Academic journal article The Town Planning Review

The Coase Theorem and Planning for Sustainable Development

Academic journal article The Town Planning Review

The Coase Theorem and Planning for Sustainable Development

Article excerpt

This paper discusses the potential contribution and limitations of the Coase Theorem to the theorisation of sustainable development. The Coase Theorem can be manifested in numerous ways beyond the hypothetical example of direct negotiation between the polluters and the pollutees. Sustainable development not only provides a negotiative context, an infrastructure where compensation in the Coasian sense can be made, but also a framework for transforming negative externalities into positive externalities, as illustrated by a real life example from Canada. Central to the framework is a change in the mindsets of parties to a negotiation and Schumpeterian innovations.

The dilemma for economists who argue that rational people look after their own selfinterest is that they are propcigating a self-defeating paradox. The converse of their case is that people - including economists must be irrational if they portray themselves as working for the common good. And if the theories of these economists arise from their own self interests, or their perception of their employers' or clients' interests, why should anyone think such theories will promote or lead to environmental protection? (Beder, 1996. 64)

This passionate statement of Beder is indicative of the misunderstanding of economics by some who do not appreciate that a 'win-win solution' is possible when rational (and selfish in this restricted sense) people voluntarily cooperate. It lends sentimental support to the view that the market, a means of voluntary exchange, always fails to look after the interest of everyone - hence the concept of 'market failure'.

This paper argues that with qualification and modification, the Coase Theorem, as a specific way of modelling transaction costs in the discussion of aspects of market failure, can be applied to a discussion of planning for sustainable development as a desirable and benign human goal through a 'win-win' approach. This approach has been seen as being feasible by such planning theorists as Davoudi (2001), Davoudi and Layard (2001) and Batty (2003). Indeed, it is possible that in the development process, planning practitioners are in effect practising a Coasian principle without fully being aware that it is indeed the theoretical basis for 'environmental modernisation' (Jacobs, 1999) or 'ecological modernisation', the prevailing model for planning institutions in Europe (Batty, 2003).' To appreciate the usefulness and limitations of the Coase Theorem in the enquiry of sustainable development, it is necessary to characterise both the Coase Theorem and sustainable development.

The Coase Theorem and transaction cost analysis

The Coase Theorem and transaction costs are closely related ideas and, indeed, the concept of transaction costs is the cornerstone of the Coase Theorem (Lai, 20053). However, these two ideas have taken separate routes in their application to planning research. The reception of transaction cost economics in the theorisation of town planning as a state activity occurred in the early 19905, as can be discerned from a series of focused works by Alexander (1992), Lai (19943; 1994)3; 1997), and Webster and Lai (2003). These publications all came after Ronald H. Coase who was awarded a Nobel Prize in economic science. The earlier work of Burton (1978) and Willis (1980) that referred to the idea were much more general and contextual.

The Coase Theorem itself has been applied to analytical and empirical analysis of zoning control since as early as the 19708 in work by Fischel (1978; 1979; 1980; 1987) and Siegan (1970). More recent works by Lai (i994b, 49; 1996, 97-141; 1997, 189-90, 240) and Webster and Wu (19993; igggb) have applied the invariant concept of the Coase Theorem to an empirical evaluation of land values and other urban phenomena.

The idea of transaction costs, which may be defined as all costs other than the costs of production, originated from Coase's 1937 paper, 'The Nature of the Firm' (Coase, 1937) in which the firm is explained as an organised means of exchanging the fruits of specialised production that can avoid the costs of exchanging through an unregulated market. The firm replaces the market where the transaction costs of using the latter as a means of exchange are higher than the former. The idea of transaction cost was mentioned in Coase's 1959 work on the Federal Communications Commission and became operational in Coase's 1960 paper, 'The Problem of Social Cost', in which a parable of a land use conflict between a cattle farm and an adjoining wheat farm was given. While superficially addressing a bilateral exchange scenario, this parable in fact deals with a quadrilateral relationship involving two implicit sets of third parties, and is thus capable of discussing the typical Pigovian concept of social cost or externality (defined as third party effects") (Lai, 1997, 183).

With a determination to ruin Pigou's concept of social cost, which provides justification for government regulation in environmental and other affairs that may be said to be examples of 'market failure', Coase demonstrated that state regulation or court adjudication is, given the right conditions, unnecessary. Depending on the relative prices of cattle and wheat products, the cattle farmer will be prepared to pay the wheat farmer for damage to crops by stray cattle where, as under the common law, the latter has the legal right to exclude the former. Indeed, the cattle farmer may lease land, fenced off, from the wheat farmer for cattle ranching. The wheat farmer will pay off the cattle farmer if the law is reversed. Land resources are thus allocated for the optimal mix of cattle and wheat farming. Through a trading of rights, externalities become 'internalised', and thus market failure need not happen.

From this parable, economist George Stigler derived and coined the famous invariant version of the 'Coase Theorem'. This version of the theorem postulates that where property rights are clearly defined and transaction costs are zero, then resource allocation11 will be independent (and thus invariant irrespective) of the ways rights and liabilities are assigned (i.e., who owns which rights to exclude others). Furthermore, Paretian optimality is always satisfied under these conditions. In other words, the law or any other institutional arrangement, such as land tenure, zoning, or development control regime, does not matter. As far as the parable is about land use conflict, such planning measures as segregating the two land uses in question by buffer zoning, fixed fencing and suppression of the use that generates externalities are redundant.

There is yet another and much more important version of the Coase Theorem that can be discerned from 'The Federal Communications Commission' (Coase, OSO)' which states that 'the delimitation of rights is an essential prelude to market transaction' (Coase, 1988, 157-8; Cheung, 1990). This version of the Coase Theorem (which may be called the 1959 version) does not require the absence of transaction costs or clearly defined property rights as conditions. It only requires the demarcation of certain rights for market transactions to occur.

The Coase Theorem in context

The invariant version of the Coase Theorem has been heavily criticised for a number of reasons. It has been said to be unrealistic, as property rights are seldom unambiguously defined and the world is full of transaction costs (Kuttner, 1999, 285). Rights are costly to delimit and enforce. Also, it is costly to identify a party with whom to negotiate, create and enforce a contract in a case that an exchange of rights is necessary.

This criticism, reasonable as it appears, is not decisive. It in fact focuses attention on the most powerful application of Coase's ideas in 'The Problem of Social Cost' (Coase, 1960) the corollary of this version of the Coase Theorem, is recognised in such works on sustainable development as those by Lai and Lome (2003); urban planning by Lai (1997, 195), Lai and Lome (2003, 8), Pennington (2003, 60) and Webster and Lai (2003, 104, 144); and on law by Werin (2003, 81).

To reiterate, the invariant version of the Coase Theorem asserts that where property rights are clearly defined and transaction costs are zero, then resource allocation (i.e. the amount of land inputs assigned for each of the two uses) will lie independent of the ways rights and liabilities are assigned. Thus, as a corollary, where property rights are not clearly defined or where transaction costs are not zero, then resource allocation will be dependent on the ways rights and liabilities are assigned. In other words, the choice of law, contract or any other institutional arrangement does affect the efficiency of resource allocation and hence wealth creation in real life. A number of important propositions, which form the foundation for separate branches of transaction cost inquiry, follow from this generalisation which is entirely in the spirit of the 1959 version of the Coase Theorem:

(a) Some institutional arrangements lead to a more efficient use of resources, and hence create greater wealth than others.

(b) Those institutional arrangements that assign rights to parties who bear more of the effects of their actions are more efficient than one that assign rights to parties who bear fewer effects of their actions.

(c) Those institutional arrangements that impose liabilities on parties who have the comparative advantage in avoiding mistakes, preventing harm or ensuring quality, are more efficient than those that impose liabilities on parties that do not have the comparative advantage.

(d) Institutional arrangements at any time are not randomly chosen but, subject to a given set of transaction-cost constraints, are structured to minimise transaction costs and maximise the efficiency of resource use (at least for the ruling interest group).

(e) Institutional arrangements can only survive in the long run if they reduce transaction costs, enhance the efficient use of resources, encourage innovation, and promote real growth for society as a whole.

All these propositions follow the reasoning embedded in the cattle-wheat story in being supportive of an efficient global solution that allows the possibility of a 'winwin strategy' for the parties involved. However, the nature of the 'win-win strategy' embedded in each proposition is quite different. Propositions (a), (b), and (c) are the intellectual foundations for the arena of an 'economic analysis of law' in jurisprudence (Posner, 1992). However, the efficiency criteria adopted in Posner's analyses are static in nature, not emphasising so much on the evolutionary nature of institutions. Both propositions (d) and (e) can be found in the writings on economic history by North and Thomas (1973), North (1990) and Olson (1982). Proposition (e), in particular, well articulates the 'Austrian economies' of Schumpeter (1943) and Hayek (1960). It overcomes the most important and real limitation of the Coase Theorem, namely that it is static and has no direct bearing on dynamic growth or development. It was on this broader premise that a modified version of the Coase Theorem in the context of sustainahle development has been formulated (Yu et al., 2000).

The above discussion of the versatile application of the corollary of the invariant version of the Coase Theorem should not blind us from seeing some inherent limitations of the Coase Theorem itself. In fact, a clear understanding of these limitations would allow us to better appreciate the usefulness of Coase's ideas.

The gist of the Coase Theorem is voluntary trade (i.e., Adam Smith's invisible hand). Even in the absence of transaction costs, the Coase Theorem would not be regarded as useful, where the interest in question is non-tradable or inalienable, or where a trade of the interest itself would generate derivatives that are ethically objectionable. In the vocabulary of those whom one may call 'libertarian economists', everything (such as a land resource) having a value is in theory tradable or substitutable.4 From this stance, value is subjective and can be created from trade rather than being innate or absolute, not to mention sacred. Based on this system of beliefs, not only can value be created from slavery, voting, war and peace, but also from marriage, affection, loyalty, sincerity, bravery, charity and religious beliefs.

Commercialisation, runs this line of thought, will emerge whenever production is specialised and the costs of exchange are sufficiently low, notwithstanding an ethical evaluation of such trading activities. The illegal trading of protected animals is an obvious example well known to those who are concerned with ecological protection. To those who attach absolute values to certain resources, human or natural phenomena, a change of heart (i.e., a change in the utility preferences), and hence a serious change in lifestyle, is more important than just switching systems or rules of property rights. A more frugal, altruistic, contemplative, and humble way of individual and social existence is viewed as being more in harmony with the natural order. Such moral criticism about voluntary trade leads to two other distinct problem areas for the Coase Theorem.

Where the potential for trade is present and is not in any sense objectionable, the Coase Theorem may not work at all where one potential trade partner simply refuses to trade for whatever reason. This partner may be said to be 'irrational' in economics, but irrationality as such is exactly a key dimension of private property rights, as a right to trade implies a right not to trade. Even Coasian economists admit that the Coase Theorem, as a theory of efficient resource allocation, ignores the issue of monopoly power or equity in wealth distribution.

However, even a radically humble and egalitarian way of life does not preclude innovations that enrich the meaning of life. Habitats devastated or lost by past human avarice and carelessness need to be rehabilitated and social wounds due to prejudice healed. If we believe that endeavours that are geared to such charitable needs are to be pursued in a voluntary and participatory manner, neither autarchy, in which individuals survive as non-interacting islands, nor anarchy, where rational individuals fight an interactive perpetual Hobbesian war of one against everyone else, is a normal condition of human existence. This persuades us to agree with the economist that human interactions through the market must be capable of being mutually beneficial. That such interactions may often be foolish, imperfect and mutually destructive should not deter us from investigating ways by which they could become desirable and benign. Granted its limitations, the Coase Theorem is a useful tool for such an investigation.

Sustainable development: an economic characterisation and post-Coase Theorem discussion

Principles i, 3, 4 of the Rio Declaration and Agenda 21, condemned by Doyle (1998, 771) as 'the secular bible of global free markets and pluralist democracy', firmly anchor the concept of 'sustainable development' as humanistic, developmentoriented, bottom-up and consensual (Lai and Lome, 2003). A dialogue between this position and major world religions is ongoing.5 The Coase Theorem in this light is immensely relevant as a tool, as it is based on consensual exchange. Furthermore, in terms of economic theory, one theoretical concern of sustainable development is the so-called 'tragedy of the commons' (Hardin," 1968), a phenomenon which is well understood as an outcome of competition for resource use under common access. A classic example is overfishing. The choice of a suitable property rights regime or form of governance, which underlies the corollary of the Coase Theorem, is exactly the focus of attention of economists who wish to make a contribution to the implementation of sustainable development.

As a static tool, the Coase Theorem cannot adequately address dynamic developmental processes, and has been criticised by Bromley (1997, 22) for failing absolutely for handling externality across time. Hence, there must be further and better conceptualisation when discussing the Coasian approach in relation to sustainable development as a developmental process. In particular, the possibility of a 'win-win' intertemporal solution must become a necessity to pay due respect to the environmental and social dimensions of sustainable development. With these considerations in mind, we come to the following propositions about sustainable development informed by Coasian reasoning of consensual exchange:

(1) Negative externalities can be curtailed and even transformed into positive externalities if the parties involved are willing to experiment in a transformation of regular practices and mindsets.6

(2) The existence of entitlement or rights to natural resources is an important precondition for such experimentation and the structuring of a win-win contract for the parties involved.

(3) The role of the state is to establish and protect resource entitlements and facilitate voluntary negotiation among parties.

For the lack of a better term, this approach may be conveniently labelled as a Coasian framework of sustainable development.

An illustrative example: Britannia Beach

There are probably numerous examples of negative externalities being converted into positive ones7 through investment and experiment (Lai, 1993, 339, 344) in a Schumpeterian sense (Lai and Yu, 1995, 534; Yu et al., 2000) in a process that leads to 'catallaxis', that is, 'the creative order that emerges as individuals interact to discover, test and exchange new knowledge' (Webster and Lai, 2003, 35; Lai, 2004). However, the institutional mechanism and the dynamics behind such conversions have seldom been fully analysed.

Britannia Beach is a historic mining town on the outskirts of Vancouver, Canada. Operated as a company town for over sixty years at the turn of the century, and going through liquidation as well as revivals in the 19605 and 19705, the last mining company in the area closed thirty years ago in 1974. Yet the town still suffers from mining pollution such as acid rock drainage (ARD) from the old copper mine. ARD discharge has escaped into Britannia Creek, killing fish and plant life in the creek and the ocean water downstream. The main source of the problem is the naturally occurring metal sulphide ores that have been exposed to air and rain throughout the seventy years of mining at the site. 1An Environment Canada employee has called the Britannia Mine the single worst point source of metal pollution in North America' (CEC, 2004, 8). After the mine's closure, this once prosperous company-owned town passed into the hands of a private developer in 1979, who, with natural disasters continuously haunting the area and with financial and real estate scandals continuously being reported in the media, allegedly did little to save the community. Indeed, the community as a whole, to the outsiders, seemed to have deteriorated into something of a squatter area with the old mining structure being an eyesore for passing travellers.

The Britannia Beach experience could be instructive to a study of Coasian sustainable development in that land rights to the properties surrounding the mines were granted and transferred into private hands. Yet, private solutions in the early stage of development had nevertheless encountered so many difficulties for over 20 years that redevelopment did not occur until 2003. The twenty-year delay in the redevelopment effort, even with the presence of private property rights, seems to refute the Coasian framework of attempting to resolve the pollution problem by contracting, and is at odds with the Coasian sustainable development framework that is used in this paper and the authors' earlier work (Lai and Lome, 2003).

Background: the stochastic elements of heritage

The history of Britannia Beach stretches as far back as 1888." By 1929 it was the largest copper producer in the British Empire. Copper pollution to the river was not an issue until British Columbia (BC) Environment (a provincial governmental agency, now known as the Ministry of Water, Land and Air Protection (WLAP) of BC) demanded that water treatment be performed by the mine operating company, Anaconda Canada, Ltd, in 1974. The main source of the problem was that years of cumulative mining in the area had exposed sulphide ores, which, when mixed with water and oxygen, would produce a concentrated acidic, metal-contaminated water called acid mine drainage (AMD), or more generally, acid rock drainage (ARD). Allegedly, five million salmon died each year in the area of marine water near Britannia Beach (North Shore News, 1999c).

The heritage of Britannia Beach is both an asset and a liability. On the one hand, the longer various mines were allowed to operate in the area the greater were the cumulative effects of environmental degradation. But on the other hand, the longer various mines were present in the area the longer and better a cultural and technology mining story could be told about the community. This is the unique element of this community that distinguished its presence from the surrounding areas along what has been called the 'Sea-to-Sky Highway', where beautiful scenery is equally captured on a long stretch of highway but most other towns lack the historical significance of Britannia Beach.

For Britannia Beach, one could make the argument that the more severe the environmental degradation suffered by a location the greater the chance that the affected community can capitalise on its heritage. Indeed, efforts to preserve heritage were evident even before the mine was closed in 1974. The preservation of an eyesore mining mill site in the form of a museum, which could have been demolished and removed at the time of the mine's closure, might have easily become a landmark structure in the community by serving as a centre of tourism, research and the rebuilding and transformation of a community. It is perhaps the same reason why this location is being considered by Natural Resource Canada (a federal agency) for a satellite campus with a research university and jointly establishing an on-site innovation and research centre for mining which is expected to be in place by 2007.

A Coosian sustainable development approach recognising the stochastic nature of heritage

The dual aspect of time in its effect on environmental degradation and heritage build up (arguably the main reason for its competitive edge in community development in the area) can be placed in the context of a sustainable development framework, as described in Figure i. The framework provided for the setting of this discussion has been described in Yu et al. (2000) and Lai and Lome (2003; 2006). The illustration can be interpreted as follows:

First of all, cumulative copper production over the years in Britannia Beach can be labelled as Q (the southbound vertical axis). Zero copper production corresponds to a pre-mining environment indexed to be the maximum environment. Over time, more copper production will cause environmental degradation represented by the function e (Q) (with e being the eastbound horizontal axis). However, environmental degradation is also a positive function of time and thus heritage (i.e., a lower indexed environment means a higher heritage). A lower indexed environment may lead to a smaller community output F (represented by the vertical northbound axis). However, if heritage is what is going to revive a community, the community output F can also be higher. Thus, the northbound vertical axis of community output, F, is expected to be a stochastic function for every value of e. F can be interpreted as the economic livelihood of the community.

Heritage can be used to spur economic development, but it can also be the reason for the deterioration of a community. Therefore, for some values of e, it is possible that community output F can exceed the pre-degradation level of output fo. It is possible that it can also be below fo. If the community can base its economic development on its heritage, then output can be higher. However, if environmental effects dominate, total community output in the long run will be less. Indeed, there can be environmental degradation to a level so high (i.e., reducing e to such a large extent) that no positive effects for revivals are possible. The stochastic element of heritage suggested that the overall relationship between environment (heritage), e, and the output of a community, F, can be a balloon leaning towards a negative relationship, but not a deterministic negative relationship. This formulation permits the possibilities of higher outputs of F, when environmental degradation would be deepened, as described by the shaded area of the 'balloon' above the pre-degradation level of output, fo.

The formulation of the problem described in Figure ι is remarkably different from the neoclassical formulation of an externality problem, usually first characterised by a divergence between private and social costs, with an emphasis on exploring mechanisms of how to go about realising the point of optimality. Neither this formulation nor the static Coasian framework is appropriate for situations like Britannia Beach. Indeed, environmental degradation in Britannia Beach may not be so easily resolved by a bargaining process between the polluters (the miners) and the surrounding stakeholders. Such a bargaining contract, a textbook description of a Coasian solution to 'the problem of social costs', will require the miners to curtail their production activities thus reducing the amount of environmental degradation to an optimal production level in which the social benefits of mining equal the social costs. The historical reality of Britannia Beach is that the copper mining company at the time had no incentive to achieve that level of social optimality - even though it owned all the adjoining lands to the property.19

What a dynamic Coasian sustainable development approach advocates is that by adopting a system of transferable rights, development activities in the community may take on a different dimension - exploring how the positive aspects of heritage can be strengthened and thus attract more economic development into the area. Thus, bargaining and negotiations would be expected, but that type of bargaining and negotiations would be different from the uni-dimensional bargaining that had been envisioned in the original writings of Coase, which called for a limit to the polluting activities of the mining company. Here, the curtailment of mining activities is irrelevant because they were acts committed a long time ago. It would be impossible to strike a bargain between the present generation and past polluters by asking them to curtail mining activities - unless one had a time machine. The version of a Coasian sustainable development approach we advance here would argue that one should forget about that dimension of bargaining, but instead focus on the positively shaded areas of the 'balloon' created by F and e (the inverse of heritage) and F and Q, respectively, in the N-E and the S-W quadrants of Figure i. Obviously, this involves a departure from a game-theoretical strategy of non-cooperative bargaining, which can lead to a prisoner dilemma and a move towards a mutual changing of mindsets so that there is willingness to explore other 'win-win' institutional arrangements. For this reason, Figure 1 does not incorporate neoclassical functional specifications of values.

How institutional factors enter the analysis

The preceding characterisation of the problem could be considered a hundred-years' long-run view of how resources interact in a location (or a region, whatever the case may be). As pointed out, the time-path development in a particular locality such as Britannia Beach could limit choices to only certain segments in the diagram. Indeed, evaluating the situation post-1975, after all the mining activities had ceased, the environmental variable, e, should be settled at a fixed point at e. Benefits and costs associated with the environment would have to be evaluated along the new vertical dotted line, labelled as '75' going through e, as shown in Figure 2. If nothing were done, the output of the community would be limited by the darkened vertical slice (line ab) within the balloon only, with 'a' denoting the best scenario, while 'b' denotes the worst scenario.

As mentioned previously, Britannia Beach has the unique characteristic that heritage build up is inversely related to environmental degradation. The heritage movement in the community had started well before the last mine in the area closed in 1974. As early as 1967, a centennial committee had been formed for the purpose of studying the history of the mine. It was this committee that had evolved to form a Britannia Beach Historical Society in 1971. The society's mission was to preserve the mining site. It had the vision of establishing an outdoor museum, which could have the side eflect of also attracting tourists to the area, and thus contributing to its economic development. With the assistance of Anaconda and the British Columbia mining community, this idea materialised in 1975 when the British Columbia Museum of Mining opened to the public, soon after the closing of the last mine in town (Mullan, 1992).

Had the idea of museum-induced tourism been put into practice in 1975, Britannia Beach could possibly have turned a negative externality into a positive externality right then and there, with community output reaching the top range of line ab in Figure 2. However, because of various financial constraints, and perhaps a rather unsophisticated concept of sustainable development that existed at the time, the top-range vision of community redevelopment was not achieved. Instead, the lower boundary of 'b' was probably a more accurate description of the situation. A community that was home to 60,000 people of many races and languages in its seventy-year history and a city of 2,000 people during its heyday in the 19205 and 19305 had shrunk to a community of about 300 persons by the end of the last century (Squamish Chief, 2004).

Sustainable development entails building institutional features in a development process that would increase the chance of a win win outcome (Yu et al., 2000). Unlike past ecological approaches to sustainable development, which advocate doing away with the market system and private property rights, Yu et al. (2000) argue that market and private property rights can enhance sustainable development efforts. Institutional features of sustainable development should not be constructed in such a way to replace market and private property, but rather, these institutional mechanisms should work hand in hand. We shall use the Britannia Beach example to illustrate this proposition.

Let's first see how institutions can change the diagrammatic exposition already explained. Developing institutional features with the objective of sustainable development has the effect of tilting the community output-environment balloon trade upward, thus increasing the 'win-win' area of positive interaction. This situation is described in Figure 3 by the highlighted areas A and C appearing and area B disappearing in the S-W quadrant, a result of the 'win-win' region increased by area A. Notice that institutional development can shift the shaded vertical slice in the balloon in the N-E quadrant from ab to cd. For example, in 1988, the Historic Sites and Monuments Board of Canada recognised the Britannia mines' substantial contribution to the development of Canada's economy by designating the museum a National Historic Site. This would increase the attractiveness of the area for tourism, and thus increase the possibility of economic development. However, an indigenous institutional development alone could be insufficient.

Sustainable development was a relatively modern concept. Whether the community had been subconsciously practising it or not, the cornerstone of the concept was formalised in the Rio Declaration of 1992. Thus, institutional features could have been added on in an ad hoc basis all along, but it may take a holistic sustainable development concept to put all the institutional features together. For all the institutional features that might have evolved, of interest to the Coasian sustainable development approach is the private development path labelled as such in the N-E quadrant of Figure 3. The private development path aims at achieving the highest local community output F. Therefore, it is constructed as a dotted line connecting point 'b' with the maximum (highest possible value F) point of the balloon.

A showcase for public-private collabration

The private development path, as shown by the dotted line in the N-E quadrant of Figure 3, can lie further described by several milestones at b, e, and f. Notice that the ability to transfer ownership was essential to this development path. Starting with the mine company land holdings in the form of a mix of Crown grants and fee simples when the mine closed in 1975, one could imagine what the situation would be like if titles to land were not transferable. Suppose the land it sat on was granted under a non-transferable Crown lease specifically for the purpose of mining. The land would have to be given back to the government once the mine closed. It would not be obvious, then, how the development path would have turned out. The government could clean it up immediately upon repossession of the land, or it could leave it there undeveloped for many years.

The government lacked the incentive to develop or redevelop the surrounding land of the polluted site without first bringing the environment back to its original or acceptable standard level, as this would probably be considered the most prudent thing to do if the government were to take over the role of private developer. Furthermore, remediation activities in this direction are likely to aim at saving the fish in the ocean that are affected by the polluted creek, rather than saving the living community. The fact that the private ownership of land was transferable implies a more focused purpose of development in making the local community's output, F, fulfil its maximum potential. Thus, development and redevelopment efTorts are likely to involve a combination of efTorts from private interests and the public.

With reference to the model described above, the history of Britannia Beach can be conceptualised in two stages. The first stage will be shown to be diverted in some way, due perhaps to the fact that the model was not in the minds of the bargaining parties. The second stage is in some sense more 'recently discovered', and has the capability of realigning a diverted development process back to the dotted line.

Stage 1 : From b to e in Figure 3: a run-astray Copper Beach Estates

Three years after the mine closure, Copper Beach Estates (CBE), a private developer headed by a West Vancouver businessman, Tim Drummond, purchased substantial parcels of land in Britannia Beach and its surrounding areas from Anaconda Canada Exploration Ltd. There was evidence that the Department of Lands, Forests, and Water Resources of British Columbia had approached Anaconda regarding pollution concerns as early as 1973 (CEC, 2004, App. 7). Thus, it was likely that CBE bought the land with some expectation of implied liabilities associated with it. Over the next twenty years, however, CBE appeared to have done little in its redevelopment efTorts for the community, with only horror stories of real estate scandals and failed investment attempts coming sporadically from the press (North Shore News, igggb). The following account appears to report the failure of this private developer's redevelopment efforts most succinctly:

BC Environment issued effluent remediation orders against CBE under the BC Pollution Control Act and its successor, the Waste Management Act, in 1981, 1993 and 1999. CBE has not complied with these remediation orders. Over the years, CBE sold off millions of dollars in development property at Britannia without using the profits to pay for site remediation, despite an undertaking in its sale contract with Anaconda that it would comply with all future requirements of environmental authorities at the site. CBE has been insolvent since 1994, and there is a court order for sale of the Britannia lands. Since 1997, CBE has advanced and received considerable federal and provincial government technical reviews of - several 'reclamation/remediation' proposals aimed at financing site remediation through redevelopment of the Britannia site, none of which have materialised. In 2001, CBE repudiated a memorandum of agreement signed with the province, under which CBE had agreed to fund construction and operation of an effluent treatment plant at the mine using revenue from proposed real estate development projects at the site (CEC, 2004, 10).

It would be easy to condemn private property and market mechanisms for this run astray effort of a private developer. However, to do so would confuse the issue of contract enforcement with the institutional structure as a whole, as when someone blames the system of stock trading for Enron or blames democracy for campaign violations. The reason for the failure of CBE to stay on the redevelopment direction of line 'be' in Figure 3 should be treated as a failure of a principal agent problem between the state and the private developer. The alternative of the whole redevelopment process being structured by the state could be worse, as it lacks incentives and an implicit value assessment process that can be provided only by the market.

The role of a private developer in any redevelopment effort cannot be underestimated, as an interview reported a continuous hope for private efforts at Britannia Beach:

Two years ago, the company promised to hand over ownership to residents in the form of a coop in exchange for their support of a controversial proposal. Copper Beach Estates wanted to finance the construction and operation costs of a treatment plant by turning the mine's open pits into a landfill for contaminated soils. That proposal fell through (CBC Canada, 2004).

The development process involved hopes and disappointments that could be described a long and winding road, particularly in respect to the methods of financing. In 1990, CBE mortgaged the property to a numbered Singapore company for $5.9 million, and made plans to build a golf course in the area (CBC Canada, 2004). What took CBE so long to make a move was not clear. But in the same year, CBE was sold to a numbered company for approximately $21 million. Concurrently, it sold a development property at Furry Creek (a large parcel of land in the neighbourhood) to third parties for $17 million, and obtained a $5.8 million advance toward a potential sale of development property at Britannia Beach. In 1991, there was a court order for sale of the Britannia lands resulting from CBE's failure to repay the $5.8 million advance payment because its proposal fell through after environmental due diligence. In 1994, the court appointed Coopers & Lybrand as the receiver manager of Britannia Assets. CBE became insolvent. However, in 1997 it further proposed raising money to comply with a 1981 order by taking delivery of contaminated soils onsite as part of a 'reclamation plan' (CEC, 2004, App. 8). The treatment plant and a diversion pipeline would cost $n million, annual operating costs for the landfill and treatment facility would cost $800,000, which would necessitate the issue of $25 million in bonds (North Shore News, 19993).

Clearly, CBE cannot be faulted for the lack of trying. Whether the proposals had been well accepted by government agencies, the local community, or the investment public is another story. Indeed, it cannot be said that there was a lack of initiative. The landfill proposal worked out a set of tipping fees ($6.75 per tonne) intended to partially fund the acid mine drainage treatment. In addition, the proposal alleged that the landfill would generate less toxic waste because the contaminated soils would cover the exposed ore that was the source of the pollution. However, the counter argument was that

there are several open pits, only otie of which is proposed to be filled in. As a result, water and oxygen are still going into the mine workings (where the majority of the acid is generated). (Young, undated).

A technically debatable issue, the landfill idea could be considered an endeavour of a Schumpeterian experiment with a stochastic outcome that could possibly worsen the environment.

An important point to note is that during the early stage of CBE's development, it was not done under any type of visionary framework of sustainable development as the concept was still in its infancy. In many ways, private interests, the state and local communities were all exploring things in the dark. The early stages of a sustainable development dialogue came late in 1998, when the Fraser Basin Council picked up the initiatives, releasing a report outlining the concerns of residents, environmental groups and municipalities.

Understandably, for a private developer who has been questioned about bookkeeping practices and commercial fraud charges, allegedly misappropriated funds in social clubs, and one who has constantly been under threats of civil and criminal law suits (North Shore News, 1999(3), there can be considerable credibility concerns over any entrepreneurial proposals coming from Drummond. Ultimately, if a public-private collaboration is to materialise conceptually in the private direction, as described in Figure 3, a different actor might have to come in to replace Drummond in the role of private developer. Not even a change in the name of the organisation in 2002 to Britannia Mine and Reclamation Corp (BMARC) was enough. The point is that a system of private rights exchanges and a set of commercial and bankruptcy laws will indeed permit that role transfer to occur. Without such a mechanism, an irresponsible planner/decision-maker can only be replaced by political means.

The liability issue in the case of Britannia Beach is particularly interesting because even though the mines were closed in 1974 the Britannia Creek and 80 kilometres of underground mine tunnels have been acting as a conduit for effluent containing toxic discharge. As of 1999,

450 kilograms of copper enters Howe Sound daily and the flow of water draining from the mine tunnels is comparable to the amount of sewage coming from a town of 25,000 people... (A'ort/t SlioreMn's, 19993).

Therefore, it cannot be said that the liability rule in the case of Britannia Beach has no preventive implications for resource allocation. There was a real problem that needed to be solved, even though the act of pollution (i.e., mining), has long stopped.

One of the major hurdles in Britannia Beach's journey to sustainable development has been the financing needed in order to get a treatment plant going, which was estimated to cost roughly $75 million. The remediation effort is tied with a liability issue in terms of deciding who is liable, who will pay, and how to enforce orders that call for remediation. The starting point of the tracing of the liability issues began in 1973, when BC Environment attempted to enforce pollution control upon Anaconda, which ran the last mine in the area that was closed the following year.

Evidence suggested that the new owner of the mines, CBE, met with BC Environment on 14 January 1980 to request a transfer of waste discharge responsibilities from Anaconda.

CBE indicated that it was interested in the Britannia assets for real estate development purposes. BC Environment explained to CBE that pollution control orders are not transferable, and that therefore, a new order would have to be issued to CBE ... CBE sought assurances from BC Environment that its responsibilities under any new order would be limited to obligations found in the existing orders issued against Anaconda ... BC Environment stated that this could not be assumed and would not be confirmed, since the Director had discretion to order changes to works to reflect the state of the art in environmental protection, and considering that discharge requirements for copper were determined on the basis of site-specific requirements. (CEC, 2004, 90)

BC Environment explicitly stated,

...there is no guarantee that an upgrading of the works will not be required. Major expenditures could be needed in a few years to replace some of the pipe sections. The potential for underground caving and the subsequent unacceptable increase of metal concentrations in the mine water should not be overlooked. (ClEC, 2004, 91)

The ensuing regulations directed at CBE (and the non-compliance of the latter) have been described in earlier paragraphs. It would seem that the theoretical paradigm, within which BC Environmental and CBE were dealing from 1978 until 1993, was a traditional Pigovian paradigm within which the government executed its responsibility to impose the appropriate tax or remedy for an alleged act of pollution. The liability issue was to be adjusted according to the time and the condition, sitespecific, aiming at the property owner at the time to deal with the problem. The old paradigm makes no provisions for establishing 'win-win' alternatives and proposals. It is a matter of state regulation and private compliance, with Coasian bargaining thrown out the window. It proved to be largely irrelevant anyway.

The year 1993 marked the beginning of a new paradigm when the BC Waste Management Act was amended to add joint, multiple and retroactive liability for contaminated sites. The provisions came into effect in 1997, which, together with a set of Contaminated Sites Regulation, allowed the BC Government to pursue past owners of contaminated sites for payment of environmental remediation. The effect of this amendment was to take the liability question into an historical framework with a time path captured only in terms of cumulative consequences, rather than treating the liability question as a real time evolution process focused only at a particular point in time depending on the need for regulation occurring at the time.

In 2000, the Province began its pursuit of potentially responsible parties (PRPs) under WMA. In 2001, the Province entered into an agreement with the former mine operators whereby the later agreed to pay $30 million in remediation in exchange for a provincial indemnity against future liability. The provincial ministries have been influential in identifying most of the historical players at Britannia. A $30 million fund was created, coming from companies including Arco, Anaconda, Ivaco, Arrowhead Metals Ltd., Canzinco Ltd, Alcoa, Intalco Aluminum and Alumax Inc.

The arrangement also involved contributions from the private sector and the provincial and federal governments. It was hailed as a high profile state-private cooperation. The responsibility for managing the remediation project was eventually assigned to the Ministry of Sustainable Resource Management (MSRM) in 2003, with the Ministiy of Water, Land and Air Protection (MWLAP) retaining responsibility for the regulatory function under the Waste Management Act (VVMA) (Azevedo, 2004).

The concept of retroactive liability arose from a strict liability rule established in the Comprehensive Environmental Response, Compensation, and Liability Act (CERCLA), passed in the USA in 1980. The law created a tax on the chemical and petroleum industries and provided broad Federal authority to respond directly to releases or threatened releases of hazardous substances that may endanger public health or the environment. These institutional changes in principle can bring policy discussions into the framework of sustainable development described in Figures ι to 3, in which economic efficiency is implicitly assumed to aim at maximising the 'winwin' cooperation area, as opposed to a neoclassical approach of figuring out the right amount of Pigovian tax necessary for maximising economic efficiency, which existed only in the static sense of the term.

Retroactive liability rules have sometimes been criticised for having no incentive or even disincentive effects. The fact that there may be no relationship between an agent's actions and the damages for which they are HaI)Ie for implies that it may be only a means to pursue funding for remedies based on the 'deepest pockets' principle. This may indeed be a logical deduction if the rationale behind such a liability rule is to be evaluated under the static Pigovian framework of social costs. However, if interpreted under the Coasian sustainable development framework, as described in this paper, enforcement of the retroactive liability rule may entail a revenue sharing scheme based on the 'win-win' regional policy. Whether the institutional framework of sustainable development would move in that direction is too early to tell.

It is also unlikely that the Waste Management Act (WMA) Amendment in 1993 had this economic framework in mind. Laws need not be efficient in order for them to be effective. If the liability issue is to be traced to within a paradigm of neoclassical economic framework of maximising social net benefits, the act of pollution must be identified. As Coase pointed out in his classic paper, 'The Problem of Social Costs', there is a bilateral nature of the problem in any situation dealing with externalities. To stop an externality completely will be imposing a cost on the polluter, just as allowing unrestricted externalities impose costs on the victims. Thus, the gist of the economic analysis was to focus on the Optimal externalities'.

The nature of the problem here is different. After the mine was closed, there were no polluting actions of the property owner resulting from its action after the purchase of the property. The locality is expected to engage in an economic activity of a different nature (i.e., real estate development). As such, there were no polluting activities generated from the action of the owner of the property in the same nature as that generated from mining. Indeed, there were no polluting actions to be identified for the owner of the property and thus the issue of searching for Optimal externalities' is moot. If the neoclassical economic framework is to force upon the property owner extra cost-benefit calculations, the later may merely see environmental regulations as development costs with questionable benefits. Thus, a publicprivate partnership was doomed to fail.

Evidence indeed shows tremendous mistrust and deliberate evasive behaviours of public-private interaction during the early stage of the remediation process. With respect to effluent standards initially studied and imposed upon CBE, the property developer, the CEC stated that in 1992, 'BC Environment employees were concerned that issuing a new order [of effluent standards] would result in CiBE declaring bankruptcy, with liability defaulting to the province' (CEC, 2004, 93). Suspicions were mounted in that CBE assets went through a series of transfers and divestitures including one from a numbered company, '40091', pending the fulfilment of environmental due diligence. Company '40091' eventually decided not to go ahead with the deal, but the advance payment of $5.8 million was unable to be recovered from CBE. CBE's assets were subsequently placed in receivership.

Those were the fears that environmental regulators had anticipated. As early as 1991, BC Environment pointed out that CBE

appeared to be attempting to sell the valuable assets of the company (uncoiitaminatecl development property) and retain only the liabilities (the arid generating mine) for the people of British Columbia to inherit if they should declare bankruptcy (CEC, 2004, 95).

In actuality, the mounting regulatory costs have actually made transfer of properties more difficult.

A legal quagmire could easily be created, perhaps as a result of strategic interplay between private and public interaction in the first place. Some of the private contracts proposed were rather 'ingenious'. For example, a company named No. 357, Taurus Ventures Ltd, proposed to purchase the mortgage of Company '40091' at a discount and then commit money towards pollution abatement, provided that an indemnity could be obtained from the provincial government for any environment liability exceeding its fixed financial commitment. The proposal was not satisfactory to BC Environment because there remained too much uncertainty regarding the scope of the Britannia pollution problem, how it could be addressed, and what the total cost would be.

The liability issues in Britannia Beach evolved from a process of trial and error in conjunction with a changing concept of sustainable development brought into the area. Note that liabilities rules would lower transaction costs if the subject matter could be easily measured. Indeed, if there are intrinsic measurement problems, liability rules can possibly raise transaction costs rather than lowering them. In any event, a Coasian sustainable development framework essentially regards liability issues to be at best secondary, as both parties agree not to sue each other as the basis for exploring a 'win-win' solution to problems. The discussion below testifies to these points.

The twists and turns of the private-public remediation and reclamation initiatives were well documented (CEC, 2004,104-23). Aside from efforts made by various government agencies, non-government agencies (NGOs) and environmental groups (e.g. the Fraser Basin Council and Sierra Legal Defence Fund), institutional efforts were made to strengthen the legal basis by which development efforts in the area would be made from 1998 to 2002.

The status of the situation recorded at the time of the writing of the Factual Record (CEC, 2004) was the following:

The court-appointed receiver-manager was discharged from its duties at Britannia on 31 July 2001, returning management and control of the site to CBE, which remains insolvent. In the fall of 2002, '40091' sold its mortgage interest in the property to another real estate developer who maintains an option of foreclosing at anytime. (CEC, 2004, 124)

The saga of the odd couple of public-private endeavour continued into 2003 and beyond, arguably opening a new chapter in the public-private partnership.

Stage 2: From e to f in Figure 3: towards sustainable development

According to a Community Design Charrette conducted by Professor Patrick Condon of the University of British Columbia (4 September to 23 October 2003), who was an experienced architect/urban planner practicing the philosophy of sustainable development, the stakeholders at Britannia Beach consisted of 19 interest groups and a list of the names of local residents.

The plan came out of the charrette was similar in spirit to the 'win-win' possibilities provided by the theoretical framework of Coasian sustainable development described in this paper, with an emphasis not so much on an optimal clean up of the environment, but a proactive effort to get stakeholders involved in turning an historical negative externality into a positive one. It called for a drastic transformation of the museum business by architecturally turning a run-down historical mine structure into a state of the art monumental building anticipating the future while capturing the past heritage. Its surrounding area is expected to build around a tourist business stretching to the now undeveloped waterfront - hoping to increase tourism from a mere 30,000 visitors to 500,000 a year. The town is expected to grow from the current population of 300 to a community housing 2,000 to 3,000 people. It aims to be a community that has homes, services, schools and jobs all on one compact site.

The incentive to move ahead can be further supported by some catalytic developments, perhaps symbolic or real and significant endeavours of innovative activities of various sorts. For example, after the government announced its intention to clean up Britannia, more cutting edge technologies were presented that would ultimately require approval from the Ministry of Water, Land and Air Protection and the Ministry of Energy and Mines. As part of this innovative drive, the University of British Columbia and provincial government were perceived to be important. Aside from a plan by the university to build a $20 million Canadian Environmental Mining Research Centre (CERM) on site, Natural Resource Canada is also planning to construct a Britannia Centre for Mining and Innovation in the neighbourhood."' The research centres would focus on mining issues and advocating for the creation of a sustainable mining industry for research, education, and touring purposes.

Innovative technology considered for use in the area included geothermal heating by utilising the mine's warm leachate and the rebuilding of a small hydroelectric facility on the creek that used to power the mine to provide the new town with selfsufficient electricity. All these efforts coincide with the proposition that Schumpeterian experimentation is at the heart of sustainable development that could turn negative externalities into positive ones.

Although the principle of developing a 'win-win' strategy has never been explicitly used in the planning process in the new era of planning, the charrette methodology is conducive for arriving at a consensus by parties who expect to achieve a mutually beneficial outcome. Even with that, the will of stakeholders is one thing, while the institutional structure that may indeed permit the realisation and implementation of the will is another. A charrette is not a legal document. It is not even an OCP (official community plan). Yet, a statement of the future is likely to have some bearing in the planning of the community. The charette method is neither necessary nor sufficient for sustainable development principles to be played out. However, it is a very useful communication structure used for discussing 'win-win' strategies in a Coasian sense. In that sense, the role of the facilitator (i.e. the entity conducting the charette) is crucial. He or she must be able to identify all stakeholders involved, ensure that the discussion is sufficiently focused and be fair in information exchange. This method is effective at least in the sense that it has a limited time span for exchange of ideas and this would constrain uncertainty in reaching a solution.

The institutional development that will make all this work according to plan has to come from the ingenuity and integrity of the players involved. Aside from the addition of new players from the university, from mining research innovation centres, etc., and the promise of a provincial remediation clean-up process being in place, an important ingredient in this new era of development is expected to come also from the new private developer, MacDonald Development Corporation, and the associated real estate development in the area.

MacDonald, as Company '400091' British Columbia Limited, assumed control of CJBE assets in a foreclosure court decision on lyjuly 2003. This change in title of the assets is arguably important in that the foreclosure decision was preceded by a series of negotiations between the province and MacDonald in that once the latter had taken title to the property, all acreage (approximately 800 acres, including the contaminated site as well as various mineral rights) would be transferred to the province, while MacDonald would keep approximately 400 acres of uncontaminated land. The voluntary remediation agreement between the province and MacDonald in essence indemnified the latter for environmental liability, or at least putting a cap on it. MacDonald agreed to contribute $5,500 per lot to be sold from the 400 acres to assist remediation.

This reassignment of property rights is extremely crucial in facilitating future development in the area, as the first twenty years of the redevelopment of Britannia Beach has been characterised by an 'inefficient property rights structure' and an inappropriate economic paradigm that discouraged cooperation between the private and the public. As long as CBE is still holding titles to all the properties, it is not expected that lots will be up for sale until remediation works and the infrastructure of roads and services have been completed. This was explicitly stated in the SquamishLillooet Regional District By-Law 714 on 27 August 2001: 'the Britannia mine site will require various forms of remediation before development of lands owned by Copper Beach Estates and the BC Museum of Mining can proceed'. By settling the liability issue under the voluntary remediation agreement, the development of lots on the 400 uncontaminated acres was allowed to proceed.

At the time of writing this paper, Britannia Bay Rezoning (Squamish-Lillooet Regional District By-Law 881, 2004) has just gone through its third reading, allowing the northern Britannia Beach area to be rezoned from Resource Use to a Residential One zone." The lots will be developed once the subdivision approval and rezoning process are both complete - i.e., the lots are not legally created until the subdivision receives final approval from the Ministry of Transportation and are registered with the Land Titles Office. This may take six to nine months, depending on the time required to install all servicing infrastructure (Stratis, 2004).

Another feature in MacDonald's development direction that distinguishes it from its predecessor, CBE, is its involvement with the local community. Aside from putting in various infrastructure such as roads, sewage disposal systems, drainage, new electric systems, etc., the developer was also involved in remodelling efforts of various sorts within the community. There have been regular town hall meetings conducted with local residents and, with the establishment of a Residential Advisory Committee and fundraising activities of various sorts, the developer envisages building the future community around the existing human resources of the community.

In spite of all these efforts, for most residents of the community, the biggest issue facing them is still the cost of housing - how to make ownership affordable. In this respect, the developer has claimed to offer attractive and innovative financial packages for existing renters to buy the lots that they are currently using. These packages include interest-free mortgages for finite periods with preferential mortgage terms and a waiver of standard qualifying procedures. But there will be residents who will not be able to afford any kind of housing increase in the rents that are currently charged. The developer insists that it will work out an arrangement suitable for each and every local resident in this development process. This redevelopment vision, consistent with the Coasian sustainable development objective of seeking a 'win-win' solution, is expected to result in a better performance over the old method of development used by CBE.

In summary, the private development path of e-f in Figure 3 has several distinguishing features that the previous intended path of b-e was not able to pursue, implicitly supporting a Coasian sustainable development framework of which probably none of the participants involved was consciously aware:

(1) A property rights structure is able to be more effectively aligned with economic efficiency. [The province is to hold title over the contaminated site, acting as the trustee to seek remediation remedies through past polluters, while also managing remediation and the future reuse of the resources under its control.]

(2) The stochastic element of heritage is being explored both technically and socially by engaging in Schumpeterian experiments of various sorts.

(3) An implicit awareness of cooperation and developing a 'win-win' solution rather than playing a game of prisoner dilemma is in place.

At this juncture, it is worth pointing out that a traditional name for Britannia Creek translates as 'No Fish Creek'. This is, perhaps, one of the reasons there are no land-claim disputes over this site. This name suggests that Britannia Creek has never been home to salmon or other aquatic life for the reason that copper contamination has always existed in the Creek from surface leaching of ore deposit outcrops at the top of the mountain. Now that these have been mined out and the pollution diverted away from the Creek, Britannia Creek for the first time ever is capable of being a home to salmon fry and blue mussels. Both of these species have been observed repopulating the mouth of the Creek where it enters Howe Sound. Blue mussels, in particular, have never previously been seen on the banks of Britannia Creek. This being the case, one may say that the polluting mining activities actually, upon completion and after care, opens a new ecological chapter in the biodiversity of the river!"


Our paper should stimulate discussion in terms of seven leading questions in the sustainability debate. The first and perhaps the most important question raised by the sustainable development theorists is what is governance? More specifically, the question is should human development be determined by collective decision making (through legislative policymaking) or individual decision making using private markets and the price system? Our paper shows that while governance is the key, the choice set may not be one of 'either collective or individual'. Our model of sustainable development advocates a 'win-win' collaboration possibly involving the government. This understanding should help better conduct the debate between a biodiversity/preservation approach to sustainable development compared to a developmentalist one. The biodiversity/preservation approach could cause potential hold up problems. Fortunately, this has not (yet) happened in the Britannia Beach case. Indeed, local resident squatters seemed highly supportive of the redevelopment initiatives of the developers. In our paper, we explicitly specify that heritage can be an asset as well as a liability. Biodiversity/conservationist activists will forever hold the baggage of the past if they do not have a forward looking view of the future.

The second question is what is the limitation of a static view about the environment? By holding a static view of the environment most sustainable development theorists have boxed human progress into a steady state. This is an untenable proposition since the very nature of human existence is to modify the environment around them to suit their needs. This proposition relies on the two key components for success:

(1) rational, fully informed decisions; and

(2) willingness to subvert individual wants and desires to a collective (legislative) decision making process.

Both components seem to be a-historical. By not factoring in the inherent realities of democratic governance, sustainable development is both an impractical and unrealistic approach to governing human settlements and development. On the other hand, collective choice enthusiasts can also accuse free marketeers for not factoring in high transaction costs and the realities of public domain problems. Our paper presents a dynamic approach that relies on the creativities of human beings in solving problems within an enabling institutional setting.

The third question, following the previous one, is what is the nature and significance of technology in our model? It is a cliché to hold that technology can improve the quality of life. This standard argument is not accepted by the ecologyinformed sustainable development theorists. However, they tend to focus attention on the resource using aspect of innovation (or indeed resource exploitation technology) but ignore the resource conservation and transformation contribution of innovation, the kind of innovation to which we draw attention. The discussion in our paper sheds light on the idea that human innovation can indeed nourish the environment through development, given the right kind of institutional arrangements as discussed above. Empirical evidence from the literature on aquaculture and fisheries as commercial activities is particularly compelling. Aquaculture overcomes the so-called problem of the tragedy of the commons not only in terms of quantity preservation but also a growth in the diversity and quality of seafood products (Lai, 1993; Lai and Yu, 1995; Lai et al., 2005). A legislative governance approach to sustainable development will not be conducive to such innovations. History has shown that market-based societies innovate more than those that do not (North, 1990; Rosenberg and Birdzell, 1986)

The fourth question is what is the role of sustainable development goals embodied in the case study, as can be predetermined a priori? Indeed, most sustainable development programmes that stress environmental conservation and preservation establish goals a priori and design programmes to implement them. They are rarely based on empirical analysis, and are determined from theoretical ecological reasoning. But there is a place where the two different conceptions of sustainability can be contrasted. Assuming goals can be established a priori rests on the assumption that history will necessarily repeat itself, and perhaps more so, that there is nothing new under the sun. We agree that a priori goals tend to fail especially where they are imposed or seen to be so, but the alternative view is that people often state it as a matter of setting a benchmark. In a dynamic setting, the goals are not expected to be achieved at all cost. For example, when a CEO decides that a company should achieve a growth rate of 8 per cent next year, he may not have any a priori a reason to believe that it will be 8 per cent. However, this goal does foster a commitment to search for innovations to achieve the goals.

The fifth question is what are the negative effects of relatively unconstrained public participation? Broader public participation of this kind presumes that sufficient information can be brought into the decision-making process and decisions will be determined in an independent and rational way. However, public participation in governance is driven by values and data rooted in past experience. An open legislative decision-making process can work well when settling or identifying broad community values, but its effectiveness weakens substantially with more specificities and details. If sustainability were to become a core governing principle of community, the level of information and participation would likely be greater than that which can practically be delivered. Collective decision-making processes are not capable of collecting and processing the decentralised bits of information necessary to determine an efficient allocation of resources. This, of course, harkens back to the social calculation debate of the 19205 and 19305, but it is also driven by a political process that is, by design, zero sum. Unlike markets that can cater to niches, democracies apply majority rule criteria for decisions. Thus, the result is likely a 'win-lose' one. This in sustainable development planning tends to end up in a classical planning game, which is a resource dissipating zero sum rent seeking process (Tullock, 1993; Lai and Lome, 2006). Our paper does not endorse this approach. VVe rather hold that as long as the public participation is not required to be full scale, the information requirement may not be overly severe. Public participation is neither an obligation nor assumed to be a human instinct. It is not a social contract. However, it is something to be encouraged, like teaching children to have good manners. While a clear system of entitlements helps establish boundaries for legislative decision making, these entitlements must be imposed. They must be respected (formally and informally) and such erosion of those entitlements without strong judicial backing by taking (eminent domain) or zoning be avoided.

The sixth question is the link between transaction costs and the institutional framework for implementing sustainable development needs to be articulated more completely. Transaction costs also apply to collective decision making. How will this influence the efficiency of legislative decision making? Our paper suggests that legislators need to behave more smartly. They might not want to act slavishly purely for the preference of their constituencies; and indeed, their tasks may be to influence their constituencies, of course, at the risk of losing their support altogether. This is a classic problem discussed by Olson (1982) and other public choice theorists. Are the diffused benefits from participation in the legislative process high enough to overcome the costs of participation? What if they are not? Rule-of-law-governed Athenian and Roman democracies appeared to be quite capable of expanding both markets and territories. It must be emphasised that here again, the public consultation process we envision need not be all inclusive. Is this institutional framework simply opening the door for other special interests (extreme environmentalist groups) to lobby for highly constrained policy choices? Possibly, indeed very likely, that is where we hope to make a contribution to illustrate how a confrontational bargaining paradigm is contrary in spirit to the concept of sustainable development. How public participation can be so constrained to deliver 'win-win' solutions, avoiding the trap of the classical planning game, is indeed the heart of the institutional inquiry into sustainable development.

Last but not least is the theoretical relationship between 'externality' and 'property rights' invoked here in terms of development in the domain of propertyrights economics. It would seem that hitherto the dominant property-rights approach has been to regard the Pigovian idea of externality as either a theoretical nonsense (Demsetz, 2003, 287) or something (in case of 'relevant externalities' [Buchanan and Stubblebine, 1962]) that the market (Coase, 1960) or the law (Buchanan and Faith, 1981) may discover mutually beneficial means to internalise or mitigate. For all conventional considerations, the 'incentive' is narrowly confined to an integration of conflict of interests by a combination of activities or a pure exchange of rights. This paper holds that the conferment of some entitlements would provide incentive for the conversion of third-party effects into positive ones. However, this conversion is not definite but a matter of experimentation and stochastic outcome.


Although Coase has never been perceived as a planner and, indeed the essence of a Coasian bargaining solution to the problem of social costs precludes the use of government planners, a Coasian sustainable-development approach can be perceived to have been implicitly adopted by the community under study. While it is still premature to assess fully the success or failure of a public-private cooperative endeavour, a study of past behaviour at least reveals the reasons why the Old' way of public-private interaction has not worked.

Theoretically, this paper converts a static 'Chicago School' Coase Theorem using an Austrian economic concept with Schumpeterian experimentation so that it could handle the challenge posed by the need to implement sustainable development as a means to attain the common good, which accommodates the idea of reversible substitution. Articulating well with the tools of neo-classical economics, the 'AustroCoasian' model that we characterise goes beyond mere preservation and can perhaps be best described by the Confucian expression 'cultivation', which refers to the development by human efforts and wisdom not only of originally wild species, but also the character of a person. This paper practically offers some ideas of a marketconvivial option for policy and lawmakers who appreciate the danger of equating implementing sustainable development to making more regulations and edicts. The approach adopted, which may be said to be 'planning by negotiation' that avoids the problem of deadlock in a classical 'planning game' (Lai and Lome, 2006), is consistent with the idea of 'planning by contract' ('planning by consent') (Lai, 19943; 1994!); 1996; 1997; 2004; 20053; 2005)3) or 'private land use planning' (Pennington, 2002) for the common good with humility and respect for the institution of private property.

1 Ecological modernisation argues that economic growth is not the runny of sustainable development; indeed economic growth is seen as necessary Io achieve environmental improvements and sustainability' (Batty, 2003, 7(1). As ecoonomists, we du not subscribe to citlicr the 'deep-grfen' approach (Mawliinney, 2003); that denies development a cbaiice nor the idea of Beckerman (1992; 1995; 2003) that stistainable deveopnient is a reel herring, a waste of time.

2 This definition is not the same as a 'technological externality' discussed by Yandlc (2003, 263).

3 In the parable, the amount of the land allocated for the two land uses may be visualised by imagining thai the extent of the two types of uses is dermarcard by a movablr border fence that shifts according to changes in values of the marginal product of the wheat and cattle outputs.

4 In the sustainable development literature, there is a distinction between 'strong suslainabilily' (DaIy 1991, Rees 1990, 1999) and 'weak sustainability' (Pearce et al., 1989; Pearce and Barbier, 2000). The latter accepts substitutionaly.

5 For the position for the Catholic and Orthodox Church, see the Pontifical Council for Justice and Peace (2002).

6 This can be compared to 'conversion' or a change in the heart in Christian environmental ethics. See Ryan (1994).

7 Theoretical propositions of the nature of externalities were largely definitional. sec the classic paper of Buchanan and Stuhblebine (1962). Bucahanan and Faith (1891) argued that the law ('liability rule') can be superior In the market ('property rule') for internalising externalities consequent upon certain 'entrepreneurial ventures'. While this paper shares their use of Schumpcter's concept of emrcprciicurship. it stresses the traiislbrnialion of negative externalities rather than mere internalisation. When he was with the University of Washington in early 1970s. Stevern N. S. Chcung articulated in an unpublished manuscript a proposition of the conversion of an externality. However, dieting lbrnnilaled a model with positive externalities turning into negative externalities, primarily driven by the law of diminishing returns. None of the earlier models emphasised an Austrian Schumpeleriaii process of traiislormation

8 See history at

9 Indeed, with zero transaction rosis, il could he argued that an unmodified version of Coasian bargaining could have resolved the earlier environmental problems in that fish in the ocean would have been owned by some stakeholders so thai an 'optimal pollution' level could have been adopted. We thank Chris Webster for pointing out this logical pitfall in our earlier formulation of the problem.

10 NRC expected to start construction in 2006 and be opened in 2009 (McPhie. 2004).

11 To be sure, current procedural accomplisment in rezoning and subdivision do not immediately result in exchangeable property rights.

12 We thank Professor John Meech of UBC for providing us with this observation.



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We would like to express our gratitude to Professor Patrick Coiidon for directing us to the various sources of information needed in reviewing the Britannia Beach case study. Apart from the many individuals cited in the text who kindly agreed to be interviewed, we wish to thank specifically Professor John A. Meecli. Professor Chris Webster and Dr Sam Staley for their invaluable comments on the manuscript. The research for this paper is sponsored by an Outstanding Young Researcher award granted to the first-named author by the University of Hong Kong in 2004.

[Author Affiliation]

Lawrence Wai-chung Lai is Professor of Planning. Knmomies and Law in the Department of Real L'state and Construction, University of Hong Kong, Pokftilam Kciad. Honi; Kong; email: Frank T. Lorne is Adjunct Professor in the Departincnt of Real Estate and Construction, University of HOMK Kong, Pokfulam Road, Hong Kong and Senior Consultant and Research Prolessor in the New Keononiy and Institutional Research Centre, Shenzhen University. Slirnzhcn, China; email: flonie@ird,

Paper submitted November 2004; revised paper received and accepted March 2005

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