Lant and colleagues (2008) correctly identify social inefficiencies that cause the underprovision of ecosystem services. Ecosystem services are a case of positive externalities. They are nonexcludable— people benefit from them whether they pay or not. Because they get little or no compensation, landowners have little incentive to provide the services and to protect the ecosystems. Also, pollution and other negative externalities of human actions cause the decline of eco-systems and their services.
To increase efficiency, Lant and colleagues propose designing new democratic institutions with spatial and hierarchical structures congruent with the scale of ecosystem services. These institutions would collect taxes from the beneficiaries of ecosystem services and from agents that produce negative externalities, and reward landowners for the provision of ecosystem services, thus generating incentives for the cost-effective protection of ecosystems and biodiversity.
The problem with this idea is that the democratic political process also suffers from externalities. Just as landowners in a free market put their land to the most rewarding use for themselves, and not necessarily for society as a whole, political agents also look after their own interests.
The most basic ingredient of efficient democracy is a knowable and thoughtful electorate. However, voters have little incentive to spend the time and effort to inform themselves and think about the political issues—in our case, the details of environmental management. A voter's effort benefits the whole of society in a nonexcludable way, and only a small fraction of this benefit accrues to him or herself. Voters who spend considerable effort in making up their minds end up reaping the same rewards as voters who spend little or no effort. As a result, most voters spend very little effort. Moreover, because the costs of bad policies are borne by all, and only a small fraction falls upon each voter, voters often indulge in selfserving but irrational ideas that harm society—a case of negative externality. Caplan (2007) has found that voters have systematic biases that do not cancel out as simple random errors would. This leads to systematically bad policies. The same kind of analysis of self-interest and positive and negative externalities applies to politicians (who promise and enact policies that are popular instead of optimal), bureaucrats, and lobbyists.
Thus, Lant and colleagues want to address the externalities of commercial markets by creating a system that is also plagued by externalities. Political institutions will solve some problems, worsen others, and create new ones. Whether they work better or worse overall than traditional voluntary markets is an open, empirical question.
I agree with Lant and colleagues that some free-market mechanisms help to internalize externalities. As they discuss in more detail, a mechanism that may work at the local level is property bundling. Externalities and inefficiency arise when the spatial scale of environmental effects is larger than the size of properties. One way to internalize externalities is to increase the size of properties or to have lands potentially linked by externalities owned by a single individual, firm, or community. Property law should indeed evolve to facilitate forms of ownership that better deal with new environmental challenges.