Ronald Coase and the Cearfoss solar farm
Originally published in the Herald-Mail
Back in 2015, when plans were announced for a solar array on farmland near Cearfoss, the project seemed like an unalloyed good. It would produce nearly pollution-free, renewable energy, provide income for two farms, increase local economic output and maintain dozens of acres of green space, all without burdening roads, schools and other public infrastructure.
Then several Cearfoss residents joined together to oppose the project, saying it would hurt the rural character of their neighborhood. It’s tempting to dismiss these opponents as “CAVE people”—Citizens Against Virtually Everything—but they have a point: they bought or built homes with the expectation that they would enjoy farmland beauty and tranquility. Solar panels may not be noisy or polluting, but they’re also not lovely fields of corn and grass.
(Disclosure: Some of my relatives are among the opponents. I have not discussed the matter with them and they have not influenced this column.)
Since then, the project has been bound up in government machinations. Public hearings have been held, votes taken, court decisions rendered and appeals filed. Meanwhile, a second array has been announced for the State Line area.
Both the project’s would-be owners and its opponents have considerable spent time and money on paperwork, lawyers and fees. They are caught in a problem described by one of the greatest economists of the 20th century: Ronald Coase.
If you haven’t heard of Coase, don’t feel bad. Though he won the Nobel Prize in economics on 1991, he wasn’t the type to pursue celebrity. He was an “economist’s economist,” quietly studying and applying the insights of his field to various problems. Every decade or so he’d publish a paper or book that would change some economic sector.
One of those papers, published in 1960 with the drab title “The Problem of Social Cost,” deals with problems like the Cearfoss solar farm. In economic jargon, the paper is about “externalities”—positive or negative consequences of an economic activity. For instance, a factory’s pollution is a negative externality for its neighbors, while a bakery’s delicious smells are a positive externality.
The problem with externalities isn’t that they exist, but that they aren’t priced. For instance, the polluting factory probably shouldn’t be shut down; what it produces is valuable, after all. But the cost of its externalities should be included in the price of its products, which in turn would affect consumers’ purchase decisions. That would change the factory’s operations in a socially beneficial way—perhaps by cutting production or changing its operations so it pollutes less. The bakery would be the reverse case: if it were paid for its positive externality, it would produce more bread aroma.
Of course, not every externality can be priced and paid for. But such pricing and paying would encourage more positive externalities and discourage negative ones. That would push production in a more socially beneficial direction.
Coase explained all of this and added two important insights. The first is that, as long as the involved parties can negotiate freely and one of the parties—it doesn’t matter who—has clear property rights over whatever is in dispute, the negotiations should reach the best-possible social outcome. Suppose the factory neighbors are declared to have a right to clean air, but they can trade that right away. They could reach an agreement where the factory continues operating, provided it gives the neighbors something in return (like money to relocate). Likewise, if the factory is deemed to have a right to operate, the neighbors could band together to pay the factory to go away. Coase’s point is that, from an economic standpoint, as long as someone has clear property rights over what’s in dispute and the disputants can negotiate freely, they should reach a socially optimal outcome.
Unfortunately, according to Coase’s second insight, negotiations often aren’t free and property rights aren’t well defined. In the Cearfoss case, do the neighbors have any right to the positive externality the farms have been providing? Have they paid for that positive externality? On the other hand, does the array’s owners have a right to spoil the neighbors’ views?
Ideally, the array’s builders could pay its neighbors to accept the array’s negative externality. Or the neighbors could pay the array’s owners to go away—or else pay the farmers who are leasing their land to the array to break the lease—in essence, paying the farmers for a positive externality. The result would be a socially better outcome.
But there are no clearly defined property rights in the Cearfoss controversy, and thus no negotiations and trade. Instead, state and local laws and regulations require the controversy be settled through zoning appeals, public service commission actions and court decisions. That means both the array’s owners and opponents will end up paying—for lawyers and government proceedings. And that’s not a socially better outcome.
Thomas A. Firey is a Maryland Public Policy Institute senior fellow and a Washington County native.