Environmental Quality, Resource Rents and Property Rights

This paper provides a micro foundation for analyzing the relationship between environmental quality and income, by stressing the importance of property rights. The existing literature is prominently represented by the studies on Environmental Kuznets Curve (EKC) and has not examined the manner in which property rights shape the relationship between environmental quality and income. The empirical literature on EKC has typically analyzed the effect of economic growth represented by per capita income on environmental quality represented by air and water pollution. The assumption of exogenously given or perfect enforcement of property rights and use of inadequate definitions of income and environmental quality for mapping their relationship are two of the main limitations of this literature this paper addresses. We develop a model in which property rights to a natural resource stock evolve from a state of open access to more efficient property regime as the price of the resource increases. In our framework, environmental quality is synonymous with the size of the resource stock (stock of clean air and water, groundwater aquifer, stock of trees in a forest, oil reserve in an oil pool) and resource rent is synonymous with income derived from the resource. We show that the relationship between environmental quality and resource rent can evolve in various ways and under certain specific conditions it can also follow a U-shape that is consistent with the EKC. Thus the paper provides an alternative theoretical explanation for EKC based on evolution of property rights without relying on macro growth theory models. We test the model implications using historical case studies of various natural resources.


Haimanti Bhattacharya and Dean Lueck

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