Download Chapter 7: The Political Economy of

Chapter 8: The Political Economy
of Environmental Regulation and
Resource Management
Professor Steven C. Hackett
Humboldt State University
Political Economy
Overview:
What is political economy?
A simple analytical framework
Supply of regulatory policy
Demand for regulatory policy
Equilibrium in the political market for
regulation
Political Economy
Overview, Continued:
Application: Political economy of
environmental regulation
Social choice theory and the median
voter theorem
Application: Self-governance of
localized common pool resources
Case: Montreal Protocol
What is Political Economy?
History: In the time between Adam Smith’s
Wealth of Nations (1776) and John Stuart
Mill’s Principles of Political Economy (1848),
what is now called economics was more
generally called political economy.
The term political economy reflected the
belief that politics and economics are
inseparable, and in fact that political factors
are crucial in determining economic
outcomes.
What is Political Economy?
History:
Much of the focus in political economy was
on what we might now call the economics of
public policy.
What is Political Economy?
R. Keohane, 1984. After Hegemony. p. 21:
Wherever, in the economy, actors exert
power over one another, the economy is
political.
Alt and Shepsle, 1990. Perspectives on
Positive Political Economy: Political
economy is the study of rational
decisions made in the context of political
and economic institutions.
What is Political Economy?
Allen Drazen, 2000. Political Economy in
Macroeconomics, p. 7: Political economy
begins with the observation that actual
policies are often quite different from
‘‘optimal’’ policies, the latter defined as
subject to technical and informational, but
not political, constraints. Political
constraints refer to the constraints due to
conflict of interests and the need to make
collective choices in the face of these
conflicts.
What is Political Economy?
Within microeconomics, political economy
is an approach used to understand how
political and legal institutions influence the
economic behavior of people, firms, and
markets, as well as the economics of how
interest groups influence the formation of
laws and regulatory policy.
What is Political Economy?
From the standpoint of international
economics, political economy is
concerned with understanding how
national policies influence international
trade, investment, and finance, with the
processes that lead to the formation of
international economic treaties and
institutions, and with the economic
consequences of these laws and
institutions.
What is Political Economy?
Positive Political Economy:
These relatively recent approaches to
political economy – sometimes referred to
as the new political economy – borrow
economic approaches for modeling
incentives as a way to understand the
political and economic forces that shape
public policy.
What is Political Economy?
Example of Positive Political Economy:
Investigate the role of campaign
contributions in explaining post-election
voting.
What is Political Economy?
Normative Political Economy:
Identifies “good” policy outcomes
(consistent with a particular value system)
and investigates how, given the existing
political constraints, these good policy
outcomes can be realized.
What is Political Economy?
Example of Normative Political
Economy:
Lumber companies (or labor unions if you
prefer) form a political action committee,
construct a set of desired policy
outcomes, and contribute to those
candidates most likely to support the
desired policy outcomes.
What is Political Economy?
In chapter 4 we developed the economic theory
of efficiency-enhancing environmental
regulation. But since environmental regulation is
an outcome of political processes, the nature of
environmental regulation will reflect the
economic forces at work in the political process.
Therefore new political economy models can
help us understand how environmental and
natural resource regulations come about.
Economic Models of Political Economy and
the Regulatory Process
Public choice school of thought and the
supply of regulatory policy:
Instead of assuming that politicians select policies
that best serve the public interest, traditional public
choice models start from the premise that
politicians, like other economic agents, are
motivated by incentives such as ideology, wealth,
reelection, and power.
From this foundation one can model the supply of
legislation or administrative rules.
Economic Models of Political Economy and
the Regulatory Process
The role of institutional structure:
Legislative and administrative outcomes also depend on
the institutional structure within which these activities
occur. Shepsle and Weingast (1994) offer an accessible
survey of the work that has been done on the
institutional structure of the U.S. Congress. For
example, issues such as party control, seniority, the role
of committees and committee chairs, voting rules, and
other aspects of procedure are important elements in
understanding legislative outcomes. A different
institutional structure governs the administrative rulemaking process.
Economic Models of Political Economy and
the Regulatory Process
The capture theory of regulation and
the demand for regulatory policy:
What makes for a potent interest group?
According to Stigler and Peltzman:
The amount that each individual has at stake. Having
more at stake means the individual will invest more money
and effort.
 The size of the group. Smaller groups are easier to organize
and can more quickly come to agreement than large groups.
Economic Models of Political Economy and
the Regulatory Process
Support for the capture theory of regulation comes from a 1997
Los Angeles Times analysis of political giving by major U.S.
corporations by Vartabedian. The largest corporate contributors
tended to be those most heavily regulated by government or
most dependent upon government for subsidies. Clearly these
firms have a high demand for favorable regulation. By the same
token, firms with a reputation for sound management, and which
therefore have a relatively lower demand for favorable
regulation, were found to be below-average contributors. From a
sectoral point of view the largest political contributors came
from the financial, military, oil, telecommunications, and
tobacco industries.
The Political Market for Regulation
The demand for regulation derives from the various
groups whose interests are served by regulation.
Interest groups organize around a common set of
preferences, and therefore express a group willingnessto-pay for effective support of a regulation that
reflects the marginal utility derived from the
regulatory outcome. This willingness-to-pay is
manifested in political currency that includes money
payments and the provision of votes, volunteer effort,
and endorsements.
The Political Market for Regulation
Some examples of interest groups:
Firms oftentimes organize themselves in trade associations.
Trade associations are likely to seek regulations that reduce their
production costs, provide subsidies, erect entry barriers and
constrain substitutes, and provide an environment more
conducive for collusion.
Environmentalists organize themselves into groups that lobby
for regulation that conserves or restores the environment.
Consumers may organize themselves into interest groups
seeking lower product prices and product quality assurance.
Workers may organize into interest groups seeking more jobs,
higher pay, and better working conditions.
The Political Market for Regulation
According to Keohane (1999), The supply of effective
support for regulation has three components, each
reflecting the cost of supplying effective support for a
particular regulatory outcome.
First, the supply of effective support for regulation is a
function of the opportunity cost of the time and
effort invested by the regulator in shepherding
environmental legislation or administrative rules
through the political process.
The Political Market for Regulation
Components of the supply of effective support for regulation,
continued:
Second, the supply of effective support for regulation
is a function of the psychological cost of supporting
regulation that may be in opposition to the personal
preferences of the regulator. It is possible that this
cost becomes negative if the regulation is in accord
with the regulator's personal preferences.
The Political Market for Regulation
Components of the supply of effective support for regulation,
continued:
Third, the supply of effective support for regulation is a
function of the opportunity cost of supporting regulation
that can impair the regulator's probability of reelection or
reappointment. As with the regulator's personal
preferences, this opportunity cost can become negative if
the regulation is in accord with the interests of the
regulator's constituency and thus increases the likelihood
of reelection or reappointment.
The Political Market for Regulation
Equilibrium:
As we learned in Chapter 3, equilibrium occurs where
supply and demand intersect. In the context of the
political economy of regulatory policy, the
equilibrium quantity represents the quantity of
effective support for a policy, while the equilibrium
price represents the price, in political currency, per
unit of effective support.
The Political Market for Regulation
80
70
Supply
60
Political Currency
50
40
30
20
Demand
10
0
20
40
60
80
100
120
140
160
Quantity of Effective Support
180
200
The Political Market for Regulation
Changes in Equilibrium:
What factors might displace this equilibrium and
cause an increase or a decrease in the equilibrium level
of effective support for a particular regulation?
An increase in demand might occur, for example, if a
new interest group joins the coalition demanding the
regulation. All else equal an increase in demand
would cause an increase in the equilibrium quantity of
effective support (and an increase in equil. price).
The Political Market for Regulation
Changes in Equilibrium:
Likewise if polls indicate that constituents more strongly favor
the regulation then this would increase the supply of
regulation and therefore increase the equilibrium quantity of
effective support.
Each regulatory alternative will have its own supply and demand,
and thus will have its own equilibrium level of effective support.
Different regulatory alternatives will derive their demand from a
different mix of interest groups, and will derive their supply from
different regulator opportunity costs.
The Political Market for Regulation
What determines whether a given equilibrium quantity
of effective support will be sufficient to become law or
policy?
Political institutions such as voting rules, filibuster
and cloture rules, the role of committees, party
control, seniority, and the requirements for
overcoming a veto are a few of the many factors at
play.
Applications: The Political Economy of
Environmental Regulation
The Downing political economy model of an
environmental regulatory agency:
The model includes three groups: the polluter, those
bearing the external costs, and the regulatory agency.
The administrator(s) of the regulatory agency have the
twin objectives of (i) maximizing agency budget and
discretionary control, and (ii) improving environmental
quality. Polluters and those bearing the external costs
invest resources to influence the politicians who set the
agency budget, and thus indirectly control the level of
regulatory activity.
Applications: The Political Economy of
Environmental Regulation
The Downing political economy model of an
environmental regulatory agency:
Analysis from this model indicates there is a
feedback effect between the type of
environmental regulation we observe (e.g.,
effluent fees, technology-forcing regulations)
and the pattern of lobbying pressure exerted by
the regulated firms.
Applications: The Political Economy of
Environmental Regulation
Milliman and Prince political economy model of a
polluting firm’s incentives for research and
development (R&D) in innovative and less expensive
ways of meeting the requirements of pollutioncontrol laws.
Firms that succeed in finding an innovative and lowercost means of complying with pollution-control laws
might influence the introduction of even more stringent
environmental regulations. They argue that “firms, not
regulatory agencies, often initiate [environmentally
friendly] innovation and diffusion” (p. 248).
Applications: The Political Economy of
Environmental Regulation
Hackett political economy model of a “patent race”
for pollution-control technology, and the incentive
for firms to lobby policy makers for more restrictive
regulation of their own industry
The winner(s) of the patent race find a cheaper method
of clean production, and have an incentive to lobby
government to create a more regulated environment
where the innovators have a cost advantage over their
rivals. Raising rival firms’ costs increases profit for the
patent race winner.
Applications: The Political Economy of
Environmental Regulation
Hackett political economy model of a “patent race”
for pollution-control technology, and the incentive
for firms to lobby policy makers for more restrictive
regulation of their own industry
Example: DuPont and the Montreal Protocol for
control of halocarbons (CFC’s). DuPont’s development
of less polluting substitutes gave it an incentive to join
with environmentalists in lobbying for a ban on
harmful halocarbons produced by rival firm ICI.
Applications: The Political Economy of
Environmental Regulation
Maxwell, Lyon, and Hackett political
economy model of voluntary self-regulation
by polluting firms
Firms have an incentive to self-regulate if, by
doing so, they can mollify environmental
interest groups enough to head off more
stringent regulations imposed by a regulatory
agency.
Applications: The Political Economy of
Environmental Regulation
Maxwell, Lyon, and Hackett model:
Used Toxics Release Inventory (TRI) data to evaluate
whether declines in the cost of organizing political
resistance to pollution lead to a greater threat of
increased government regulation, driving firms to selfregulate and reduce emissions. The TRI requires firms
to self-report their emissions of certain toxic
compounds and thus works to lower the information
cost to citizen groups that lobby government for
stricter regulations.
Applications: The Political Economy of
Environmental Regulation
Maxwell, Lyon, and Hackett model:
Since the TRI was instituted in 1989, toxic emissions
per unit of manufacturing output have steadily
declined, which is consistent with Maxwell, Lyon, and
Hackett’s prediction. Moreover, states such as
California that have a very high density of selfidentified environmentalists are shown to have a more
rapid reduction in toxic emissions per unit of
manufacturing output than states with a lower density
of environmentalists.
Applications: The Political Economy of
Environmental Regulation
Maxwell, Lyon, and Hackett model:
Thus by simply providing information on
pollution emissions, the TRI makes it easier for
citizens to threaten polluters with more stringent
regulation, which in turn works to lower
emissions by way of voluntary self- regulation
in order to attenuate the threat of more stringent
regulation.
Social Choice Theory
Social choice theory is a part of political theory
concerned with collective decision-making,
such as through voting in a democratic system
of self-governance.
The seminal work in this field is by Nobel prize winning
economist Kenneth Arrow in his 1951 book Social Choice and
Individual Values (NY: John Wiley)
Social Choice Theory
One of the most prominent advancements in
social choice theory is the Median Voter
Theorem (aka median voter model).
Consider an election with the following
characteristics:
Political candidates can (at least to some degree) commit to
a political position in the minds of the voters
Median Voter Theorem – More Assumptions
Voters have single-peaked preferences, or
policy bliss points, and can be described by a
distribution function arraying them in a
simple two dimensional policy space (e.g.,
left vs. right). If there is an odd number of
voters, the median voter lies in the middle of
the distribution.
Median Voter Theorem – More Assumptions
There are two candidates seeking election
to a single member district (e.g., US House
of Representatives districts, CA State Senate
or Assembly districts).
The voting rule is that only one candidate
can win (“winner-takes-all”) based on a
plurality rule (candidate with the most
votes wins).
Median Voter Theorem
Under these conditions, the plurality winner (or
for that matter a simple majority winner) will
position herself to advocate for the bliss point of
the median voter.
In other words, under these conditions the
candidates have a dominant strategy of
advocating a centerist platform consistent with
winning the median voter, as well as all the voters
on either one side OR the other of the median.
Median Voter Theorem
If parties A and B want to capture the median voter, they should
move towards the center. The red and blue areas represent the
voters that A and B expect they have already captured.
Median Voter Theorem
Most elections in the U.S. feature single member
district (winner-takes-all) plurality (or simple
majority) voting rules – SMDP voting.
If the election can be described as a “location game”
in which the two politicians first commit to a location
in policy space, and then voters vote for the
candidate closest to their bliss point, then the Nash
equilibrium (and dominant strategy equilibrium) is
for both politicians to commit to a location proximate
to the median voter.
Duverger’s Law
Duverger’s Law asserts that winner-takes-allplurality rule voting tends to eliminate small
parties and create a stable two-party system.
The discovery of this tendency is attributed to Maurice
Duverger, a French sociologist who observed the effect
and recorded it in several papers published in the
1950s and 1960s.
Duverger’s Law
A two-party system develops spontaneously from
the single-member district plurality voting system
(SMDP), in which legislative seats are awarded to
the candidate with a plurality of the total votes
within his or her constituency, rather than
apportioning seats to each party based on the total
votes gained in the entire set of constituencies.
Duverger’s Law
A frequent consequence of Duverger's law is the
spoiler effect, where a third-party candidate takes
votes away from one of the two leading candidates.
Illustration – Duverger’s Law
% of
Voters
Party Platform Locations
Example: Left
splinters, right
maintains “party
discipline” and
wins
Vote D
Vote R
Vote G
Left-Wing G
Values
D
R
Right-Wing
Values
SMDP Voting Rules – Essential to Form an
Internal Coalition
The dilemma for political parties in a single
member district plurality voting system is
maintaining an internal coalition of centrists and
those on the tail of the distribution within the
political party.
This is difficult because the dominant strategy
locates the party candidate at the median voter, far
from the voters in the tails of the distribution.
SMDP Voting Rules – Essential to Form an
Internal Coalition
Internal coalition, two party politics alienates or
marginalizes those at the tails of the distribution,
and can result in low voter turnout.
Proportionate Voting Systems
In a proportionate voting system (used in varying
degrees in most European countries), you can vote
for a small party closest to your bliss point, and party
representation in the legislature is in proportion to
the percentage of the overall vote that each party
receives.
Proportionate Voting Systems
In a proportionate voting system (used in varying
degrees in most European countries) one can end up
with many small parties.
In this case, a parliamentary government is formed
by way of an external coalition of different parties.
Proportionate Voting Systems
External coalition, parliamentary style proportionate
voting systems result in higher voter turnout, since
those in the tails of the political distribution are
explicitly represented in coalition government.
Proportionate Voting Systems
The dilemma in a proportionate voting system is
maintaining an external ruling coalition of
centrist parties and fringe or single-issue parties.
In proportionate voting systems there is a
tendency for small parties to have
disproportionate power in coalition governments
because they can threaten to leave the coalition
and throw government control to the “other”
coalition.
Alternative Voting Systems
Another alternative that is consistent with the winnertakes-all system in the U.S. is the instant runoff system,
which is being tried in San Francisco.
In an instant runoff system a voter can indicate their first,
second, and third preferences when they vote. If there is no
“first preference” simple majority winner, the candidate with
the fewest “first preference” votes is eliminated, those who
voted for the eliminated candidate have their “second
preference” votes counted in a re-tabulation of votes. This
continues until a simple majority winner is found.
Alternative Voting Systems
While instant runoff voting is more complicated, it
has the advantage of allowing people to vote for
“fringe” candidates closer to their own bliss point
without inducing the “spoiler effect” that
(according to Duverger’s Law) is intrinsic in
winner-takes-all plurality systems.
To learn more, visit the Center for Voting and
Democracy’s website: http://www.fairvote.org/irv/
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Hackett studied voting rules in CPR systems in which
the appropriators are heterogeneous (e.g., fishermen wth
large vs. small vessels). Suppose that the CPR system
has been abused from overuse, and the appropriators
have organized to reduce overall appropriation levels in
order to manage the CPR more sustainably. The question
is how the overall reduction in use will be divided
among the individual appropriators.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Inclusive voting rules require a supermajority
agreement in order for a proposal to pass. They
are inclusive in that they require the consent of a
supermajority. Consensus and unanimity are
examples.
Exclusive voting rules allow proposals to pass
with plurality or simple majority agreement.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Rule systems that change the original status quo
shares of total resource appropriation redistribute
wealth from one type of appropriator to another,
and are therefore more likely to generate conflict.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Hackett identified the following trade-off: heterogeneous
CPR appropriator groups with highly inclusive voting
rules (such as consensus) will take a longer time to reach
agreement because such voting rules make it easier to
block agreements. This delay allows the CPR to continue
to decline in productivity. Distributional rules that are
approved, however, are less likely to result in large
redistributions of wealth relative to the status quo, and so
individual appropriators are less likely to fight and violate
such rules, reducing future monitoring and enforcement
costs.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
In contrast exclusive voting rules, such as plurality or
simple majority, reach agreement more rapidly, and so
repair of the CPR system is not delayed. Yet if the
majority does manage to impose rules that redistribute
wealth from the minority to the majority, the agreement
is more likely to be fought and violated by the minority
in the future, resulting in higher monitoring and
enforcement costs.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Hackett, Schlager, and Walker (1994) used laboratory
experimental techniques (controlled and paid “roleplay” exercises) to look at how heterogeneous CPR
appropriator groups resolve this tradeoff.
They found that appropriators tended to select
allocation rules proportionate with historical
appropriation, and were able to reach agreements
without excessive delays or conflicts.
Application of Social Choice Theory to SelfGovernance of Local CPR’s
The effects of appropriator heterogeneity and
voting rules on the performance of CPR
governance structures have been looked at for
the case of oil and gas fields by Wiggins and
Libecap (1985) and Libecap and Wiggins
(1985).
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Oil and Gas:
Self-governance of oil fields is more likely
to succeed if there is minimal heterogeneity
among the appropriators (e.g., differences in
productivity).
Self-governance of oil fields is more likely
to succeed if voting rules are more exclusive
(e.g., 63 percent vs. unanimity voting rules).
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Johnson and Libecap (1982) provide a similar
analysis of the Texas Gulf Coast shrimp fishery,
where shrimpers vary with regard to fishing skill.
Heterogeneity in fishing skill created conflict over
the type of government fishery regulations the
various fishermen preferred: “For example, total
fishing effort could be restricted through uniform
quotas for eligible fishermen. But if fishermen are
heterogeneous, uniform quotas will be costly to
assign and enforce because of opposition from more
productive fishermen” (p. 1010).
Application of Social Choice Theory to SelfGovernance of Local CPR’s
Field research generally indicates that rules linking CPR
harvest shares to an appropriator’s historical level of harvest
(tons of fish landed, acre-feet of irrigation water) or
contribution (contributions for CPR upkeep, monitoring,
or enforcement) are far more common than rules that
simply divide CPR output equally. There is an aspect of
fairness in rewarding greater contributions with larger shares,
and sharing rules that differ markedly from historical use
patterns tend to undermine individual cooperation with
group efforts directed at sustaining the commons.
Political Economy of the Montreal Protocol
The Montreal Protocol is an international treaty
that limits the use of halocarbons that harm the
stratospheric ozone layer.
In studying the political economy of the Montreal
Protocol and the role of DuPont and the British chemical
firm ICI, Oye and Maxwell developed the concept of
Olsonian and Stiglerian political circumstances.
Political Economy of the Montreal Protocol
In Olsonian political circumstances (named after Mancur
Olson), the benefits of environmental regulation are more
diffuse, spread thinly across many entities, while regulatory
costs are more concentrated, weighing heavily on a few
entities.
In Olsonian situations the many who receive relatively small
benefits from regulation have little incentive to invest in
policy influence activities, and face high organizational and
coordination costs because of their large numbers.
Political Economy of the Montreal Protocol
Thus in Olsonian situations it is more
difficult to get stable systems of
regulation, meaning that regulatory
controls for protecting the environment,
for example, are relatively likely to be
overturned due to the lobbying efforts of
the few who bear the costs.
Political Economy of the Montreal Protocol
In Stiglerian political circumstances (named after George
Stigler), the benefits of environmental regulation are more
concentrated, heavily benefiting a few entities, while
regulatory costs are more diffuse, weighing lightly on
many entities.
In Stiglerian situations the few who receive relatively large
benefits from regulation have a strong incentive to invest in
policy influence activities, and face low organizational and
coordination costs because of their small numbers.
Political Economy of the Montreal Protocol
Thus in Stiglerian situations it is
relatively easier to get stable systems of
regulation, meaning that regulatory
controls for protecting the environment,
for example, are relatively likely to be
created and maintained due to the
lobbying efforts of the few who receive
the benefits.
Political Economy of the Montreal Protocol
Oye and Maxwell argue that the Montreal
Protocol, which outlawed CFC production by the
year 2000, gave a particularly strong advantage
to firms like Du Pont that came up with CFC
alternatives over their rivals that did not. In
particular, Oye and Maxwell state that:
“Du Pont and Imperial Chemical Industries, Ltd. (ICI)
experience with restrictions on CFCs represents a
classic Stiglerian illustration of producers benefiting
from regulations mandating product substitution” (pp.
193–94).