Why Is Natural Resource Damage Assessment so Hard?

I. VALUING THE COMMONS The failure of markets to allocate environmental public goods and handle externalities satisfactorily has long vexed economists. The tragedy of the commons stands in sharp rebuke to the idea that unsophisticated, privately organized markets work well enough to please Pareto. Since Paul Samuelson (1954) laid out the problem of efficient production of public goods in simple terms, the economic theory of the problem has been well understood. The work of Lindahl, Groves, and Ledyard has established mechanisms that can be used, in principle, to get consumers to reveal true values of public goods and avoid "free ridership"; see Hurwicz (1986), Werner and Groves (1993). Solutions to the allocation problem based on these theories require a sophisticated market manager and taxing authority with the information and skill necessary to administer a complex and pervasive system of specific taxes. An important development in economics, starting with Coase (1937), is the recognition that sophisticated markets in contingent contracts, exchanged in a organizational setting that provides legal mechanisms for enforcement, can internalize many externalities, and avoid some commons tragedies. However, Coasian solutions work well only when the parties are clearly identifiable, the externality is publicly observable, and enforcement costs are not burdensome. In practice, the Coasian contract between an oil company who wants to exploit a remote wilderness, and consumers who benefit from the contribution of this wilderness to biodiversity and global air quality, requires an agent to represent consumers in the negotiation, and to monitor contract compliance. But this agent is simply the government, and the natural resource damage assessment statues and legal mechanisms in place are our practical approximation to the Coasian contract. Viewed in this way, the principalagent problem between the government and its consumers is the problem, and one is led back to the issue posed by Samuelson, Lindahl, and others as to how to measure what the consumer principals truly want.