Monday, July 9, 2012
The conventional problem with externalities is well known: Parties often generate harm as an unintended byproduct of using their property. This Article examines situations in which parties may generate harm purposely, in order to extract payments in exchange for desisting. Such “strategic spillovers” have received relatively little attention, but the problem is a perennial one. From the “livery stable scam” in Chicago to “pollution entrepreneurs” in China, parties may engage in externality-generating activities they otherwise would not have undertaken, or increase the level of harm given that they are engaging in such activities, to profit through bargaining or subsidies. This Article investigates the costs of strategic spillovers, the circumstances in which threatening to engage in these spillovers may be credible, and potential solutions for eliminating, or at least mitigating, this form of opportunism through externalities.
The phenomena explored in Kelly's article has a wide range of implications, not the least of which is for forest policies aimed at combating climate change. As I blogged about recently, one of the difficulties in developing Reduced Emissions from Deforestation and Degradation climate policies has been the risk that, as highlighted here, "by paying people not to deforest, the system might inadvertently encouraging people to falsely declare their intentions to cut down trees . . . You do that and of course, everybody would have an incentive to say, 'I'm going to deforest next year so please pay me' . . . ." Kelly's article also describes this problem:
A similar phenomenon also has been occurring in densely-populated cities and towns as well as in national forests and parks. Many cities and towns are hoping to expand the amount of land devoted to open space. To this end, municipal governments are seeking to purchase undeveloped parcels of land or the development rights to such parcels. However, realizing the municipality’s interest in acquiring additional open space, landowners may act opportunistically. Specifically, even if a landowner had no intention of building on a particular parcel, the landowner may announce construction plans or commence construction to secure an elevated price, thereby making it much more costly for the municipality that is seeking to preserve the land as open space. Similarly, as the Wall Street Journal has documented, a real-estate broker named Thomas Chapman “has made a controversial career trading scattered parcels of private land that sit inside national forests and national parks.” Mr. Chapman’s strategy is simple: “[H]e talks up plans to develop the parcels,” including the possibility of bulldozing the land, “[e]nvironmentalists sound the alarm,” and “often, the government or conservationists come with money or a land swap to buy him out, saving the cherished parcel from development—and making Mr. Chapman money.”
"Strategic Spillovers" provides important insights into this phenomenon, adding a much needed analysis and refinement of understandings of environmental externalities.
- Blake Hudson