Cross-Sectoral Externalities Related to Natural Resources and Ecosystem Services

Abstract

Standard approaches to environmental and natural resource use externalities generally focus on single-sector resources and user groups. Remedies include Pigouvian-style government constraints, small group controls following Elinor Ostrom, or less frequently, bargaining across users as outlined by Ronald Coase. However, many difficult natural resource management problems involve competing uses of the same resource or multiple interdependent resources, across multiple, heterogeneous sectors. Cross-sectoral externalities are generated and impede attainment of conservation objectives. The multiplicity of resources and stakeholders, who may have different property rights, hold different use or non-use values, have different traditions, or fall under different regulatory regimes, increases the likelihood of multi-jurisdictional conflicts. We provide an institutional analysis following Oliver Williamson’s four-levels of institutions (social embeddedness, institutional environment, governance, resource allocation) to illustrate the sources of potential conflict, the costs of addressing them, and the potentials for exchange. In comparing the costs of alternative approaches, we include transaction costs associated with property rights; the costs of lobbying, implementing, and enforcing government regulation; and the costs of scaling up from small-group controls when resource problems involve multiple sectors and heterogeneous populations. In our illustrative case examples, instruments that are not formal property rights are exchanged at lower transaction costs. We close by discussing how Coasean, Pareto-improving voluntary exchange agreements may be lower cost, more effective, and more durable solutions than alternative management regimes to mitigate cross-sectoral externalities.