Are property rights now more clearly defined for organic farmers in Minnesota?

Michael Giberson

The United States Supreme Court chose to let stand a Minnesota Supreme Court decision concerning the rights of organic farmers exposed to pesticide drift from neighboring conventional farms. In the case Johnson v. Paynesville Farmers Union Cooperative Oil Co., the organic-farming Johnsons had sued conventional-farming Paynesville for damages after pesticide drift from Paynesville’s farm damaged the Johnson’s organic crops and required some of Johnson’s fields to be held out from organic production for up to three years. The U.S. Supreme Court action left in place Minnesota’s decision which held Paynesville was not responsible for harm to the Johnsons’ organic crops.

The case provides a good background for exploring questions of externality and property rights (i.e., a real live case for contemplating Coasian reasoning):

  • At one time both the Johnsons and Paynesville engaged in conventional farming, including the application of pesticides. Pesticide drift was a non-issue.
  • In the 1990s Johnsons decided to switch to organic farming. They posted signs declaring the property was to be used for organic farms, established a buffer zone between their organic fields and adjacent properties, and asked Paynesville to take actions to avoid overspraying Johnsons’ fields. Then they operated without pesticides for three years in order to qualify to market their product as organic.
  • Subsequently, pesticide drift from the Paynesville farm has resulted in damages to the Johnsons on at least five occasions: crops have had to be sold at lower non-organic prices, crops had to be destroyed, and fields had to be held out of organic production for three years after the pesticide overspray.

The story may be framed as a simple case of negative externality: Paynesville’s operation are imposing an external cost (i.e. “polluting”) the Johnsons’ operations. The beginning economist will jump to the conclusion that efficiency requires a tax on Paynesville, or, in the case of a more thoughtful student, liability for damages.

But the question of who is creating the externality is a bit more complicated, observes the more advanced economics student. After all, pesticide drift is only a problem because of the Johnsons’ choice to go organic. You might say that the Johnsons caused the problem by starting up an organic farm in an area they knew was subject to occasional pesticide drift. If you build your house adjacent to an airport, you don’t really have much ground to subsequently complain about the related noise and traffic.

In class discussions when I’ve talked about this case, most students will side with the Johnsons at first. The question that moves many of them back to Paynesville’s side is this: “If Paynesville had the right to its manner of operations before the Johnsons switched, how did the Johnsons acquire the right to force Paynesville to change its operations?” Or sometimes, this question: “No one is too worried if Johnsons’ choice results in a higher cost of operation for the Johnsons, but on what grounds do the Johnsons get to impose a higher cost of operation on Paynesville?”

(Note that you can move students to the Paynesville side by asking, “What right does Paynesville have to limit the Johnsons ability to farm the way they please on their own farm?” Also relevant, Minnesota farming regulations prohibits the application of pesticide in a manner that damages neighboring property, and the State has cited Paynesville for violating this rule in the past.)

Now that it appears that the legal matters are settled–the Johnsons’ choice to go organic does not impose restrictions on how Paynesville operates–Coasian thinking would have us expect the least-cost avoider to take steps to minimized the costs associated with pesticide drift. I can imagine several possibilities, but have no idea which would be least cost:

  • Johnsons pay Paynesville to exercise greater caution to avoid pesticide drift.
  • Johnsons expand their buffer zone between the organic crops and the Paynesville property.
  • Johnsons simply suffer occasional pesticide drift and attendant costs.
  • Johnsons return to conventional farming on their property.
  • Johnsons sell and relocate their organic farm elsewhere.
  • Johnsons buy out Paynesville (i.e. Paynesville relocates its conventional farm elsewhere).

Because this is a case in which the number of parties is small on each side of the externality, the costs of negotiation should be small and so ‘transactions costs’ ought not be a barrier to obtaining the least cost solution. Of course if the least cost adjustment is fully in the Johnsons’ control then it will not require negotiation at all.

NOTES: The first link above includes a summary of the case and links to related documents including the Johnsons’ appeal to the U.S. Supreme Court. The Johnsons’ appeal includes a lengthy appendix with the text of the Minnesota court decisions.

Lynne and I have each written about this case before: Lynne here, and me here and here.]

Any reason to be worried about wind power industry layoffs?

Michael Giberson

In an article titled “4 Reasons All Americans Should Be Worried About Wind Layoffs,” you’d think there would be at least one reason that people should be worried about wind industry layoffs.

Sadly, no.

Instead the author tells the reader: (1) wind power installations are largely in GOP-held congressional districts, (2) the U.S. is losing the “race” with China to build the most wind power, (3) fossil fuels receive tax breaks too, and (4)  natural gas prices are low.

The only substantive content in the short piece was a casual invoking of “the externalities of fossil fuel.” I’d encourage the writer to hold on to this sentence, toss the rest, and start again.

Demsetz discusses Coase’s mistake on Pigou and social costs

Michael Giberson

Last summer, Harold Demsetz spoke at the Property and Environment Research Center on Ronald Coase’s big mistake in “The Problem of Social Cost.” PERC has just posted the video.


Harold Demsetz lecturing on Coase's mistake in "The Problem of Social Cost."

The article he is presenting is, “Fallacies in the Economic Doctrine of Externalities,” but I bet in the written article he doesn’t say, “what the hell is a court doing in this model?” (at least not in those words).

Demsetz notes that his title is a nod toward Frank Knight’s 1924 response to Pigou, “Some Fallacies in the Interpretation of Social Cost.”

External costs of energy production, auditing the Energy Star program, and more

Michael Giberson

NewsWatch:Energy puts together a pretty good list of energy links, today noting the National Research Council’s new “Hidden costs of energy: Unpriced consequences of energy production and use.” (Surprise: coal looks bad. But note that much of the harm arises from a small number of coal-fueled generators.  The rest of the coal-burners are not awful.)

Also, a Department of Energy audit of the the Energy Star program “has concluded … that it does not properly track whether manufacturers that give their appliances an Energy Star label have met the required specifications for energy efficiency.” From the New York Times.

NewsWatch:Energy also notes the flare-up at the Texas Energy and Environment blog over informal remarks by the Oncor CEO on the lack of value from restructuring electric power in the state. Later Oncor issued a formal statement by the CEO. The official story: “In the long-run, deregulation – even with the short-run challenges we had – is the best decision Texas could have made.”

Hey, I just noticed that they also linked to my post on the Economics of Tres Amigas. Wow, they really are good at finding the best stuff. :-)

More links at Chron Energy Newslinks 10.20.09.