Grant McDermott bio photo

Grant McDermott

Assistant Professor
Dept. of Economics
University of Oregon

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Looking over the comments section of an old post, I realised that I had yet to make good on a promise to "flesh out my scepticism regarding the ability of tort law to meaningfully contribute to climate change action" (or, alternatively, expose it as a sham). Essentially, a friend of mine with strong anarcho-capitalist leanings had suggested that the climate impasse could - and should - be resolved through the private courts rather than any type of government regulation that seeks to create, for example, a carbon price via cap-and-trade or carbon taxes. I have just left my response underneath his comment as to why I regard this stance to be wholly unworkable in practice. I invite you to look over my points and see whether you agree or not. (The summary version: Non-representation of future claimants, and the complete impracticability of claimants to adequately and fairly engage separate carbon producers from all over the world; and vice versa).

Anyway, moving beyond the specific case of climate change, this is leads me to the consideration of tort law as a means of addressing environmental ills, generally. Indeed, I would say it is very much related to something that's central to my specialisation: The role of markets (underpinned by legal institutions like tort law) versus the role of governmental regulation in dealing with environmental problems. Before continuing, let me first say that my usual position on economic matters is fairly uncontroversial in that I regard markets as vastly superior to any supervening government force. Freedom to choose, responsibility for our own actions, etc, etc...

However, as an environmental and resource economist, I am constantly brought up against cases where markets don't work particularly well, or, alternatively, no market exists to deal with the provision of certain goods. That is the nature of our specialisation; we have to consider externalities, fuzzy property rights, environmental public goods, and other market "failures". Even with these imperfections, I am inclined to heed the words of one of my university professors who said something to the effect of: "Always consider other options before getting involved in environmental policy, because outside actions have the potential to stuff things up proper make matters even worse".

Having said that, there are still undoubtedly many cases where government intervention and regulation has led to improvements in environmental outcomes and natural resource management. Further, it's no coincidence that such instances often invoke market mechanisms, thereby simulating artificial scarcity and conferring property rights. This ultimately creates the right set of incentives for people to act in a profitable way to address environmental issues.[*] I can name many, many examples... From the rejuvenation of previously endangered fisheries, to the reduction of acid rain.

Even if we ignore such successes, I find it curious that certain libertarians continue to hold an unshakeable belief in the efficiency of tort law to resolve all environmental ills in an otherwise unregulated market. Regulation, on the other hand, is seen as nothing more than unworkable nonsense cobbled up by a lumbering coalition of bureaucratic imbeciles and self-serving politicians. This position seems to not only understate the transaction costs and asymmetries of information and financial power in a real-world market system, but also thoroughly oversells the efficiency of our legal systems. So, in addition to the points that I tried to highlight specifically with regards to climate change, here are some additional factors that I believe limit the effectiveness of tort law when it comes to addressing environmental problems on a more general scale:

First and foremost, litigation takes a very long time and can be hideously expensive... especially when there is money and power involved. It's easy to cite a number of high-profile environmental and health incidents that illustrate this. Exxon took 20 years to pay out after the Valdez oil spill off Prince William Sound. Officials from Union Carbide were still embroiled in criminal proceedings upon the 25th anniversary of the Bhopal Gas Disaster in India (although the company had made an out-of court settlement in 1989). More recently, Chevron has vowed to overturn a landmark $8.6bn fine imposed by a court in Ecuador in a case that has already been running for 18 years. Because of these factors, there is an inherent bias towards groups with money and legal clout. Legal disputes are hardly ever a fair fight between equals; it's about who brings the best lawyers to the party and who can confidently front the costs for the entire (possible) duration of a trial.

These are pretty fair indications of how inefficient legal systems can be, with endless recourse to stalling and appeals. Indeed, (good) regulation is often aimed at circumventing inefficient and protracted tort processes such as the ones that I have highlighted. In other words, it helps to reduce transaction costs to a minimum.[**]

To be sure, unchecked government meddling in production and industrial processes can have - and has had - very damaging consequences to both human beings and our environment. For instance, the Indian Government had a heavy hand in the Bhopal Plant and may be as liable as anybody for the tragedy that ensued. However, I don't see that as particularly relevant to the sheer length of the subsequent court case. Moreover, if regulation is dangerous because it affords power to supposedly disinterested third parties, would judges and juries not be susceptible to this influence too? Or, more simply, could they not also be subject to making the same bad decisions that stand to affect both current and future outcomes through the rule of legal precedent?

This leads me to another weakness underpinning our legal system: It lacks the very mechanism that makes markets work so efficiently. That is, there is no comparable profit-loss mechanism that leads self-interested parties to drive a continual improvement of the system. This idea was succinctly captured in a recent paper by Nobel Laureate James Buchanan: The Limits of Market Efficiency. As a pioneering figure in public choice theory, Buchanan did as much as anyone to highlight the fallibility of government authorities in being effective regulators. In this paper, however, he sets to balance the scales by showing that a) markets "work" only under certain legislative frameworks, and b) these frameworks are themselves devoid of forces that would make them inherently optimal. Here's a snippet:
Consider[...] the differences between the spontaneous emergence of a body of law, a set of rules, and the allocation of valued resources in the market process. In the latter, [...]opportunities for securing differential private rents and avoiding differential negative rents are open and available to prospective entrepreneurs-arbitrageurs, whose behavior, in itself, becomes part of the correction that efficiency conditions require. Contrast this process with application to law. Suppose that a law, rule, or convention emerges and exists, one that is recognized, even if by all participants, to be less enhancing to their well-being than a readily imagined alternative. The opportunity cannot, however, be exploited by single entrepreneurs-artibrageurs because of the nonpartitionability of law, as such. There is nothing comparable to the profit-loss dynamic of the market that will insure any continuing thrust toward more desirable outcomes. 
To conclude, I think that scepticism of government is absolutely justified in many cases, as I have tried to indicate at the beginning of this post and in a number of my previous posts. If there are market imperfections, it doesn't necessarily follow that government involvement will adequately address them. Indeed, it could exacerbate the situation and, frankly, it’s ridiculous to pretend otherwise. Where possible, I absolutely support community/individual management of resources above that of the State, just I support individual responsibility in many economic aspects. I also think that tort law can play an important role in controlling for localised environmental externalities. However, as per my reasons above, I disagree that regulations are inherently inefficient in comparison to a purely market-based system underpinned by tort law. Again, the danger is in applying blanket rules to complex situations that require evaluation on an individual basis.

THOUGHT FOR THE DAY: There is no silver bullet solution to solving our many, and often complex, environmental problems. Those that see tort law as some kind of panacea overlook the very real inefficiencies present in such a system. Consequently, torts remain very useful tools alongside regulatory measures for addressing environmental issues, but I don't believe that they can succeed by, or in of, themselves.

UPDATE: I completely forgot to talk about something that I'd originally meant to include in this discussion; the role that risk plays in limiting the effectiveness of pure market transactions. In particular, how different risk premiums are exacerbated by asymmetries of information, and how this can make it preferable to have some unilateral rule in place that guarantees us a minimum standard of protection from risk, which we cannot otherwise control for. This is very important in the context of justice administered ex post versus ex ante. As I wrote here:
[...] I much prefer driving in a country where standardised driver licenses and road-worthiness tests for vehicles offers me some insurance against risk-prone drivers. There's no way I control for who shares a highway with me, but at least I am reassured that their cars (say nothing of the drivers themselves) are expected to meet certain minimum standards. 


And, of course, I would suggest that "justice" administered ex post is, in many cases, a straggling third best; especially when it comes to more dramatic outcomes like severe injury and death. Don't get me wrong; there's plenty bad regulation out there... But I'd prefer (regulatory?) prevention than (courtroom?) "cure" when the latter involves putting a monetary value on matters that are inherently beyond valuation.
UPDATE 2: In an older blog post, Tyler Cowen points to an AER paper by Susan Rose-Ackerman, Regulation and the Law of Torts, which strongly supports the basic arguments I have made above. Speaking of Marginal Revolution bloggers, Alex Tabarrok co-authored this book a few years ago on the inefficiencies prevalent in the US tort system.

UPDATE 3: A follow-up, of sorts, here.
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[*] Daniel Kuehn has a really good series of posts in this regard, under the collective heading of calculation verses incentive problems.
[**] Two points additional bear mentioning. First, in all of the above cases claimants were afforded a fraction of the recompense that they were initially promised due, in large part, to the principles of corporate limited liability. In this matter, I am in essentially in agreement with the proponents of tort law that a system of limited liability encourages unduly risky behaviour. To get an idea of my views on limited versus strict liability, please see here. Second, I have seen tort proponents argue that transaction costs are subsidised by government in the case of regulation and therefore of equal weight to transaction costs incurred when markets are left to their own devices. This is a non sequitur. To use a simple example, if government bans the use of lead in petrol unilaterally then transaction costs have essentially been reduced to a minimum. Alternatively, think about how impossible it would be to track down the former owner of each and every plastic bag that happens to blow into your property versus government simply adding a tax to each bag that makes people utilise them in a far more effective and environmentally friendly way.