The Political Transaction Costs and Uncertainties of Establishing Environmental Rights

Abstract

The significance of transaction costs for the analysis of environmental policy is increasingly recognized. This article focuses on one aspect of the topic: the political uncertainty and transaction costs of establishing environmental rights. Our contribution is to model the political process around the rights establishment, and to monetize the associated welfare costs. The model includes both policy-related and political–institutional parameters, including the extent to which environmental rights are shared with polluters; the environmental benefits of the policy; the policy's abatement costs, and the relative political power of polluters and environmentalists. The model is solved to give unique Nash equilibria for the transaction costs of lobbying, and for the probability of the policy's political success. These results are then used to show the degree to which political actions can dissipate the expected economic surplus from environmental policymaking.