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Economic Sense

RSS By: Matt Bogard, AgWeb.com

Matt's primary interest is in the biotech industry and ag policy.

Biotech Alfalfa: Who may harm who?

Jan 21, 2011

By Matt Bogard

From Drovers/Cattle Network "Using Property Rights Is A Trick Against Biotech Crops"

"Some politicians wrap themselves in the flag to justify their positions, and then there is Secretary of Agriculture Tom Vilsack appealing to farmers and ranchers' belief in "private property rights" to justify limiting biotech crop production"

Great article with a lot of great points. I agree, we should make a distinction between enforcing clearly defined property rights, and what seems to be proposed, which is an arbitray assignment (or reassignment) of property rights.  For the sake of this discussion, lets start by assuming that biotech contamination of organic crops is 'pollution.' (despite the evidence that the risks are slight) What does economic theory tell us about property rights and pollution?

Traditionally when it comes to environmental pollution, the general philosophy was that 'the polluter pays'. A factory polluting the air or water should pay for the damages that are caused. In a much simpler case, if you build a house next to me and you don't like the smell of livestock waste coming from my property, the traditional philosophy would hold that you could have the government stop my operation. (or in this case, the biotech alfalfa grower pays for genetic contamination of organic alfalfa)

The economist Ronald Coase brought additional insight to this issue. 

1) yes it is true that my operation is harming you via air pollution. (odor)
2) however, in stopping me via government or legal intervention ( or taxing my waste production) you are harming me.

Coase says that the issue is that nonone owns the air that surrounds my livestock operation and your home. There then follows a dispute over how the air should be used- to absorb livestock odor, or to provide a scent free atmosphere in your back yard. Whenever the cost of one's behavior is not factored into a price at which a choice can be valued, I can harm you without compensating you for it. ( i.e. an externality exists)

However, if I own rights to the air, then I can choose to pollute the air. If you own rights to the air, then you can prevent me from polluting it. If noone owns the air, then it is first come first served or winner takes all.

That is not the end of the story though. What Coase emphasizes is that if I own the rights to pollute, you can pay me to limit my pollution i.e. buy those rights from me. I can then use the proceeds to alter my livestock nutrition, genetics, and management to reduce the odor my operation is causing. On the other hand, if you own the rights to pollute I can purchase those rights from you, or invest in technology that will allow me to continue my operation without violating your rights. I will do which ever is most optimal. This can be accomplished without major government regulation, or the arbitrary imposition of a tax.

The assignment of property rights and the potential for bargaining results in behavior that is changed or altered to account for the negative impact our choices have on others. This is the essence of what is known as the 'Coase Theorem"

However, if transaction costs are high, then bargaining may not take place. In that case, Coase emphasizes that any assignmnet of property rights should be based on which party can bear the externality at the lowest cost. Transaction costs can change based on changes in technology, which can also change how we define property rights. (for example, the technology that allows us to monitor CO2 emissions is what makes the concept of cap and trade possible).

How might this apply in the context of biotech alfalfa?  According to the Coase Theorem, it shouldn't matter who is assigned the rights in this case (giving the biotech producer the right to pollute, or giving the organic producer the right to stop neighbors from planting biotech). Both parties could bargain ahead of time to determine the optimal mix of biotech/organic production. Transaction costs should not be any higher than any normal land rental agreement.  Alternatively, one producer or the other could purchase insurance that would pay an indemnity in the event of contamination. (who would have to pay the premiums would depend on who has the right to pollute etc.) However, monitoring and enforcement costs could be high in terms of determining genetic contamination.

Another option would be a regulatory approach, limiting planting options for biotech producers.  This is what the Drovers article is critical of Tom Vilsack for. You could say it is enforcing property rights, but  only in a very arbitrary way, and unnecessary.

The agriculture industry offers some of the greatest examples of how technological advances and market forces lead to self correcting or internalization of externalities.  The adoption of biotechnology has led to reduced groundwater pollution, increased biodiversity, and reduced greenhouse gas emissions. All of which has occured in absence of taxes or government regulations. In the case of biotech alfalfa, a technological advancement that would trump legal or regulatory remedies would be use of 'terminator' gene technology.  Of course, that takes the power and prestige away from regulators, and empowers  property owners and market forces.

We also may have to consider as well, the postive externalities associated with the use of biotechnology. Recent research indicates that in many cases, biotech crops produce economic and environmental benefits that directly benefit organic and nonbiotech neighbors. These benefits often go uncompensated, and are referred to as 'positive' externalities. Yet, we don't see a political move forcing organic producers to plant biotech, or pay their neigbors for doing so.

In any case, what the Coase Theorem tells us is that there is no case for arbitrarily giving organic growers a trump card over those that want to use biotech alfalfa. The principle of polluter pays is not necessarily optimal.

References:

See also my AgWeb post Avatar: Property Rights, and the Environment

The Problem of Social Cost
R. H. Coase
Journal of Law and Economics, Vol. 3, Oct., 1960 (Oct., 1960), pp. 1-44

Communal Benefits of Transgenic Corn. Bruce E. Tabashnik  Science 8 October 2010:Vol. 330. no. 6001, pp. 189 - 190DOI: 10.1126/science.1196864 

Areawide Suppression of European Corn Borer with Bt Maize Reaps Savings to Non-Bt Maize Growers. Science 8 October 2010:Vol. 330. no. 6001, pp. 222 - 225 DOI: 10.1126/science.1190242W. D. Hutchison,1,* E. C. Burkness,1 P. D. Mitchell,2 R. D. Moon,1 T. W. Leslie,3 S. J. Fleischer,4 M. Abrahamson,5 K. L. Hamilton,6 K. L. Steffey,7, M. E. Gray,7 R. L. Hellmich,8 L. V. Kaster,9 T. E. Hunt,10 R. J. Wright,11 K. Pecinovsky,12 T. L. Rabaey,13 B. R. Flood,14 E. S. Raun15,

"Cumulative benefits over 14 years are an estimated $3.2 billion for maize growers in Illinois, Minnesota, and Wisconsin, with more than $2.4 billion of this total accruing to non-Bt maize growers."

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