photo: jon hanson

It was interesting to open up BBC News and to read the article “Ownership key to saving fisheries“. In brief, essentially scientists have surveyed fisheries across the world and found that giving fishermen long-term ownership of fisheries is the way to keep stocks at a sustainable level. It’s a vindication of basic economics.

In this article, I want to discuss the issue of deforestation in the Amazon – one of the biggest environmental issues facing the world. I’ll run through a simple demonstration on how we could preserve the Amazon Rainforest using the exact same principle as that used in the Amazon.

The Amazon Rainforest

The Amazon Rainforest encompasses 1.4 billion acres (5.5 million square kilometres). In the 10 years from 1991 to 2000, about 500,000 square km of the Amazon was lost to deforestation. It’s been estimated that 17.1% of the Amazon has been lost to deforestation since the 1970. And at the present rate of deforestation, the Amazon Rainforest will be reduced by 40% by 2020.

That’s a big problem for all of us. The Amazon is a huge carbon sink – it locks away huge amounts of the greenhouse gas CO2. Deforestation not only reduces the world’s capacity to lock away CO2; it leads to the release of CO2 too. The existence of the Amazon Rainforest has huge benefits for all of us.

photo: angela7dreams

Ask a typical person on the street how to solve the problem of deforestation and you’ll get answers such as: prevent illegal logging or ban deforestation of the Amazon.

But then put yourself in the position of somebody who lives in or near the Amazon. Obviously, you’ll need to feed your family and make a living. Cut down some trees and sell the timber to make a bit of money. Use the land to farm and to graze cattle and to feed your family.

I think it’s extremely unfair for anybody to tell the people who live in the Amazon they can’t do this. I mean, how are they expected to make a living otherwise? Sure, we all lose out from the deforestation because it contributes to climate change. But it’s only fair that the people living in the Amazon should primarily be allowed to look after themselves and their families in the only way they have.

The Problem with Al Gore’s Public Commons

In 1989, Al Gore said:

Contrary to what Brazilians think, the Amazon is not their property, it belongs to all of us.

Essentially, Al Gore was blaming the Brazilians for cutting what does not belong to them – the Amazon.

Here’s the problem of a public commons. It could get a little mathematical, so bear with me.

Let us, hypothetically, say that a single acre of the Amazon Rainforest benefits everybody in the world by one millionth of a dollar. Every acre of the rainforest locks away CO2… that’s good news

photo: markg6

According to Google, the current world population is 6.6 billion. So the economic value to society of an acre of rainforest would be $6,600.

Now, we’ll enter the mindset of somebody living in the Amazon (call him Barack). Just like the rest of us, Barack benefits from lower CO2 levels by one millionth of a dollar. CO2 levels don’t have any local effects so we can make this assumption the benefits are the same for everybody. So the economic value to the private individual (Barack) is $1/1,000,000.

Barack could choose to cut down this acre of rainforest. He can sell the wood, and then he can graze his cattle on the cleared land. That’ll probably make him a good $2,000 or so.

So Barack has two choices:

• Cut down the rainforest and make $2,000 of money
• Leave the rainforest standing; benefiting him by $1/1,000,000 in a lower CO2 level.

It’s quite obvious to see that Barack will cut down the rainforest. He doesn’t care about the rest of us who all lose out by a millionth of a dollar – in fact it’s such a small amount that none of us would really make a big fuss about it. Would you make a fuss about a millionth of a dollar?

But look at it from a global perspective: as a global community, we’re all losing out on the rainforest worth $6,000 and getting timber and beef which is only worth $2,000 to us. As a community, we’re made $4,600 worse off by Barack’s decision.

We can pay Barack to preserve the rainforest

photo: Hamed Saber

So here’s a proposal. What if we gave Barack the deeds to that acre of rainforest? He’ll own it and have responsibility to look after it. In fact, we’ll collectively give Barack a sum of $4,000 to preserve that rainforest because we know we’re getting a lot of good out of it.

Now Barack has two options:

• Cut down the rainforest and make $2,000 of money
• Leave the rainforest standing and make $4,000 of money

It’s a no brainer. Barack will preserve the forest.

Now look at it from a global perspective. Collectively, the global community is benefiting by $6,600 from Barack’s acre of rainforest. But we’re only paying him $4,000 to preserve it – so we’re collectively made better off by $2,600 by Barack’s decision to save the rainforest. Everybody wins from property rights.

To sum it all up…

Without property rights: Barack cuts down the rainforest. Barack makes $2,000. The world loses out by $4,600. CO2 levels rise.

With property rights: Barack preserves the rainforest. Barack makes $4,000. The world benefits by $2,600. CO2 levels fall.

So there we have it. The big environmental issues won’t be solved by telling other people what to do, banning deforestation or giving money to people to plant trees. We don’t need to wait for scientific advances to fix the environment. We just need some open-minded thinking and some basic economics.

Economics, simply, is the study of incentives. It’s absolutely fascinating to me because it’s a triumph of mathematical logic over subjective guesswork. It’s applicable to every day life and it answers the big questions on how we can solve the big issues facing society today.

photo: jared

Recently, I went to Reading Festival. It’s a weekend music festival with 80,000 people. And as you can imagine, there are some huge effects on the environment from such an event. People burn and dump all kinds of things around the site, leaving both air and ground pollution behind. Not only is it bad for the environment, it’s potentially harmful to the health of the music fans who attend the festival.

I want to focus on three specific issues at Reading Festival:

• There is a huge amount of litter around the site. People don’t bother putting their rubbish in the bin.
• Those who are more considerate for the environment often find the bins will overflow from the sheer amount of trash. Because of the overflowing trash, the busiest parts of the arena had a very pungent foul-smelling stench. And it cost a lot of money for the festival to employ people to regularly empty the bins.
• Some revellers at the festival insist on throwing the contents of their drinks over huge crowds of people, especially in crowded tents. This is a huge nuisance and it’s highly unhygenic. Several friends of mine have told me of instances of people relieving themselves in paper cups and then throwing these over crowds of people – frankly a very disgusting and antisocial thing to do. There is also a risk of injury to the person hit by the bottle/cup.

The festival has a paper cup deposit scheme. The scheme is very simple and straightforward and in my opinion did a great job at changing some of the incentives to reduce litter and anti-social behavior.

It worked by placing a deposit of 10p on the cup which each drink was sold in. A pint of beer would cost somewhere in the region of £3.50 ($7) which would include 10p which would be refunded when the cup was returned.

This created positive incentives for several different groups of people.

Those who’d have littered:

photo: bobcat rock

The 10p deposit multiplied by the number of drinks consumed over the whole weekend and the number of people in the group would have added up to a fair bit of money. I saw many people who had stacked up whole piles of cups in their backpacks, obviously with the intention of getting their deposits back at the end.

Some people would continue to litter. They would lose their 10p deposit which goes into the coffers to employ somebody who would tidy up the litter.

Those who were anti-social:

The deposit also creates a disincentive to throw the contents of your drink over large crowds of people for the same reasons: you’d never get your 10p back. I would say that this is actually quite a weak incentive as I still saw a fair amount of this happening. Whether me and my friends were drenched in cups of beer, water or urine I’ll never know. But whatever it was, I’m sure it would have been more of a frequent occurance if the deposit system didn’t exist to encourage people to hold on to their empty drink cups.

Those who were environmentally conscious:

photo: Matthew Johnston

I’d like to believe the vast majority of people would look for a bin to throw their rubbish into. For those people, it wouldn’t be any harder for them to hand them in to get a 10p deposit back instead. It’s a great way of rewarding environmentally conscious behaviour.

There are even more environmentally conscious people in society who would pick up other people’s litter in order to keep their own towns, cities and streets clean. Unfortunately, this doesn’t happen at festivals because nobody actually lives there – for 360 days a year, they don’t benefit from a cleaner environment at Reading Festival.

The 10p deposit rewarded these more environmentally conscious people and gave them incentives to keep the place tidy. I saw two enterprising girls who, in the interval between two acts, walked through the arena collecting the cups which people had left behind or thrown. They could probably have got a free lunch from the amount of deposit money recieved from returning the cups.

For the festival organisers:

The scheme costs very little. It saves the festival organisers money – the bins don’t fill up as quickly and litter in busy areas (where it would cause the most discomfort to revellers) would quickly be picked up by the revellers themselves. And there is no reason to think that the 10p price hike on all drinks would have caused a fall in sales, because everybody knew they’d get that money back.

Conclusions

photo: Steven Fernandez

This, in my opinion, is economics at it’s best. A scheme which benefits everybody – the organisers who recieve additional funds towards cleanup and have less to cleanup, the music fans who benefit from a more hygenic festival experience and the entrepreneurs who benefit from free lunches at the same time as helping to keep the environment clean. Best of all, it barely costs anybody anything.

Some of the big problems facing society today such as the environment can be solved with bottom-up approaches, harnessing the power of crowd-sourcing and economic incentives. These solutions are simpler, cheaper and infinitely more effective than the centrally-planned approaches such as employing huge armies of litter pickers. That, to me, is the beauty of good economics.