Addressing Global Environmental Externalities: Transaction Costs Considerations

Abstract: This review examines collective action to address global environmental externalities with a transaction cost framework to examine why the results can be so mixed. The approach views international cooperation as a contractual process that assigns property rights to long-term benefits and costs of externality mitigation. It focuses on the costs of negotiations among politicians and organized parties and among country politicians in establishing national positions and negotiating international agreements. It differs from the literature on international environmental agreements that models states as primary actors and thereby abstracts from the process by which internal parties assess the net gains of collaboration and how their objectives are aggregated into cross-country efforts. National leaders cooperate if it serves domestic interests to do so. Four factors raise the transaction costs of assigning property rights: (i) scientific uncertainty regarding the externality and its response to collective efforts; (ii) varying preferences and perceptions as affected by wealth and the marginal value of consumption; (iii) asymmetric information about the benefits and costs of mitigation; and (iv) lack of compliance with agreements and new entry. Testable implications are drawn and used to examine local common-pool resources (CPRs); to draw implications for scaling up; and then to analyze global externalities, including the provision of reserved areas and national parks, application of the Convention on the International Trade in Endangered Species, the Montreal Protocol to control the emissions that damage the stratospheric ozone layer, limits on the harvest of highly-migratory ocean fish stocks, and efforts to limit emissions of greenhouse gases (GHG) and related climate change. A transaction costs framework provides a fruitful way of analyzing the potential for successful collective action to address global environmental externalities.