3.2.2 Understanding market failures and incentive schemes
Why intervene? A market failure perspective
Individual landholders respond to a variety of incentives when making decisions about land management( Wills, 1997). Markets based on private property rights are the most widely used mechanism for signaling incentives to individuals in western society. At present, landowners are rewarded for land uses that produce marketable outputs( such as cattle production for beef in the BBB) but not for other socially valued products such as the maintenance or enhancement of public goods( in this case managing land processes to minimise the runoff of TSS onto the GBR). As a result, landholders produce products which are paid for by the market( cattle) at the expense of other products which may generate a public good, but which do not earn landholders an income. When the market fails to supply a good to the level that is socially desirable, market failure is said to have occurred and government intervention may be justified( Murtough et al., 2002). 10
Government intervention may be in the form of regulation, through addressing and rectifying market failures and the establishment and support of a market( Market Based Instruments MBIs), through other means such as coercion or through schemes that combine techniques and also draw on partnerships and social networks( Buitelaar, 2007).
Coupled with an understanding of the public private benefits associated with the application of incentive mechanisms, applying a market failure analysis assists in the process of understanding barriers to the adoption of desirable land management and subsequently begins to help understand types of intervention that may be successful and their design.
Why do markets fail and what does this mean for incentive mechanism selection and design?
The perfect market has a number of characteristics. Namely, unlimited buyers and sellers, complete information, zero cost to trade( transaction costs), completely and costlessly defined and enforced property rights and no entry, exit or capital constraints. Based on this statement, there are a number of design components that are critical to enabling a market to function. These are discussed in this section with the market failures present in the BBB summarised in Table 6.
Property rights are completely defined and enforced
A property right defines who may use an object, who controls the use of the object, who may receive benefits from the object, and who legally has the ability to impose costs on others in relation to the object( Bromley, 1989). To achieve the maximum possible benefit from a right in a private property regime, the right must have the characteristics of excludability, divisibility and transferability. Each is discussed below.
Excludability allows the owner to exclude others from consuming outputs. This feature relies on the practicality of identifying and stopping potential consumers. If potential consumers can be
10
Government intervention is only justifiable if it is welfare enhancing and the benefits of the intervention outweigh the costs( see Coggan et al.( 2010)) and Coggan( 2012).
.
32 | Landholders driving change: Exploring new incentives