ecosystem services from private land as a critical problem. While there is no one cure, potentially effective remedies lie in (1) the evolution of the common law of property, (2) reforming economic incentives, and (3) the development of ecosystem service districts.

The common law of property currently discourages ecosystem services, but, through judges’ decisions, on a case-by-case basis, the law is always changing. When a high court—the Supreme Court for Federal law and the state supreme courts in those respective states—decides a case, lower courts are bound to implement those precedents. This is how the common law evolves.

The natural resource, environmental, and ecological economics literature is rich with suggested policy reforms that would encourage cost-effective provision of ecosystem services. Some of the most pertinent examples that we will explore in depth in Chapter 15 include:

1. Tradable pollution permits, especially for carbon emissions and sequestration, not only to discourage emissions, but to motivate private landowners to store additional carbon on their lands rather than in the atmosphere.
2. Switching from crop production-based agricultural subsidies to ecosystem service-based subsidies in order to increase provision of carbon storage, water purification, soil conservation, and wildlife habitat on private rural land.
3. Incrementally shifting taxation from income to pollution fees and resource consumption and reducing or eliminating subsidies for natural resource production and consumption. This makes it more expensive to exploit natural resources or pollute, thus discouraging them.

Ecosystem service districts—similar to school, fire, and other local service districts—are in their infancy. While not perfect, watersheds, perhaps as modified by state boundaries, are the best bet for geographically defining ecosystem service districts because they are nested at multiple spatial scales based on tributaries. Moreover, the provision of four key ecosystem services—water supply, water purification, flood control, and aquatic and wetland habitats—occurs within the geographical definition of watersheds, and a fifth and sixth—soil erosion control and carbon storage—can also be managed well at watershed scales.

For these reasons, New Zealand has restructured environmental administration along watershed lines. Closer to home, New York City demonstrated how natural capital can provide the essential service of water purification at lower cost than manufactured capital when they spent $1.5 billion on improving water quality in the Catskills watershed, thus avoided $10 billion in construction costs for a water filtration plant.

Given the diversity in ecosystem services and the manner in which they benefit people, the political challenge of overcoming the tragedy of ecosystem services lies in bringing these strategies to bear in the best possible manner for each unique situation.

Further Reading

Deitz T., Ostrom E., and Stern P.C. 2003. The struggle to govern the commons. Science 302: 1907–12.

Hardin G. 1968. The tragedy of the commons. Science 162: 1243–1248.

Heal G, Daily G.C., Ehrlich P.R., Salzman J, Boggs C, Hellman J, Hughes J, Kremen C, Ricketts T. 2001. Protecting natural capital through ecosystem service districts. Stanford Environmental Law Journal 20: 333–64.

Ostrom E, Burger J, Field C.F., Norgaard R.B., and Policansky D. 1999. Revisiting the commons: Local lessons, global challenges. Science 284: 278–82.

Ruhl J.B., Kraft S.E., and Lant C.L. 2007. The Law and Policy of Ecosystem Services. Covelo, CA: Island Press.