Sackett V. EPA

In August Business Week (linked in title) reported on a couple (Mike and Chantell Sackett) that purchased a piece of property in 2005. The couple hoped to build their dream home on the plot, which was located in a Residentially zoned area and surrounded by other houses. Business Week reports that after the Sacketts had begun digging they were approached by the EPA and told that they had to immediately stop construction, there land was deemed to be a wetland and protected under the law; if this was not completed they were to rack up sum $32,000 per day construction continued. Two Federal Courts turned down the Sakketts because the EPA had not asked to enforce the fine and no ruling could be made. However, the Supreme Court agreed to hear their case. Other background info is available in the article.

When I read this article I thought WWRCD? (What would Ronald Coase do?).

The article struck a nerve for me. It turned farmers and shepherds into real people and the government. Essentially, the government is using its monopoly on force to give itself the property rights to, and therefore rights to potential damages on, the "wetland" around and on the Sacketts' plot. There are two things that stick out in this assertion. (1) Its use of monopoly power and (2) property rights and solutions. I focus first, and mainly, on this second point.

Lets think for a moment what would happen if the EPA were not a government agency but a private business ( EPA Inc.) and EPA Inc. owned the surrounding land. According to Coase, the Sacketts would be allowed to build on their property but EPA Inc. would have their own tool bag full of property rights. WWRCD? It would seem that the Sacketts would be liable for damages on EPA Inc.’s property. Upon showing the degree and nature of the damages that ‘spill over’ from the Sackett residence to EPA Inc.’s property an internal equilibrium could be found. The Sackett’s could agree to implement the proper cleansing procedures to ensure that no damage leaves the property, or agree to pay EPA Inc. the necessary amount to proceed with cleaning. The Public Good that is the wetland, owned by EPA Inc. would not be harmed under such an agreement and the Sacketts would be able to build their dream home. In essence, the two parties would internalize the externality. Well-defined property rights see the day done and a positive sum game is established. The Sacketts live in their home (+), and the wetlands remain undamaged(+) (assumed there are any damages).

However, what happens when the EPA (as we know it) attempts to define property in the way that it does: The Sacketts have rights to the physical plot, but the EPA controls the “public” aspect of the property i.e the wetlandness of the property. There now seem to be two possible outcomes. (1) The Supreme Court rules in favor of the EPA (government) and the Sacketts pay all the accrued fines, cannot build their home and face a potential criminal suit (---), but the wetland is saved (+)or (2) The Supreme Court Rules in favor of the Sacketts they build their home (+), but the wetlands are potentially damaged (-)(though I’m not convinced) by the residence. It seems to be a zero sum game either way, if not a negative one.

A question is how I will respond to the first point I wanted to address. Is the $32,000/day fine and criminal charges the result of equilibrium, or is the government able to gain economic rent by using its monopoly on force to increase the price?

What do you think (about everything especially the first point made)?

Also, as of yesterday, the Supreme Court opened the case to petitioners. LOOK!

Tax Increases and Median Voter Theory

This article refutes the argument that Obama’s new push to raise taxes on the rich only appeal to left wing Democrats and will alienate voters in the center. It states that, “while it’s true that Obama’s new posture is partly about firing up his base, he and his advisers also view it as the best way to win back moderates and independents.” According to the median voter theory that we discussed in class this makes sense; in a two party system politicians gravitate to towards the middle of the political spectrum to get the most votes. Obama, or any political candidate, will try to locate themselves as centrally as possible without alienating their voter base or causing indifference between the two parties. They therefore wouldn’t support measures that would dramatically shift them to one side of the spectrum

Considering that, according to the US Census, the real median household income in the United States in 2010 was $49,445, it seems unlikely that a policy taxing the rich (income of $250,000 or more) would alienate the median voter; they wouldn’t have to pay this tax. The polls (as shown in the article) show that moderates support tax increases. Looking at it form this perspective it seems weird that Republicans are so adamantly opposed to raising taxes for the rich; shouldn’t they be drifting towards the middle as well? Of course, in the real world things are more complicated: voters abstain and there are multiple dimensions. As the article suggest, Republicans can also use a slippery slope argument that Democrats are “tax-hikers;” the current tax would only increase taxes for the rich, but the next tax might affect the median voter as well. Maybe, the median voter opposes tax hikes from an ideological perspective or they expect to make over $250,000 in the future. Overall though, the argument that tax increases for the rich appeal to the median voter seems reasonable.

Environmental Externalities

Gernot Wagner's recent New York Times article addresses the problem of market externalities in relation to the global climate crisis. Carbon dioxide pollution is seriously damaging to "economies, ecosystems and health," but individuals are not made to pay the full costs of their own carbon emissions. As a result, we have ended up with what Wagner calls "planetary socialism": a classic case of negative externalities, in which society as a whole bears the costs of individual actions. In order to preserve our climate, we as a society must collectively reduce our emissions, but there are no incentives in place to force individuals to make these necessary cuts. In Wagner's view, the best way to solve this problem would be through a government-imposed limit on total carbon emissions (a "cap-and-trade" system).
The argument for government intervention runs counter to the ideas of the Coase Theorem. Coase argued that, given adequately defined property rights, the problem of externalities could be solved through the free market: negotiations between the producer of an externality and the affected party could lead to the 'internalization' of the externality (the individual costs of the action would adjust to reflect its social costs.) However, in this case, a Coasian solution might not be a viable option. Such a solution would face serious challenges, such as the "Assignment Problem" outlined by Gruber. For instance, we can't realistically assign property rights to the air we breathe. And it would be equally difficult to assign blame for environmental damage: if all of our emissions together are contributing to this damage, there is no easy way to determine the degree of blame to assign to each individual person. Government intervention is likely the best solution in this case.

Less Differentiation Between Communities, Less Migration

On his blog on the Washington Post website, Ezra Klein linked to a NBER paper that states that “By most measures, internal migration in the United States is at a 30-year low.” This is particularly relevant to discussion of mobility as a key assumption in the Tiebout model.

Klein’s article points out that the fall in migration is largely because of: “technological advances” that have reduced “the need for workers to move,” locations that are “less specialized and in what kind of goods and services they produce,” and changing social trends as less Americans are “moving for matrimony.”

Interestingly, the first of these reduces the cost of moving between communities. According to Tiebout, this should increase migration. However, the homogenization of locations has also reduced the benefits of moving. This should reduce migration. It is difficult to see exactly how the changing marriage trends should be interpreted in the Tiebout model. This then seems to demonstrate that even if close to perfect mobility is being achieved, migration may fall if communities cease to differentiate themselves from each other.