Gary Libecap

U. of California

Transaction Costs and Institutional Responses to the Common Pool

Most critical environmental and natural resource problems arise from common pool externalities.
Even though there can be consensus on the need to address externalities associated with the common pool, such as the losses of over fishing, the too rapid draw down of aquifers, and the emission of greenhouse gases associated with global warming, actual agreement on an institutional response is complicated by information problems, distributional disagreements, and enforcement. These factors raise the transaction costs of institutional responses to the common pool.
Given these conditions, one cannot understand the process of institutional change without consideration of transaction costs.
In the presence of transaction costs, one must be careful in making strong efficiency claims about observed conditions that appear to be "inefficient."