Friday, March 03, 2006

Wind Power Off Cape Cod

This article posted on the Environmental and Urban Economics Blog discusses a project to build a "wind farm" to provide 3/4 of the power to the Cape Cod area of Massachusetts. However, the efforts are currently being blocked by a group of residents called the Alliance to Protect Nantucket Sound. The author states that the Coase theorem should be applicable here.

How could the Coase theorem be used in this case? Any guesses at what the efficient solution may look like?


Arthur said...

Clearly, the Coase theorem should be applicable here. In the parts of Cape Cod where these wind turbines would be located perhaps home owners nearby should receive some compensation for the implicit takings if their view and overall quality of life will be impeded. How much money? That should be negotiated.
The Coase Theorem: Given well-defined property rights, low bargaining costs, perfect competition, perfect information and the absence of wealth and income effects, resources will be used efficiently and identically regardless of who owns them.
The Coase Theorem seems to present both opportunities and insurmountable problems. However, the biggest obstacle is the allocation of property rights.
Low Bargaining costs are not possible – ever try to hire a lawyer? Combine this with perfect competition, and the absence of wealth and income effects and the ability to apply the Coase Theorem goes with the wind.
However, Coase conceived a specific bundle of property rights. You may not have the right to drive your car across my property but you do have a controlled right to fly overhead. Such a similar limitation on property rights would be applicable here.
It is understood that riverfront property and the travelling on that river is allowed even though it may mean standing on a so-called private beach. I may not be allowed on the Kennedy compound but I can certainly sail by on the ocean. Obviously there are already limitations to the property rights of those beachfront properties who would have the ability to see the windmills on the horizon on a good day.
What would the property owners be compensated for? Of course their view would be altered and a potential reduction in property values. Without perfect information and perfect competition we would be unable to determine what, if any, reduction in property values there would be. Since the windmills would be six miles away I would suggest that most people would not be bothered by their presence. In other words, The Owner would have the ability to sell their property with no loss in return as the Buyer would not be bothered by the windmills. Those property owners then would be compensated only for the loss of unobstructed view.
Now we must consider other property owners – most of whom do not own those beachfront views. They would benefit from reduced pollutant particulates in the air, stabilization, if not reduction in the costs of power, and enhanced home security from being 113 million gallons less dependent of fuels from foreign sources. [It must be noted that New England does not have one single source of oil nor does it have any refining capacity. All pertoleum products must be imported in a refined state.] Recognize that even the beachfront property owners would appreciate these benefits and any compensation they might be due for the loss of their view would therefore be tempered.
In fact, one could conclude that the increased costs of energy, increased pollution and continued insecurity borne as a result of those property owners blocking this project far outweighs the rightful compensation to the beachfront owners for the loss of their view. Under a ‘Polluter Pays’ system it would be the liability of those who cause the pollution to bear the associated costs. In this case it might be appropriate for those with the great view to pay everyone else for the spillover effect of their maintaining that great view.
The problem is determining who is assigned what property rights. I would suggest that since it is acceptable to fly six miles over a beachfront home and perfectly legal to sail a boat six miles in front of that private beach, the arguments of the homeowners seems to bear little weight. The loss of benefits to the neighboring society as a result of maintaining the unobstructed view would therefore be compensated through payments made by those property owners.
This now changes the supply and demand equation of both the property owners with the view as well as those who benefit from being compensated for the resulting high costs. The net effect of that cash payment negates those high costs and would create a higher demand to live in that area altering the initial situation. There would be increased energy needs for the larger population and the property owners that are subsidizing those neighbors should not be held liable for the new situation. Therefore, you cannot segregate the wealth and income effects that are a basis of the Theorem.
In the end, the purpose of the Coase Theorem is to allow the market to resolve the issues of spillover that affect persons not connected to the initial problem. As with so many theories it fails in the light of reality. Ultimately, government, or the courts, must decide who would have what property rights. In this case it seems more efficient for government to declare that the beachfront property owners do not have rights to effects to their property that are six miles removed.

Brian Zabell said...

This is more of an attack on Alliance to Protect Nantucket Sound rather than regarding Coase, but I find their arguments to be ridiculous, hypocritical, and irrelevant.

Their main "concern" is how close the project is to the Nantucket Sound. The article mentions clearly that the Cape is "visible, though barely so, on the distant horizon." On top of that, Cape Wind would actually clean the local air!

If you don't have to see it and it's cleaning the local air, I do not see exactly where the harm for the locals comes from.

I personally believe Mr. Don Young just feels threatened that his Alaskan oil money might not be as valuable if Cape Wind is a success. That's the only reason I can think of.