Coase Rules OK? Exploring Prospects for Private Sector Environmental Protection

JEL classifications: P48, Q57, H41Correspondence: Jeff Bennett, Crawford School

of Economics and Government, Australian NationalUniversity, Canberra, ACT 0200, Australia. Email:

THE ECONOMIC RECORD, VOL. 88, NO. 281, JUNE, 2012, 278–287

[email protected]

Coase Rules OK? Exploring Prospects forPrivate Sector Environmental Protection

JEFF BENNETT

Crawford School of Economics and Government,Australian National University, Canberra, Australia

� 2012 The Economdoi: 10.1111/j.1475

Environmental policy in Australia, and internationally, has beencharacterised by taxes, subsidies, regulations and direct stateprovision. These Pigouvian-inspired measures have paid littleattention to the institutional drivers (Coasian rules) that underpinenvironmental issues. A re-orientation towards environmentalprotection initiatives driven by institutions that are endogenous tosociety offers the potential to lower transaction costs and releaseexchange efficiency improvements of the type demonstrated byOstrom in the context of common property resources and William-son in the case of firm organisation. Australian examples ofprivate sector nature protection initiatives are used to demon-strate this potential.

I On Markets, Institutions and TransactionCosts

At the beginning of any economic analysis, itis worth reflecting on the merits of the marketas a mechanism for coordinating the activitiesof millions of self-interested individuals in theircollective interest. Of their own free will, peo-ple offer information on their preferences to theworld through this interaction with others in theprocess of buying and selling. This information,through price formation, signals the relativescarcity of resources and allows the reallocationof those resources through exchange with thosewho value them more highly.

Part of the reflection on the capacity of thedecentralised market system involves contem-

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ic Society of Australia-4932.2011.00783.x

plating the foundations on which its success-ful operation depends. These foundations areNorth’s (1990) institutions. They are the ‘rulesof the game’ by which self-interested individu-als interact with each other in markets. Fore-most of these institutions are those that allowfor the definition, defence and exchange ofproperty rights: the bundles of rights andresponsibilities relating to the use, holding anddisposal of scarce resources. With such a rightsregime in place, individuals have the incentiveto provide information regarding the relativestrength of their preferences for resources to themarket masses. This is the necessary ingredientfor the social coordination of resource usethrough the exchange of rights in the market-place.

The counterpoint to this situation is that inwhich the institutions associated with propertyright definition, defence and exchange are notwell established. Without these institutions, themarket mechanism will struggle to generate andtransmit information regarding the preferences

2012 COASE RULES OK 279

of potential suppliers and users of resources.The relevant preferences are those of each indi-vidual. However, it is important to note thatindividuals’ preferences relate to their own con-sumption and production as well as to the activ-ities of others. Their preferences are thusmotivated not only by their own well-being but,potentially, also by the well-being of others.1

Without the transmission of information onindividuals’ preferences, the conclusion drawnfrom most economic analyses is that reliance onthe market will ensure that resources are wastedthrough over-exploitation or under-supply. Thetemptation that follows is to conclude furtherthat some form of collective action is requiredto ‘correct’ the ‘market failure’ so occurring.This is the conclusion drawn by those econo-mists following the footstep of Pigou (1912)who advise the establishment of taxes and subsi-dies as remedies. Individuals who do not bearthe full costs or enjoy the full benefits of theiractions because market prices are not signallingcomplete information are taxed and subsidised,respectively, to reflect the existence of such‘externalities’.

The Pigouvian focus on the failure of marketsto deliver socially optimal resource use out-comes, and in particular the policy focus on‘internalising’ externalities through governmentintervention, remains a key element of currentenvironmental economics texts2 and a mainstayof many developed nations’ environmental poli-cies.3 The existence of externalities is seen as aprime justification for government intervention,even if tempered in some jurisdictions by arequirement to demonstrate that proposed poli-cies will improve community well-being relativeto a no-new-policy alternative.4

1 ‘Others’ may range from family and friendsthrough to far-distant strangers (such as people suffer-ing from starvation in developing countries) and mayalso include people who are yet to be born. In thisway, preferences include both ‘consumer’ preferencesand ‘citizen’ preferences (Rolfe & Bennett, 1996).

2 See as an example, chapter 4 of Tietenberg andLewis (2009).

3 For example, see the Australian Government’spolicies on native vegetation (http://www.environment.gov.au/land/publications/nvf/framework3.html)and biodiversity (http://www.environment.gov.au/biodiversity/publications/strategy/chap2.html).

4 The requirement for a Regulatory Impact State-ment (RIS) is consistent with this caveat (see http://www.finance.gov.au/obpr/ris/gov-ris.html).

� 2012 The Economic Society of Australia

As has been pointed out by Randall (1983)and Anderson (2004), the weakness of thePigouvian approach is that it fails to integrateinto its analysis any recognition of the reasonswhy the offending externalities arise in the firstinstance. An alternative approach that considersthe institutional roots of externalities offers theprospect of a broader base for understanding‘market failure’ and gives a different perspec-tive on the development of policy. This is theapproach that is underpinned by the work ofCoase (1960) who put forward transaction costsas the source of externalities. Without transac-tion costs, there would be no ‘externality gap’between social and private benefits and costs asparties are able to negotiate exchanges acrossresources and achieve all of the improvementsin social well-being that are available.

However, transaction costs are omnipotentand vary in their extent from context to context.The mere existence of transaction costs andhence externalities, does not therefore justifyintervention. Clearly it is in the interests ofsociety to reduce transaction costs to enjoy thebenefits of increased exchange. However, if thetransaction costs are greater than the efficiencydividends available from enhanced exchangethen it is not in the society’s interest to engagein that exchange.5 An understanding of the fac-tors that influence transaction costs is essentialin this pursuit of efficiency gains. The key dri-ver to transaction costs is the institutional struc-ture that underpins exchange.

Institutions range from internal, informalrules such as honesty and trust through to exter-nal, formal rules including the criminal codeand regulatory law (Kasper, 1998). In theabsence of institutions, exchange is more costly.The process of knowledge formation regardingothers’ preferences is more time consuming andrisky. With stronger rules of engagement inplace, transaction costs fall and more exchangeis likely with consequential improved gains insocietal well-being.

When small numbers of relatively homo-genous people are involved, the formation of

5 Note that interventions may be supported by thosein society who gain from the so-realised exchange ifthey are able to shift the burden of the transactioncosts to others. However, interventions should bejudged from the perspective of the whole of societyand take into account the net benefits of exchange netof transaction costs.

280 ECONOMIC RECORD JUNE

institutions (itself a costly process) is relativelystraightforward and may be achieved endoge-nously. The gains from potential trades are suf-ficiently strong to warrant the costs of formingthe initial institutions that then lower the trans-action costs of those potential trades. These arethe societal conditions that Olson (1965) formu-lated as being conducive to negotiated outcomesin cases where private property rights are notwell defined or defended. In such circumstance,notably where common property goods areinvolved, members of groups are more likely tobe able to negotiate rules that facilitate internaltrades of the type that Ostrom (1990) has cata-logued. Hardin’s (1968) concern for commonproperty goods was the ‘tragedy’ of over-exploi-tation. What Ostrom found was a multitude ofcontexts around the globe where the ‘free-riding’ motivation feared by Hardin has beenovercome through the operation of internalinstitutions.

The situation becomes more complex when thenumber of people involved grows and the groupis more heterogeneous. While the gains fromexchange are likely to be greater simply becauseof the increased group heterogeneity and henceincreased differences in the marginal values heldby individuals, the costs of reaching internalagreement regarding the rules of exchange andthe on-going costs of their monitoring andenforcement will also be higher. Here the incep-tion of external, formal institutions becomesmore important. Those institutions may beformed through political collective action (suchas an elected parliament) and enforced throughcollectively funded organisations (includingcourts, the police force and gaols). Fundamentalexamples of these external formal institutions arethose established by governments that underpinthe formation and operation of market exchange.They include the ‘black-letter law’ that definesownership rights and the punishments associatedwith breaches of those rights as well as the com-mon law that has established through precedentwhat constitutes a transgression of rights. With-out these external institutions and their associ-ated enforcement organisations that are alsoestablished by government, formal marketsinvolving voluntary exchange of rights would notform. The collective formation of external insti-tutions offers significant economies of scale thatlower the per unit transaction costs. In this way,government action to define and defend propertyrights can confer net benefits on society.

With similar logic, Williamson (2002) showedhow institutions may also be formed throughcorporate structures which draw together activi-ties within a single firm so that transaction costscan be lowered.

Still the question remains regarding the con-texts in which the costs of establishing externalinstitutions (beyond those that define and defendproperty rights) and the subsequent regime oftransaction costs are worth the gains to beenjoyed from exchange. Pigouvian policy initia-tives focus on the potential efficiency gains butthey largely ignore these transaction costs. AsAnderson (2004) points out, the adoption of aPigouvian ‘solution’ implicitly involves theestablishment of an institutional arrangementthat specifies a vestment of rights. Furthermore,by imposing the solution, he argues that theimprovements in resource use efficiency thatmay be achieved through subsequent trading ofrights after an initial Coasian allocation hasbeen made, are lost.

Put simply, it may not always be desirable toestablish collective institutions to allow trade tooccur because of the high initial establishmentcosts and the on-going transaction costs. Whilethe formation of endogenous institutions isguarded by the group’s awareness of the coststhey are undertaking to form their institutionsrelative to the expected benefits from exchange,there are no similar in-built restraints to the for-mation of exogenous institutions. The danger isthat institutions may be imposed on society thatmake it worse off, especially where externalinstitutions enable those who enjoy the benefitsof exchange are able to shift the burden of pay-ing the transaction costs to others in society.

Hence, in exploring potential policy approachesto issues traditionally branded as examples of‘market failures’ – in particular those involvingenvironmental aspects – alternative underlyinginstitutional structures warrant investigation.Anderson (2004, p. 452) puts this succinctly insetting out three questions that are central to thepolicy development process: ‘Why are the trans-action costs high; can they be reduced; and whatshould be done if the transaction costs cannot bereduced as a result of non-exclusiveness andnon-rivalry?’.

In the remainder of this article, these threequestions are addressed with reference to theprovision of environmental benefits that are notcommon property resources as defined byOstrom but are ‘open-access’ resources. While



common property goods can involve the exclu-sion of users, open-access goods cannot. Theyare not only joint (non-rival) in consumption inthat one person’s consumption of the good doesnot restrict its availability to others, but they arealso non-excludable.

II Why are Transaction Costs High?The non-rival and non-excludable characteris-

tics make the transaction costs and institutionalissues associated with open-access goods quitedifferent from those of common property goodsand call into question the relevance of Ostrom’sand Williamson’s conclusions. The specificcharacteristic of open-access environmentalgoods that is of most interest is the inability toexclude beneficiaries. For instance, the benefitenjoyed by people who know that an endangeredspecies or threatened ecosystem has beenprotected may form an exceptionally large andheterogeneous group, exclusion from whichthrough either internal or external institutions iseither at a very high cost or impossible.

The common analytical response to open-access resources is that, with such high transac-tion costs in place, institutions will not formendogenously. Furthermore, markets will beunable to deliver an efficient outcome becauseno profit-maximising supplier will be able tocharge a price for providing the resourcebecause free-riding will be endemic withoutexclusion. Even if a positive price could becharged it would be inefficient given the mar-ginal costs of supplying an extra user are bydefinition zero.

The common policy response is for the stateto become the monopoly supplier. Hence, thewidespread establishment of networks of state-owned and -operated national parks that providefor the protection of ecosystems and species.

So the answer to Anderson’s first question inthe context of open-access environmental goodsis that transaction costs are high because of thecomplexities ⁄ impossibility of establishing insti-tutions (internal or external) that can provideincentives for preference information to bemade available. The institutional arrangementsthat have emerged – involving the collection oftaxes, the development of environmental policyand the implementation of that policy – arecostly to operate. However, as the public’sdemands for environmental protection benefitshave increased, the community has supportedgovernment policy that involves incurring those


costs. In political economy terms, it is probablymore accurate to conclude that sufficient votersin sufficient marginal electorates have held envi-ronmental protection preferences that have beenstrong enough to swing their votes towards can-didates offering to impose the costs of stateenvironmental protection provision across thewhole community.

III Can Transaction Costs be Lowered?The next question Anderson poses is whether

these transaction costs can be lowered throughthe introduction of different institutional struc-tures. Of particular interest is the feasibility ofinstitutional structures that would reduce theprominence of the state as a provider of open-access environmental protection goods and ser-vices. This line of questioning follows the samelogic as that employed by those seeking tounderstand the role of endogenous institutions inthe provision of common property goods andservices: it looks for examples of contextswhere state provision has been usurped or atleast supplemented. For this article, Australianexamples are investigated.

(i) Terrestrial Ecosystem ProtectionTerrestrial ecosystem protection has long been

the province of government in Australia. Exten-sive networks of national parks have been setaside in all states. However, over the past threedecades, there has been a general slowing downin the rate at which new national parks havebeen declared. The last 20 years have witnessedan expansion in the network of privately ownedand operated nature reserves. The trend towardsprivate sector ‘nature conservation enterprises’was initiated by Earth Sanctuaries Pty Ltd, alimited liability company, and has been takenforward by Bush Heritage Australia (BHA) andAustralian Wildlife Conservancy (AWC), bothof which are not-for-profit organisations. Eachof these organisations has operated through thereceipt of private funds that they have used tobuy freehold title over land. In the case of EarthSanctuaries, monies were received from the pub-lic through the issuance of new shares in capitalraisings (Aretino et al., 2001). Both BHA andAWC seek donations from the public. EarthSanctuaries has faded in prominence over thepast 10 years after the company experienceddifficulties in having its prospectus for capitalraising approved by the corporate regulator(the Australian Securities and Investment


Commission – ASIC). The company was de-listed in 2005.6 However, the land holdings ofboth BHA and AWC have expanded. BHA(2011) currently owns and manages 33 reservescovering over 947,000 ha in six states. AWC(2011) owns 21 sanctuaries around Australiacovering more than 2.5 mha. Their purchaseshave sought to target the protection of particu-larly vulnerable species and ecosystems that arenot well represented in the estate of nationalparks.

This evidence of growth in the private supplyof environmental protection assets indicates thatthe publicly established and maintained institu-tional structures underpinning the private owner-ship of land are sufficient to see the emergenceof an alternative to state ownership for environ-mental protection. The transaction costs associ-ated with private ownership have been at a lowenough level under the arrangements put in placeby BHA and AWC for individuals to pay for thegoods and services offered. Notably, the goodsand services provided are largely non-exclud-able. For instance, donation to the organisationsdoes not give exclusive visitation rights todonors. What is enjoyed by donors is the knowl-edge that the areas of land purchased with theirdonations, and their associated ecosystems andspecies, are protected. This is available equallyto non-donors.7

Both AWC and BHA have lowered the trans-action costs for individual donors by providing

6 In conventional accounting terms, Earth Sanctuar-ies was unprofitable. Its reserve visitation revenueswere less than its operational costs and so unable tosustain expenditures on further expansions of its hold-ings. Its modus operandi of securing cash flow foroperation and expansion through raising more capitalwas successful when operated as a private companywhose shareholders were essentially donating the pur-chase price of shares. As a publicly listed company,Earth Sanctuaries had to justify its share float pricein a formally approved prospectus that set out itsnet asset position. The application of conventionalaccounting principles established a net asset value ofthe company that was far less than the float price.

7 While the benefits arising from making a donationare non-excludable, the enjoyment from the act ofgiving is the donor’s alone. The reasons why peopledonate to these organisations have not been investi-gated; however, they are likely to involve ‘citizen’(altruistic) as well as ‘consumer’ (selfish) dimensionsgiven the non-excludability characteristic of the bene-fits provided by the donation.

a vehicle for them to pay for an expansion inthe supply of protected areas. The organisationshave established mechanisms that the generalpublic trusts to deliver outcomes and throughtargeted advertising campaigns have made thatavenue well known amongst those with strongnature protection preferences. Established donors areapproached regarding campaigns to raise fundsfor the purchase of specific areas and are thenkept well informed regarding the progresstowards the goal. Success is widely reported inthe media. Bequests are particularly welcomedwith the costs of making the necessary arrange-ments being accommodated by the recipientorganisation.

These private organisations have sought tomeet a community demand for environmentalprotection that governments had not met. Theyhave been able to mobilise funds that tradition-ally would have been thought trapped by free-riding. However, their approaches to loweringthe effective costs of private supply have notbeen without government assistance. Mostimportantly, tax deductibility status has ensuredthat the individual’s cost of a donation made islowered by their marginal tax rate. Furthermore,some of the AWC portfolio has been securedwith dollar-for-dollar matching grants from thefederal government. By providing assistance inthis way, governments have been able to assistin satisfying the demands of those with strongerenvironmental preferences than the median voterat lower costs to their other spending targetsthan would arise from state ownership and man-agement (Weisbrod, 1975).

The operations of BHA and AWC haveinvolved the generation of endogenous institu-tions to lower the transaction costs of peopleinterested in terrestrial environmental protection.However, they have both worked within estab-lished external institutions. Their land purchaseshave been facilitated by the government’s role indefining property title and enforcing the rights soestablished. The stability of these institutionaland organisational settings provides levels ofcertainty that further lower the transaction costsfor the ‘buyers’ of environmental protection.BHA and AWC have also sought, through thepolitical process, access to taxpayer funds toincrease the value generated for donors’ money.

(ii) Riparian Ecosystem ProtectionA similar modus operandi to that employed

by BHA and AWC is now developing amongst



organisations seeking to supply environmentalprotection benefits in riparian ecosystemsthrough the purchase of water entitlementsin river systems that have been modified byirrigation.

The environmental condition of rivers in theMurray Darling Basin deteriorated over the lastcentury as progressively more water was with-drawn from the system for irrigated agriculture.State allocations of licences to extract water forirrigation was driven by the political strength ofirrigators to the point where in the state of NSWthere were licences for more water extractionsthan there was water available even in the wet-test years. A combined recognition that the allo-cation of irrigation water entitlements wasflawed and that some riparian ecosystems wereon the point of collapse stimulated a policyresponse that involved the setting of a cap onfuture extractions, the development of propertyrights to water that were separate from land titleso as to facilitate the emergence of a water mar-ket and, more recently, to a programme of gov-ernment-funded ‘buy-backs’ of entitlementsfrom irrigators. In this way, the state has insti-tuted a set of external institutions in an attemptto provide for the more efficient use of thewater resource.

Trade in water entitlements has ensured thatwater for irrigation has moved to higher-valueduses. Trade also allowed better adaptation toperiods of drought. The establishment of titleover water has also permitted government toenter the newly established water marketsto buy entitlements to be managed by the‘Commonwealth Environmental Water Holder’(CEWH) specifically to achieve environmentalgoals such as improving the condition of flood-dependent ecosystems along the rivers of theBasin (e.g. wetlands and River Red Gum for-ests). Entitlements to 1001 Gl were being heldby the CEWH as of 31 July 2011 and as at 30June 2011, 550 Gl had been applied to secureenvironmental improvement to rivers, wetlandsand floodplains (Australian Government, 2011).

The establishment of tradeable water title hasalso provided an institutional base for the emer-gence of private sector entities whose goal is toprovide environmental improvements in water-dependent ecosystems along the rivers. Forexample, Healthy Rivers Australia (HRA) hasestablished a ‘water bank’ that holds watereither donated by entitlement holders or pur-chased using funds from donations and sponsor-


ships. This water is made available, onapplication, to individuals or organisations thatpropose to use it for riparian ecosystemimprovements. For example, HRA has supplied30 Ml of water to support the reintroduction ofthe Southern Purple Spotted Gudgeon, an endan-gered fish species, into the Paiwalla Wetland inSouth Australia. This followed a successful cap-tive breeding programme undertaken by HRA inconjunction with another private not-for-profit,Native Fish Australia. A further 1500 Ml wasprovided to supplement the 2011 watering of theMurrumbidgee wetlands (HRA, 2011).

In comparison with the allocations made bythe CEWH, the private sector contributions ofHRA are minor. However, the history of privateacquisitions of water title for environmentalpurposes is short, given that it is only compara-tively recently that water title has been definedseparately from land title so that separateexchange could take place. Indeed, it is impor-tant to note that the establishment of HRA hasbeen stimulated by the formation of water mar-kets that in turn were made possible by theexternal institutions associated with water enti-tlements. Government initiatives to form sepa-rate title to water, establish a register of titleand back those institutions with enforcementmechanisms that were essential to the formationand operation of HRA. Furthermore, grants fromgovernment have been important sources offinance for HRA, and tax deductibility of waterdonations has been granted. In June 2010, theAustralian Valuation Office determination thatthe donation to HRA of a temporary entitlementto 48.4 Ml would generate a tax concession of$16,900 established an important precedent.

A further initiative in this regard is the forma-tion of the Environmental Water Trust by theNSW Nature Conservation Council (NCC), theumbrella organisation for environmental non-government organisations in the state of NSW.Originally formed to accept donations relatingto a campaign to buy water entitlements thatwere scheduled to be auctioned for irrigationdevelopment on the Warrego River in the north-west of the state, the Trust’s remit was broad-ened when political lobbying proved effective inpreventing the auction from going ahead. Thetransaction costs associated with securing politi-cal favour were clearly lower for the NCC thanthose associated with establishing and managingthe Trust as well as the subsequent costs ofmanaging the water entitlements to be procured.


Again, the NCC has secured tax deductible sta-tus for donations to the Trust (EnvironmentalWater Trust, 2011).

These examples of terrestrial and riparianenvironmental protection demonstrate the evolu-tion of different endogenous institutionalsettings in the context of open-access environ-mental goods and services. The benefits antici-pated by donors to the organisations describeddo not involve direct use of the assets protected.They are therefore fundamentally different fromthe land-based common property resourcesdetailed by Ostrom and the fishing benefits pro-vided (exclusively) to those supporting watertrusts in the western United States (Scarborough& Lund, 2007). They are specifically in the cate-gory defined by Anderson’s third question: thosegoods with the characteristics of non-exclusive-ness and non-rivalry. So while the relativelynascent Australian cases documented beforedemonstrate the reality of endogenous institu-tions developing to lower transaction costs, it isalso appropriate to ask what more can be donegiven their special characteristics.

IV Transaction Costs under Non-Rivalry andNon-Excludability

The nature reserves that have been establishedby BHA and AWC provide non-excludable, non-rival goods in the form of ‘non-use’ values suchas the knowledge that species and ecosystemscontinue to exist for this and future generations.However, they also provide potential use valuesassociated with visitation. Even though many ofthe reserves in these organisations’ portfoliosare remote and vast, there are prospects for visi-tor access and exclusion of those who are notdonors (either previous to the visit or at the timeof the visit through a pseudo entrance fee). Suchvisits would be non-rivalrous (up to a conges-tion threshold) but potentially excludable. Thisraises the prospect of the joint production ofnon-use and use values from environmental pro-tection (Demsetz, 1970), whereby exchanges aremade in conventional markets for the use valuesthat provide for the supply of the joint non-usegoods.8

8 Note also that private suppliers of open-accessgoods and services often combine the act of donatingwith the provision of private goods such as T-shirtsthat allow donors to signal their status, which may inturn be of social value.

There would appear to be no externallyimposed barriers to prevent a visitation marketemerging. Innovative ways of excluding userswho do not pay are already in place in somegovernment operated national parks. Forinstance, visitors may be required to pre-purchase entry passes that must be displayedwhen in the park and are subject to (low-cost)random checks with heavy penalties for non-compliance. The reluctance of AWC and BHAto embark on this type of venture is thus a signthat the transaction and operational costs arehigher than the expected returns. The EarthSanctuaries experience is salient. Their goal wasto engage in ‘ecotourism’ to fund reserve acqui-sition, however, apart from one reserve that waslocated adjacent to the city of Adelaide in SouthAustralia, visitation demand for the relativelyremote sanctuaries was insufficient to generatesufficient revenue to fund the enterprise.

Proximity to major population centres – andthe associated low travel costs of visitation – istherefore an important factor in generating suffi-cient use value revenues to allow successfuljoint production of non-use benefits. The ironyof this is that heavy visitation may not be con-ducive to species and ecosystem protection, andmany of the endangered ecosystems and speciesare in the more remote areas where developmenthas not yet led to their demise. Hence, for thejoint production model to be successful, thejointness has to extend across a portfolio ofassets and involve cross-subsidisation within theventure. Without reserves adjacent to the cities,this is not feasible, and the establishment of pri-vate reserves in these locations may be chal-lenging given that land prices near cities areunlikely to be attractive and because of thecompetition well-established state-owned andoperated national parks would provide.

It is useful to note that the existing portfolioof national parks that are city-proximate assetsdo charge entry fees, and exclusion is enforced.However, the revenues raised by these ‘cityparks’ is not directly used to cross-subsidiseremote parks. Rather, park revenue is paid intothe state’s consolidated revenue. Hence, individ-ual park managers have no incentive to encour-age use so as to generate revenue flows for usein managing the asset under their control. Man-agement funds are fixed as amounts allocatedfrom the overall parks service budget. The pros-pect of cross-subsidisation across the portfolioof different assets is even more unlikely.


9 http://www.washingtonpost.com/wp-dyn/content/article/2007/06/26/AR2007062600880.html.

10 http://www.theage.com.au/environment/conservation/shakeup-ends-wilderness-society-feud-20100701-zn0r.html.


One possibility for institutional reform thatthis observation points to is the prospect fornational park assets to continue to be owned bythe state but to be operated by private sectorinterests. Such a strategy would avoid the politi-cal backlash that could be expected from theprivatisation of the national parks estate. How-ever, it would inject some competitive pressureto lower costs and provide improved customerservice as well as introduce the prospect of jointproduction of excludable use benefits and non-excludable non-use benefits. The long history ofpublic–private partnerships (PPP) in the supplyand management of infrastructure and the pri-vate management of utilities gives some point-ers as to how reform in the nature protectionsector may proceed. For instance, the right tooperate a protected area may be offered for auc-tion by the state at predefined intervals throughtime. Bids received may be positive or negativedepending on expectations of income flows.Revenue raised by the state from the auctionsmay be used to fund payments made to negativebidders who require payment to manage remote,little used but biodiversity-rich areas. Alterna-tively, bids may be received for ‘bundles’ ofprotected land assets that encompass high- andlow-use areas.

In the context of riparian ecosystem protec-tion, water entitlements held by the state forenvironmental purposes could be treated similarly.Organisations gaining access to entitlementswould be motivated to achieve environmentalimprovements at least cost through timelyaction, unimpeded by bureaucratic approval pro-cesses. They would also have access to watertrading as a source of income. As environmentaldemands for water are countercyclical to irriga-tion demands, the prospect is for environmen-tally motivated entitlement holders to sell whenirrigation demand is strong and buy when it isweak. Profits so generated could be used tocover the operating costs of the organisation andpotentially an expansion of their entitlementholding.

An important aspect of these possible reformsis that they require the state to step back fromits past prominence as owner and manager ofenvironmental assets. To test the viability ofprivate sector initiatives, the ‘crowding outeffect’ of government action must be removed.As Schlager and Ostrom (1993) report, theintroduction of external institutions into con-texts where internal institutions had ensured the


sound management of a common propertyresource can be destructive. Similarly, theremoval of external institutions may be neces-sary to see the emergence of internal institu-tions. The on-going success of BHA, AWC andHRA will be in part determined by the actionsof the state as a competitor supplier of natureprotection services. A policy of expansion of thestate’s holdings of national parks, for instance,would be likely to reduce the willingness of thegeneral public to donate to BHA and AWC. Thecontinuation of the government’s water buy-back policy (Australian Government, 2011) willmake HRA’s task of raising funds more diffi-cult: media coverage of riparian ecosystemsrecovering due to the actions of governmentwould make the public less likely to be con-cerned that government action is not enough.

A potential source of governmental concernin shifting its role from direct provision toco-funder of privately owned and managedprotected environmental assets is the account-ability and transparency of private sector opera-tions. Controversies surrounding the operationsof two high-profile not-for-profit conservationorganisations, the Nature Conservancy in theUnited States9 and the Wilderness Society inAustralia,10 have brought such concerns toprominence. The incentive for private sectoroperations that survive financially through thecontinued flow of donations is to maintain theinternal institution of trust held by the donatingpublic. Transparency and accountability is keyto this. Pidot (2005) contests, in the context ofconservation easements owned by land trusts inthe United States, that governments should insti-tute a new layer of institutions to ensure theperformance of the private entities. Specifically,he argues that land trusts

should be legally accountable for upholdingtheir part of the bargain, including monitoringand upholding the terms of each easement andassuring that its public benefits are secured inthe future … (and that) … (t)he process bywhich conservation easements are designed,appraised and managed should be more rigor-ous, publicly transparent and accountable.


The introduction of institutions to ensure theseoutcomes would necessarily add to the transac-tion costs associated with private provision.Such rules associated with disclosure regardingacquisitions and management could be designedso that they mirror the disclosure standards ofprivate sector organisations that already havestrong incentives to maintain the trust of thedonors. This would ensure that any added trans-action cost burden would be minimal for suc-cessful operations.

V ConclusionsThe award of the Nobel Prize in Economics

for 2010 to Elinor Ostrom and Oliver William-son signalled the significance of institutions andtransaction costs to the discipline and acts toreinforce the impact of Ronald Coase’s analysisthat goes back to 1960 and was recognisedthrough the award of the 1991 Nobel Prize inEconomics.

Despite this recognition, environmental policyin Australia and internationally continues to bemore influenced by Pigouvian thinking. Are-orientation of policy to recognise the potentialoffered by endogenous institutional arrangementsto lower the transaction costs associated with theprovision of environmental protection goods andservices requires exploration. Australian exam-ples demonstrate that existing government estab-lished and maintained institutions associatedwith the definition and defence of land and waterproperty rights have been sufficient to see thedevelopment of internal institutions that haveunderpinned the success of a number of privatesector nature protection initiatives.

While the role to date of the private sector asa supplier of protected terrestrial and riparianecosystems in Australian is small relative to thatof the public sector, its history is relativelyshort. That role has also developed in an institu-tional context that has been dominated by publicsector provision. Further development of privatesector initiatives may be possible, but these arelikely to depend on the state relinquishing someof its current roles. This would reduce the‘crowding-out’ effect of government provisionand would also reduce some ‘barriers to entry’(Demstez, 1982) that currently act to restrainprivate sector action.

The evolution of internal institutions may notbe speedy. People in Australia have long experi-ence, and hence expectation, of governmentownership and management of protected natural

areas. A shift towards private sector involve-ment and the associated internal institutionsmay take time. However, transitional strategiessuch as PPP offer a way forward. Already pri-vate concessionaires are active in many nationalparks offering services ranging from kiosks toguided tours. Aboriginal custodians of nationalpark lands have also taken on active manage-ment roles, particularly in Northern Australia.Changing the way these interactions betweenthe state and the private sectors are managed sothat they provide competitive incentives for thejoint production of use benefits along with eco-system protection benefits offers a first step.

Nor should it be expected that the transitionwill achieve a ‘nirvana’ of Pareto-efficientresource allocation. What can be expected is animprovement in the well-being of society thatacknowledges the costs associated with the pro-cesses that generate the resource use outcomes.

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Coase Rules OK? Exploring Prospects for Private Sector Environmental Protection

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