Environmental protection emerged as a major policy issue in the early 1960s, when public concern about the impact of human activity on our natural resources and their consequent impacts on human health became an important political issue. The result was the enactment of numerous laws designed to protect the environment through government regulation. Although there is broad public support for protecting the environment, there is increasing debate over whether government regulation is the best means of achieving environmental protection. Critics of environmental regulation point to its high costs and inconsistent results and also to its abundant weaknesses. Contemporary environmental regulation’s greatest failing, according to many of its critics, is that its effects are equivalent to those of central economic planning. These critics argue that market institutions, such as property rights, voluntary exchange, and common‐​law liability rules, would do a better job of advancing environmental concerns in concert with individual liberty. This approach to the environment, known as free‐​market environmentalism (FME), has played an increasingly prominent role in the debate over environmental policy.

Most environmental regulations are predicated on the idea that market failures exist when the government does not intervene. In the simplest of terms, this perspective holds that markets fail to account for the external environmental costs—externalities—produced by economic activities. Such external effects range from the air and water pollution that accompanies industrial production and agriculture to the depletion of natural resources that are commonly owned. For example, if a factory were to emit untreated effluent into a river or stream without compensating those who are impacted by the pollution, the costs of the factory’s actions are externalized. Whereas the factory must pay for the labor, capital equipment, and material inputs that it uses to make products, it need not pay for its use of the river for waste disposal. Such pollution externalities are presented as evidence that markets fail to account for environmental values, at which point, it is argued, government intervention is required. One problem with this paradigm is that it justifies government regulation of all human activities that have any measurable environmental impact. As a result, it provides an available pretext to regulate nearly anything.

Libertarian analysis of environmental policy rejects the market failure paradigm. In the broadest sense, libertarianism holds that environmental problems are instead the result of the absence of markets. Environmental problems, whether uncontrolled pollution or the unsustainable use of natural resources, result when resources are left outside of the market institutions of property rights, voluntary exchange, and the rule of law. Libertarian environmentalists note that privately owned resources are typically well maintained. In contrast, resources that are unowned or politically controlled are more apt to be inadequately and poorly managed. Proponents of FME would establish institutional arrangements so that more of the world would enjoy the same custody and protection as a home or yard owned by an individual or group. “At the heart of free market environmentalism is a system of well‐​specified property rights to natural resources,” explain Terry Anderson and Donald Leal in Free Market Environmentalism.

FME’s focus on property rights evolved from the work of Garrett Hardin, Harold Demsetz, and Ronald Coase, who demonstrated the importance of defining and defending property rights for the protection of resources. Hardin, in particular, explained that when a resource is unowned or owned in common, such as the common grazing pasture in a medieval village, there is no incentive for an individual to protect it. In such a situation, it is in every cattle owner’s self‐​interest to have his herd graze the pasture as much as possible and before any other herd. Every cattle owner who acquires additional cattle gains the benefits of a larger herd, while the cost or overusing the pasture is borne by all members of the village. Inevitably, the consequence is that the pasture is overgrazed and everyone loses. Indeed, the cattle owner with foresight will anticipate that the pasture will become barren in the future, and this knowledge will give him an additional incentive to overgraze. To refuse to add another cow to one’s own herd does not change the incentive of every other cattle owner to do so. The end result, according to Hardin, is a “tragedy of the commons.”

Libertarian environmentalists argue that avoiding the tragedy of the commons requires the creation of property rights in the underlying resource so as to align the incentives of resource users with the sustainability of the underlying resource. Private ownership overcomes the commons problem because owners have strong incentives to protect and enhance the value of their properties. Property owners also can prevent overuse by controlling access to the resource. As Hardin noted, “The tragedy of the commons as a food basket is averted by private property, or something formally like it.” Demsetz’s work on the management of beaver by Native Americans reinforces these conclusions; the creation of de facto property rights in beaver populations led to their sustainable use. Other FME scholars, such as Terry Anderson and P. J. Hill, have shown how the value of unowned resources creates incentives for the establishment of property rights in the first place, but also for the development of technologies that allow such property rights to be defined and protected. This idea can be observed in the development of branding and barbed wire as technologies to protect cattle in the American West.

For property rights in a resource to provide the right incentive to its owner, these rights must be definable, defendable, and divestible. Owners must be free to transfer their property rights to others at will, which encourages property owners to consider the environmental concerns of other potential resource owners. Thus, for example, a timber company may take better care of its land if there is a prospect of selling or leasing that land to outdoor recreational users or others who also will care how the land is managed.

FME places the protection or property rights at the heart of pollution control as well. Common law liability rules, such as prohibitions on “nuisance” and “trespass,” create liability for environmental harms. Where property rights are protected, an upstream polluter can be sued by a downstream property owner for money damages and injunctive relief because to harm someone’s property by polluting it is no more acceptable than vandalizing it—and this result provides additional incentives for sound resource stewardship. Although the common law liability approach to pollution has largely been abandoned in the United States and Canada in favor of administrative regulations, it is still in use in much of England. The prospect of litigation from downstream property owners discourages companies from polluting.

Litigation against polluters is not always possible. Proof of harm, identifying the source of a given pollution problem, and the costs of litigation can all discourage downstream property owners from taking action against an upstream polluter. Some argue that such problems can be overcome through the creation of associations and other entities that specialize in the protection of property rights from environmental harm. In England, for example, an association of fishing clubs is extremely active in policing the rights of its members and taking legal action against polluters.

Another element of the libertarian approach to environmental issues is a hostility toward government programs that cause environmental harm. Numerous environmental problems are caused or exacerbated by governmental actions that introduce inefficiencies or subsidize polluting activity. In the United States, government agencies are among the nation’s largest polluters. Research by Mikhail Bernstam, published in his book The Wealth of Nations and the Environment, also documented that those nations with the most regulated and controlled economies, such as the former Soviet Bloc countries, also had the worst environmental problems. Without market institutions, there was little incentive for firms to reduce material use or improve productive efficiency, let alone engage in stewardship of environmental resources. The results, in many parts of the former Soviet Bloc, are environmental problems far more severe than anywhere in the West.

FME also applies the insights of economists such as James Buchanan and F. A. Hayek to argue that governmental agencies have neither the incentives nor the information to properly manage environmental concerns. Terry Anderson, among others, noted that the records of most governmental agencies entrusted with land management responsibilities are dismal. Lacking the price signals of profit and loss, public officials rarely have the information they need to plan complex systems and allocate resources. Even well‐​intentioned government managers are unable to anticipate how various institutional arrangements will affect the incentives that motivate individuals. Many economists also note that environmental agencies, no less than other governmental agencies, are subject to political pressure by economic interest groups engaged in rent seeking.

It is difficult to apply the FME paradigm to some environmental resources. Regional air pollution, for example, is difficult to address because of the inability to define and defend individualized property rights in air. Regional airsheds may well be unfenceable commons. To address this sort of problem, libertarian environmentalists endorse various policies that seek to replicate the institutional arrangements provided by markets. Two quasimarket approaches that are often discussed are the imposition of “pollution taxes” and the creation of quasiproperty rights in emissions, such as tradable emission permits that can be bought and sold. Another approach is the creation of an association or cooperative enterprise to manage the resource, much like a condominium association manages the common areas of a condominium. This property‐​based approach has been used for various land and water bodies and might be applicable to local or regional airsheds. Where pollution problems are the result of multiple small sources, such as individual automobiles, such aggregation can reduce the transaction costs involved with property‐​based approaches to environmental protection.

This market‐​based strategy is pervasive in discussions of environmental policy today. The benefits of FME approaches to environmental protection can be seen in many resources that are managed through property institutions. Examples include the creation of property rights in instream water flows in the western United States, which has empowered environmentalists to purchase water to protect fish; the establishment of property interests in wildlife in much of southern Africa; and the use of property rights in fisheries in New Zealand, Iceland, and parts of the United States. In each of these instances, the creation of property interests in environmental resources has created powerful economic incentives for sound resource stewardship and protection. The challenge for free‐​market environmental advocates is to develop creative means of extending market institutions to a broader range of environmental resources.

Further Readings

Adler, Jonathan H., ed. Ecology, Liberty, & Property: A Free Market Environmental Reader. Washington, DC: Competitive Enterprise Institute, 2000.

Anderson, Terry L. “The New Resource Economics: Old Ideas and New Applications.” American Journal of Agricultural Economics 64 no. 5 (1982): 928–934.

Anderson, Terry L., and P. J. Hill. “The Evolution of Property Rights: A Study of the American West.” Journal of Law and Economics 18 no. 1 (1975): 163–179.

Anderson, Terry L., and Donald R. Leal. Free Market Environmentalism. San Francisco: Pacific Research Institute for Public Policy and Westview Press, 1991.

Coase, Ronald H. “The Problem of Social Cost” and “Notes on the Problem of Social Cost.” The Firm, the Market and the Law. Chicago: University of Chicago Press, 1988.

Demsetz, Harold. “Toward a Theory of Property Rights.” Journal of Law and Economics 9 (1966).

Hardin, Garrett. “The Tragedy of the Commons.” Science 162 (1968): 1243–1248.

Meiners, Roger E., and Andrew P. Morris, eds. The Common Law and the Environment. Lanham, MD: Rowman & Littlefield, 2000.

Smith, Fred L., Jr. “A Free‐​Market Environmental Program.” Cato Journal 11 no. 3 (1992): 457–476.

Smith, Robert J. “Private Solutions to Conservation Problems.” The Theory of Market Failure: A Critical Examination. Tyler Cowen, ed. Fairfax, VA: George Mason University Press, 1988. 341–360.

Yandle, Bruce. Common Sense and Common Law for the Environment. Lanham, MD: Rowman & Littlefield, 1999.

Jonathan Adler
Originally published