Be Wary of the Negative Externality

The clamor behind green energy continues to spread as a cleaner alternative to fossil fuel. However, I wish to extend a simple recommendation to such advocate: be wary of the negative externality.

Paradoxically, the so-called "clean energy" creates several negative production externalities. A Chicago based firm, McCann Appraisal LLC, found that wind turbine noise frequently causes sleep disturbances and other health concerns. In addition, numerous studies measure losses in property value ranging from 20% to 60% in communities worldwide. In fact, Denmark passed a law in 2008 with a clause mandating compensation for a loss of value in real property caused by the construction of wind turbines.

What is the role of government in this scenario? Lets return to the Danish law from above. The government intervened and enforced compensation for damage inflicted on society. But out of the five hundred and fifty one claims from people living near wind turbines, the average complainant received $8,478, a value not even near the actual amount of damage incurred on property owners.

What if the Danish government used a Coasian solution to internalize this externality? Ronald Coase contends that a market solution will lead to an allocatively efficient outcome if property rights are established and there are no transaction costs. In this example, the Danish government could simply grant property rights to homeowners rather than the energy company. Therefore, if businesses wanted to pursue the construction of wind turbines, they would have to receive permission from nearby homeowners, who would likely require some sort of compensation for the damages they would incur. This compensation would reflect a market value, and it would perhaps be more just towards the property owners than a government dictated amount. The Coasian approach may encounter the fee rider  and holdout problems in some larger communities, but it may be the best solution for many of the smaller, country communities being hurt by the wind turbines.