William Watson: Hydro Quebec wants to cut down more than 100 trees—an ‘externalities’ problem
Monday morning I was in class teaching the “Coase solution” to externalities problems, which is named after its discoverer, Ronald Coase, the Nobelist economist and one of very few humans ever to publish a book in his second century.
Bart lives upstream, Lisa down (using an example from the text we use). Bart’s pollution hurts Lisa’s fishing business. If we have every Green’s favourite, “polluter pay,” Bart has to compensate Lisa for any damage he does her. If he doesn’t pollute, he doesn’t have to pay. He’s thus induced to “internalize” the externality, which is what economists want.
But Coase’s ingenious contribution, “pollutee pay,” also works. Even if Bart is legally free to pollute, Lisa can benefit by paying him to stop. How much would she pay? Up to the damage he does her. But if she does make him such an offer, that internalizes the externality for him. If he goes ahead and pollutes, it’s only because what she’s offering—which is her cost from his pollution—doesn’t offset his gain from his pollution. Again, that’s exactly the calculation you want him to make. It doesn’t matter, says Coase, whether Bart has the right to pollute or Lisa has the right to be free from pollution, so long as somebody has the property right, they bargain their way to an efficient pollution solution.
Monday evening I was at the local town hall sitting in on a real-life Coase problem. Hydro Quebec, the province’s government-owned electric monopoly, was explaining to three dozen tree-loving citizens why it has to cut down more than 100 trees under a high-voltage power line along whose right of way several families have their backyards and many more of us walk our dogs. You can see me listening attentively and, despite the headline, not angrily, in the top right hand corner of one of the photos accompanying this news story. (You can see my dog here.) The information session was prompted by several citizens having blocked access to the right of way when Hydro’s truck showed up to start cutting down trees it had spray-painted for removal.
Hydro explained that electrical arcing from high-voltage lines to any nearby object, trees included, can cause negative externalities in the form of fires and large-scale power outages. So its rule is that within 10 metres either side of a line nothing can be allowed to grow higher than 2.5 metres. In turn, several residents explained their love for the trees. One older couple told of how their children had planted two birches 45 years ago, how they’d tended their fruit trees, how much their rare walnut tree meant to them, how, despite regular inspections of the right-of-way, Hydro had never complained about the trees, even as they grew taller and taller. Others talked about how the trees absorb the noise from trains running nearby, are home to hundreds of birds, eat up carbon dioxide, and are beautiful to look at—more externalities.
What’s going to happen? Hydro says it has the absolute property right—a disadvantage of our Canadian trust in government. Many homeowners have their backyards on lease from Hydro. The gentleman with the walnut tree at least got assurance no cutting would take place until he’d had a chance to transplant his tree. The chief Hydro spokesperson did seem willing to consider a gradual cull of the trees, perhaps extending over several years, thus avoiding a sudden clear-cut and giving replacement flora a chance to grow. Though a joint Hydro-town committee has been struck to decide on next steps, Hydro did end the meeting by warning some trees definitely will have to come down.
A classic Coase solution would have the citizens pay Hydro to prune rather than take down the trees. Given Hydro’s rules, that seems unlikely.
But the several citizens who are very angry have made clear they will not stop their agitation until Hydro backs off, and that if the trucks do come back, they more than likely will be met by some form of civil disobedience. Given extensive local coverage of this story, Hydro seems to realize that going ahead as originally planned will damage its reputation. Thus the cost to Hydro is in proportion to the public anger and the public anger is in proportion to the benefit from the trees. It’s a kind of internalization of the externality, if not exactly what Coase had in mind.
I’ll update the story as events warrant.
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