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Rent-seeking and economic valuation of environmental quality

Femida Handy
School of Social Policy and Practice, University of Pennsylvania, Philadelphia, Pennsylvania, USA, and

436

Joyce Gleason
Department of Economics, Nebraska Wesleyan University, Lincoln, Nebraska, USA
Abstract
Purpose The paper seeks to address conceptually the issue of monetary valuations of environmental intangibles. Design/methodology/approach The paper offers an innovative approach based on the rent-seeking behaviour of individuals, as seen in lobbying for environmental goods. As an alternative to the contingent valuation method, which relies largely on willingness-to-pay disclosures in hypothetical situations, this approach depends on actual payments made by individuals in real situations. If individuals are willing to spend scarce resources to obtain an environmental good, then the total expenditures incurred provide an estimate of the value of that environmental good. Findings The estimates provide a lower bound of value of certain environmental goods. The rent-seeking approach gives a different and more direct way to determine the value of environmental public goods. Originality/value The paper considers the free-rider problem and other issues arising from the voluntary nature of public good rent-seeking activity. Keywords Rents, Public ownership, Social environment Paper type Conceptual paper

International Journal of Social Economics Vol. 34 No. 7, 2007 pp. 436-448 q Emerald Group Publishing Limited 0306-8293 DOI 10.1108/03068290710760227

1. Introduction In order to respond to public demand for maintaining or improving environmental quality, governments must try to determine the optimal level of environmental quality and only then how to achieve this goal. The rst part of this question requires information on the value of the benets and/or costs associated with changes in environmental quality. Any decision involves a trade-off. The rate at which we are willing to make the trade-offs measures the value we attach to the benet of environmental quality, and it is this measure of value that we address here. Market prices for private goods give us monetary measures of their value. What complicates the issue in measuring the value of environmental goods is their nature they are usually public goods. This implies that each person enjoys benets of environmental quality (for example, clean air) and the use by one person does not deny or diminish its value for another. Since, most environmental goods exhibit characteristics of public goods, then markets cannot be relied upon to estimate their values nor to establish the optimal level of environmental quality.

How should governments establish monetary estimates for the benets and costs of providing environmental goods? To estimate a monetary value for the costs and/or benets of achieving environmental quality without the market, economists use a variety of techniques. Two such methods are the travel-cost method and the hedonic-pricing approach. Both have been criticized by many scholars for their limitations and especially for their failure to measure adequately the non-use or intangible spillover benet of many environmental goods (Carson et al., 1996; Stevens et al., 1995; Oglethorpe and Miliadou, 2000; Kotchen and Reiling, 2000). The third and most common method, the contingent valuation method, estimates benets for a wide range of environmental goods by using survey techniques to elicit peoples willingness to pay for environmental goods (Diamond and Hausman, 1994; Ready et al., 1995; Loomis and Ekstrand, 1998; White et al., 2001). However, some scholars have eschewed this technique due to its hypothetical nature and its strategic design; the limited choice-of-payment information; possible context biases; wording problems; a potential embedding problem; and scenario rejection (McClelland et al., 1992; Bagnoli and Lipman, 1992; Mitchell and Carson, 1989; Bateman and Turner, 1993; Hausman, 1993; Kahneman and Knetsch, 1992; Rowe et al., 1996; Reaves et al., 1999; Carson et al., 2001). What is clear is that there exists no single satisfactory measure of value for environmental goods that is not subject to such indirect estimation problems. However, it is possible to envision a new, more direct, perspective to the ongoing attempts to value environmental quality (Cropper and Oates, 1992; Champ et al., 1997). We aim to contribute to that discussion by providing a perspective that is arguably more realistic; it is based on the economic theory of revealed preference resulting from actual individual action rather than intent. This approach arises from observations of rent-seeking behaviour to obtain environmental quality by lobbying those with the power to grant it. 2. Rent-seeking Rent-seeking activity undertaken to impact decision makers emerges in a society where there can be political interference in the market. If an economic agent discovers that there are ways to persuade the government to grant her/him a right (monopoly, licences, quotas, permits, or other benets) which will increase individual gain, it will be rational for him/her to expend resources to try to secure this right. Such behaviour is referred to in the literature as rent-seeking and the rents are the additional gains by the entrepreneur who secures these rights by achieving the desired change in government policy. These rents are gains that arise from a transfer of value from either consumers or rival producers to the successful rent seeker. Once such rents are secured, rent-seeking behaviour may not stop. New entrants and others in the market, realising that the rents may be transferable, will spend resources to apply pressure for a favourable change in government policies. Thus, rent-seeking activity consists of expenditures of effort, time and other productive resources to change the governments policy, or in the extreme case, the government itself. Resources devoted to this use must reect the value of the potential gains expected by the rent seeker. That is, we assume that the expenditure of scarce resources in the attempt to secure the desired gain represent a rational investment from the rent seekers perspective. This rational investment reects how much individuals value the expected outcome in monetary terms. For example, it would be irrational to spend $100

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on rent-seeking for an uncertain outcome worth $100. Indeed, given the uncertainty of success, rent-seeking efforts of a $100 are rational only if the prize far exceeds the outlay of $100. The theory of rent-seeking used here, was rst developed by Tullock (1967) and has been applied to many different issues (Tollinson, 1985). Although much of the literature deals with private gain, insightful attempts have been made which apply the theory of rent-seeking behaviour to public goods (Katz et al., 1990; and Riaz et al., 1995). In the history of the environmental movement, we nd overwhelmingly that many policies are adopted, at least partially, as a result of rent-seeking activity by local and environmental non-prot organisations (Sale, 1993). These organisations often evolved in response to widespread concern about environmental degradation and the need for conservation. They found it more effective to try to inuence governments, corporations, and individuals who have the power to change policies and behaviour than to directly acquire the environmental benets in question. The resources spent in rent-seeking by environmental organisations largely come from individuals through donations of time and money. They have been effective in leveraging small amounts of resources into greater expenditures by the public and private sectors (Sale, 1993). Thus, successful rent-seeking can result in prizes such as cleaner air and water, avoidance of hazardous waste sites, preservation of biodiversity, reduction in deforestation and prevention of global warming, etc. Demonstrations, protests, public awareness campaigns, and direct lobbying have been cornerstones of rent-seeking behaviour for environmental goods. The total expenditures on such rent-seeking is a signal of the value that these groups and their supporters attach to environmental goods. The desired direct effect is to impact public policy and an additional indirect effect is to change public opinion, which in turn, may also affect policies. In the USA only 6 out of 81 applications to build hazardous waste treatment facilities resulted in operating facilities between 1980 and 1987 (Kunreuther et al., 1993). The main reason why so many facilities were not built was public opposition (Ratick and White, 1988). By examining such rent-seeking behaviour, it seems possible to estimate the value of the environmental good in question. This value reects the calculation of benets or losses avoided by the desired action. Examples include the benets gained in the case of a clean-up of radioactive soil, or the loss avoided as in the instance of the environmental damage forestalled by a ban on certain pesticides. The model proposed may thus be used to capture the lower bounds of the benets of environmental change, either in providing an environmental good or preventing the loss of existing environmental quality. 3. Valuation of environmental quality an example We use the siting of a landll as an example of how to estimate the value of environmental preservation using the rent-seeking method. To avoid the perceived costs imposed on the community in which the landll site is proposed, local residents respond by protesting and lobbying governments to change the location of the landll site (The so-called Not-In-My-Backyard or NIMBY Syndrome). The resources spent in such rent-seeking will reect the lower bound of the value placed on the environmental quality that the residents want to preserve, and hence is an important signal to decision makers. Using the hypothetical case of a proposed landll site, this section illustrates how a monetary value for a particular communitys evaluation of its

environmental benets (losses) can be determined by analyzing its rent-seeking behaviour. Consider the case of people who live near a proposed landll. They fear the potential inconvenience of expected dust pollution, noise pollution, heavy vehicular trafc, litter, odors and increased risk of water and air contamination as well as the decline of property values (ECDG, 2000). Can such loss of environmental quality be quantied, ex ante? Some of the costs such as loss of property values and the expense of extra cleaning, of sound proong, and of air conditioning are indeed quantiable after the fact. There are, however, many important physical and psychological costs involved in dealing daily with the trafc congestion, odours, elevated outdoor noise levels, litter in the neighbourhood, an increase in scavenging animals (birds and rodents) and the risk of contamination of the water and soils by leachate as well as a negative visual or aesthetic impact (ECDG, 2000). The latter are difcult to quantify, even after the fact, and nearly impossible to do so ex ante. Hence, these implicit costs are often absent from the usual cost-benet calculus relied upon by policy makers. One way of assessing the perceived cost of externalities associated with living in the neighbourhood of a landll is to interpret ex ante the behaviour of individuals in a neighbourhood when a landll site is proposed nearby. These residents, when threatened with the possibility of a landll, anticipate future loss of environmental quality and begin to mount campaigns to avoid these costs. There are often strong, well-organised local protests mounted against such siting (Inhaber, 1991; Hunter and Leyden, 1995.) To avoid the costs that could be imposed by a future landll, individuals bear the costs of mobilization, protest actions, lobbying, etc. in terms of time and money spent on their organisation. Such expenditures have a good chance for success, as there often are legal requirements for public participation in decisions involving public land use (Bleiker and Bleiker, 1995; ACIR, 1979). This requirement provides a legitimate venue for citizen advocacy and encourages all affected parties to provide input before decisions are made. Even where legal requirements are lacking, it is plausible to assume that affected parties will spend resources to avoid the social costs of a future neighbourhood landll. Indeed, there exist numerous examples, which show that such rent-seeking by citizen groups has been successful in derailing locally unwanted land uses (Inhaber, 1991; Kemp, 1990; Marshall, 1989). We argue that there is a direct, though complex, relationship between the expenditures incurred in rent-seeking, the potential environmental costs of a landll and the monetary valuation of intangible loss in environmental quality associated with the landll as perceived by those affected. This approach simply recognises the rational behaviour of individuals in question. It is unlikely that any individual would incur costs that exceed the expected value of the benets to him or her, and so the costs undertaken will indeed be a function of the expected value of the benets. The proposed rent-seeking method incorporates the expenditure of opponents to the landll, that is, their rent-seeking costs, as a reection of the minimum monetary value of the expected loss in environmental quality, in other words the social cost. While these resource expenditures will not provide an exact estimate of the benets of the environmental preservation, it should provide a lower bound for its estimation. The discussion that follows will illustrate this point further.

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The estimation of the social costs of a landll site by this approach differs importantly from the more-common contingent valuation method (CVM) because it does not rely on simulations or hypothetical markets. Using the rent-seeking method, valuations are revealed after real expenses are incurred. This method reveals the value individuals are actually willing to pay for environmental quality, for either improvement or preservation, and avoids the hypothetical nature of the CVM. Indeed, individuals who are willing to put their money where their mouth is send a clearer signal of how much they value environmental quality than those answering questionnaires where they state imagined amounts they would be willing to pay. However, the estimates based on rent-seeking expenditures raise other issues. Thus, this method is not offered as a replacement of the CVM, but as a complement. 4. The model The model introduced in this section is a simple model constructed to elicit the underlying partial equilibrium analysis. It does not attempt a model of a general equilibrium framework that considers other land uses or alternatives to rent-seeking. Nor does it account for strategic behaviour. It assumes a one-time optimization[1]. No doubt such considerations may bring the model closer to real world complexities decision-making. However, the aim of the present model is to highlight how rent-seeking behaviour can provide insight into valuation of the social benets of a public good. As an example, consider a situation where government is considering where to locate a landll site. For the sake of simplicity, assume there are only two potential communities for siting the landll and neither community wants to be chosen. Since, such siting is an open public process, citizens in each community will pressure and inuence the government to avoid having the landll in their respective neighbourhoods. The community that lobbies successfully will not be chosen for the landll site. First, suppose C dollars equal the unknown environmental benet to residents in community no. 1 for its not being chosen. That is, community no. 2 is chosen for the site. Each individual resident values his/her benet at aC dollars where 0 , a , 1. If we assume that the environmental benets of not having the landll are evenly distributed among community no. 1 residents, then the preservation of environmental quality in community no. 1 exhibits the characteristics of a public good (with non-excludability and non-rivalry in consumption) within the winning community. Second, we can analyze the rent-seeking done by both communities. The probability that a community wins that is, avoids the landll site, is assumed to be a function of how much it spends in rent-seeking. It is the ratio of the total amount spent by residents in that community to the total amount spent by both communities in lobbying to prevent the landll. Suppose that community no. 1 has n individuals involved in rent-seeking activity and let Xi (i 1, . . . n) be the amount the ith individual spends in rent-seeking activity. The probability that community no. 1 avoids the landll site is given by: ! n X Xi P1
i1 n X i 1

Xi

m X j1

! Yj

Similarly, suppose m individuals engage in rent-seeking from community no. 2 and Yj ( j 1, . . . m) is the amount the jth individual in community no. 2 spends in rent-seeking activity. The probability that community no. 2 avoids the landll site is given by: ! m X Yj P2
j1 n X i 1

Rent-seeking and economic valuation 441

Xi

m X j1

! Yj

where 1 2 P1 P2 Assuming a risk neutral individual, she/he maximises utility Ui U i P 1 aC 2 Xi P 2 2Xi P 1 aC 2 XiP 1 P 2 P 1 aC 2 Xi 4 3

The rst order condition for optimization is dUi=dXi aC dP 1 =dXi 2 1 0 thus:   dP 1 1 dXi aC From equation (1) we get:
m X

Yj
m X j1

dP 1 " dXi n X
i 1

j1

 ! #2 Yj

1 aC

 6

Xi

Thus, from equations (5) and (6) we get:

m X

! Yj
m X j1

"

j1 n X i1

 ! #2 Yj

1 aC

 7

Xi

Assume that a is the same for each individual, i.e every individual faces the same benets from avoiding the landll site, each individual will rent-seek in equal amounts, thus Xi Xj X and Yi Yj Y for all i and j. Equation (7) can be written as:   mY 1 8 2 a C nX mY

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Avoiding the landll site for individuals in community no. 2 poses a symmetric problem with that of individuals in community no. 1. By maximising the expected value of the rent-seeking by an individual in community no. 2, this leads to Equation (9):   nX 1 9 aC nX mY 2 Adding equations (8) and (9):   10

aC nX mY 2

Thus, the value of the total rent-seeking that occurs in both the communities to avoid the landll site is only half of the value of benet to any one individual. For example, if one community spends $2,500 on rent-seeking activity and another spends $4,000 the benets gained to an individual from avoiding the landll site would be in the neighbourhood of $13,000. The total benets from avoiding a landll site (hence the value of the social costs of its presence) could be estimated at $13,000 times the affected population. For 1,000 individuals, the social costs would therefore be $13,000,000. Thus, the actual rent-seeking cost (2,500 4,000 6,500) reects only 1/2,000th of the value of total P social P cost. In other words, the total social cost is: C 2 Ri Ni , where Ri represents the rent-seeking done in the ith community and Ni represents the population in the ith community. Table I illustrates what the total social costs might be for different communities with different expenditures on rent-seeking activities. Note from the above that wealthier communities that have higher rent-seeking costs (R1 and R2) will have greater perceived total social costs (C), as will those communities with greater populations. This is reasonable given that total social costs are expected to vary with size of the population affected and the wealth of the community. 5. Free-riding and other considerations Rent-seeking activity for public environmental goods is generally carried out by concerned citizens who come together and organise lobbying efforts and/or other means to prevent a loss or secure a gain. These groups organise voluntarily and bear the costs of the rent-seeking activity. They may raise funds within the community to help them with their activities and volunteer their own resources and services. And, it

Community 1 Population N1 4,000 4,000 40,000 Rent-seeking expenditure R1 2,500 40,000 2,500

Community 2 Population N2 6,000 6,000 60,000 Rent-seeking expenditure R2 4,000 50,000 4,000 Gain to each individual of not having a landll G 2(R1 R2) 13,000 180,000 13,000

Table I. Calculation of benets of avoiding a landll site (perceived social costs of the landll site)

Total benet of avoiding the landll (perceived social costs of landll C ) C 2(R1 R2)(N1 N2) C G(N1 N2) 13,000,0000 180,000,000 130,000,000

is likely that some individuals who put a positive value on the avoidance of the landll site will not participate (fully or at all) and will instead become free riders because the prize is a public good (Olson, 1971). Thus, the actual rent-seeking activity seen in any community will be less than would be expected in the case if all who beneted were participants. In other words, the rent-seeking model used here may underestimate the true social benet of avoiding environmental costs or gaining environmental goods. What may also complicate the picture is where rent-seeking efforts represent utility to the individuals that is not directly related to environmental goods being sought. Andreoni (1990) has argued that individuals make voluntary contributions for a variety of reasons: they want more of the public good, but also may want what he calls a warm glow from their giving. Individuals contributing to rent-seeking efforts would be subject to similar private benets that may increase the amounts donated and make it difcult to estimate the Hicksian surplus involved. In their paper, Champ et al. (1997, p. 153) model a budget-constrained, utility-maximising consumer who donates to a lobbying effort and is partly motivated by the warm glow and partly by wanting more of the public good. The model is able to show that when such a consumer donates money toward the provision of a public good, the amount of the donation is less than or equal to that consumers Hicksian compensating surplus for the public good. Donors maximum willingness to donate, they show, will be less than the maximum willingness to pay for the public good, donations can be interpreted as lower bounds even if they are motivated partly or completely by Andreonis warm glow, the difference being accounted for by free riding that occurs. Champ et al. (1997) use donations as a mechanism by which to estimate a theoretical lower bound on mean compensating surplus for a public good, in this case the removal of old unpaved roads in the Grand Canyon. The result can easily be applied to the rent-seeking expenditures discussed above as these expenditures rely largely on the voluntary monetary donations by individuals but include donations of time and other resources. The model presented in this paper also accounts for free-riding in the sense that the total resources spent rent-seeking by the community represents only a fraction (aC/2) of the value to each individual. If we assume that environmental quality is a normal good, it is likely that a wealthier community will place greater valuation on the environmental good than a poorer community. Will this affect the rent-seeking activity? Consider the case where community no. 1 is signicantly wealthier than community no. 2. In this case, individuals would value the costs of having a landll site in their locations differently and a for community no. 1 (a1) will be greater than a for community no. 2 (a2). Consider what ensues if a1 . a2 Equation (4) now reads as:    1 1 1 21 nX mY 11 C a1 a 2 so that nX mY (Ca */2), where a * is the harmonic mean of the as. The total rent-seeking activity that takes place is one-half of the harmonic mean of the as. Hence, their values do affect rent-seeking done in each community. Optimising for both communities as before and solving:

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a1 mY a2 nX

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  a2 , nX as a1 . a2 a1

444

The rent-seeking activity in the wealthier community no. 1 exceeds that in the poorer community no. 2 despite relative population sizes (Katz et al., 1990). The major implication of this is that the community more likely to end up with the landll site will be the poorer community even if the poor community has a larger population because the larger number of free-riders would offset the greater number of rent seekers in the larger community. This result conrms empirical ndings (Bullard, 1994) and the intuition that wealthier communities end up with better environmental quality, giving theoretical credence to of the charges of environmental racism. If we use a multiple of actual rent-seeking costs to determine the value of an environmental good, and rent-seeking activity varies in different communities, environmental quality does not have an absolute value per se. It is contextually valued and it depends not only on the physical characteristics of the location but also on the preferences and incomes of those who reside in the community and who are most likely to be the beneciaries of that particular environmental good. 6. Conclusions and suggested extensions This paper suggests that expenditures on rent-seeking may serve as a way of measuring the implicit value of changes in environmental quality. This method involves considering actual rather than hypothetical willingness to pay or valuation by individual travel costs who might seek environmental benets. However, the proposed method is suitable only in situations where active rent-seeking occurs. Furthermore, the results obtained using rent-seeking measures cannot be used to provide a denitive valuation. For one thing, this particular analysis is based on an assumption of homogenous individuals, but the results offer a more realistic alternative to existing ex ante valuation methods. And, although many of the externalities involved from a certain action can be captured in the rent-seeking behaviour, as affected individuals will undertake to protest, it is not clear that all externalities are captured if the incidence crosses political boundaries. Indeed, it is reasonable to expect trans border pollution to invoke rentseeking from neighbouring municipalities, counties and even countries There is some evidence (Pierce et al., 1992) that socio-economic variables such as high incomes, high levels of educational attainment and employment in prestigious occupations are good predictors of who participates in rent-seeking for environmental change. This indicates that the individuals who participate in rent-seeking are wealthier and the resources they spend in rent-seeking efforts may not be truly representative. Nevertheless, it also indicates that these groups place a value on environmental quality given their education and higher budget constraints. If, however, the communities in question are relatively homogenous then this weakness vanishes. If each communitys population is not homogenous, a more complete model will need to reect different values of a for different individuals. The likely result is that only those individuals who value the change in environmental quality most highly will contribute to the rent-seeking. Thus, a likely observation may be that of a coalition of concerned environmentalists, individuals directly affected, and wealthy individuals contributing to the rent-seeking efforts. In this sense, the calculation offered here would

represent an underestimate of the total social value of environmental quality. This weakness may be eliminated in the model if we assume that only those who value change are included among the n or m individuals, numbers that could be estimated by polling the population, or voting on special amendments during elections. Another missing ingredient is any valuation of the time devoted by individuals to the rent-seeking. Using the average shadow price of time is likely to improve the model, but still lead to an underestimate if lower-income individuals devote more time. But this rent-seeking model for valuation of social benets and/or costs offers several exciting directions for further research. Using non-market valuation from rent-seeking studies can change the nature of the debate from being a people versus the environment to one of recognizing people care about the environment and are willing to expend real resources to protect and ameliorate their environment. They care about the environments just as they do for goods and services they buy in the market place, and their expenditures can diffuse the often heard argument that while we would like to protect the environment, we simply cant afford it. Finally, environmental policies have major economic consequences in the USA and elsewhere, and as the cost of environmental regulation increases, so does the value of potential comparative advantages in the marketplace. Seeking regulatory policies that give to niche producers markets in environmentally friendly goods and services makes rent-seeking by such producers a protable strategy. Thus, it is natural that rms can make alliances with environmental organisations to further their private interests by using environmental regulations to transfer wealth. This adds another dimension worth further research in using environmental rent-seeking to valuate environmental quality. For example, the Business Council for a Sustainable Energy Future, an alliance of solar, wind, gas, and geo-thermal power producers and related rms, is lobbying for deep cuts in greenhouse gas emissions.
Note 1. In an application of rent-seeking to public goods Katz et al. (1990) use Tullocks formulation for efcient rent-seeking, and analyse how much individuals are willing to spend in rent-seeking to win the a pollution clean up in their own neighbourhood. I follow their model closely.

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Hanemann, W.M. (1994), Valuing the environment through contingent valuation, Journal of Economic Perspectives, Vol. 84, pp. 19-43. Harris, C.C., Driver, B.L. and McLaughlin, W.J. (1989), Improving the contingent valuation method: a psychological perspective, Journal of Environmental Economics and Management, Vol. 17, pp. 213-29. Hourcade, J.C., Salles, J.M. and Thery, D. (1992), Ecological economics and scientic controversies. Lessons from some policy making in EEC, Ecological Economics, Vol. 6, pp. 211-33. Kahneman, D. and Tversky, A. (1979), Prospect theory: an analysis of decision under risk, Econometrica, Vol. 47, pp. 263-91. Schkade, D.A. and Payne, J.W. (1994), How people respond to contingent valuation questions: a verbal protocol analysis of willingness to pay for an environmental regulation, Journal of Environmental Economics and Management, Vol. 26, pp. 88-109. Smith, V.K. (1992), Arbitrary values, good causes and premature verdicts, Journal of Environmental Economics and Management, Vol. 24, pp. 71-89. Corresponding author Femida Handy can be contacted at: fhandy@sp2.upenn.edu

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