Principle of Interest-Pay-Say in Principle of Interest-Pay-Say in Community-Based Community-Based

Environmental ManagementEnvironmental Management

Daigee ShawDaigee ShawPresidentPresident

Chung-Hua Institution for Economic ResearchChung-Hua Institution for Economic ResearchTaipei, TaiwanTaipei, Taiwan

OutlineOutline

1.1. Challenges of community based Challenges of community based environmental managementenvironmental management

2.2. Principle of equal participationPrinciple of equal participation

3.3. Principle of interest-pay-sayPrinciple of interest-pay-say

4.4. ConclusionConclusion

OutlineOutline CBEM ConclusionEqual Participation Interest-Pay-Say

Challenges of CBEMChallenges of CBEM

Community-based Environmental Management (CBEM): Community-based Environmental Management (CBEM): An application of participatory democracyAn application of participatory democracySetting a trend towards solving environmental Setting a trend towards solving environmental problems using local capacityproblems using local capacity

However, some questions are raisedHowever, some questions are raisedCBEM is suitable for which types of environmentalCBEM is suitable for which types of environmental management?management?How to distribute responsibilities and benefits among How to distribute responsibilities and benefits among stakeholders?stakeholders?

This paper addresses the 2nd question This paper addresses the 2nd question Attempts to provide proper incentives using Attempts to provide proper incentives using the principle the principle of interest-pay-sayof interest-pay-say in order to offer a solution in order to offer a solution

CBEMCBEMOutline Equal Participation ConclusionInterest-Pay-Say

Problems of DecentralizationProblems of DecentralizationDifficulties in Difficulties in internalizing internalizing

externalitiesexternalities between communities between communities

Endangering Endangering equityequity by by

channeling resources into channeling resources into

the hands of the hands of local eliteslocal elites

Free-ridingFree-riding: With a small and equally : With a small and equally

distributed share of voice, distributed share of voice,

each stakeholder has few each stakeholder has few

incentives to monitor the incentives to monitor the

management of management of commonscommons

Outline CBEMCBEM Equal Participation Interest-Pay-Say Conclusion

Economics of the FirmEconomics of the FirmOrthodox Neoclassical Theory of the FirmOrthodox Neoclassical Theory of the Firm

Profit maximization subject to technological conditions (pProfit maximization subject to technological conditions (production function)roduction function)View the firm from outsideView the firm from outside

FrictionlessFrictionlessCooperation Cooperation No self-interestNo self-interest

However, if we view the firm from insideHowever, if we view the firm from insideIncentive to integrate, cooperate?Incentive to integrate, cooperate?Metering problemMetering problem (Alchian and Demsetz, 1972) (Alchian and Demsetz, 1972)Rent-seeking (Tullock, 1967; Krueger, 1974)Rent-seeking (Tullock, 1967; Krueger, 1974)Agency problems (Jensen & Meckling, 1976) Agency problems (Jensen & Meckling, 1976)

Outline CBEMCBEM Equal Participation Interest-Pay-Say Conclusion

Economics of the FirmEconomics of the FirmMany forms of firms:Many forms of firms:

One-man firm One-man firm

Partnership Partnership

Not-for-profit organizationNot-for-profit organization

The traditional Soviet firm The traditional Soviet firm

Socialist labor-managed firmsSocialist labor-managed firms

The labor-owned firm The labor-owned firm

Stakeholder-owned firmStakeholder-owned firm

Outline CBEMCBEM Equal Participation Interest-Pay-Say Conclusion

Principle of Equal ParticipationPrinciple of Equal Participation(theoretical model)(theoretical model)

Equal ParticipationEqual Participation

The commons concerning The commons concerning nn individuals individualsA community-based public good management systeA community-based public good management system m Let Let CCii be individual be individual i’i’s input (the level of effort s/he s input (the level of effort s/he would like to make for the management of the comwould like to make for the management of the commons). mons). Total input Total input C C == ΣC ΣCii Total output Total output B B ==a Ca CThe output gained by individual The output gained by individual ii is is BBii = = b bii BBIndividual Individual i’i’s utility s utility U U ==U U ((BBii, C, Cii ) )

Outline CBEM ConclusionInterest-Pay-SayiCiC

Principle of Equal ParticipationPrinciple of Equal Participation(theoretical model)(theoretical model)

Equal ParticipationEqual Participation

Based on the principle of equal participation Based on the principle of equal participation

bb == 1/n 1/nEach individual has the same share of output Each individual has the same share of output which is irrelevant to each individual’s contributionwhich is irrelevant to each individual’s contribution

First-order condition maximizing the utility of First-order condition maximizing the utility of ii

Marginal rate of substitution of benefit for effort Marginal rate of substitution of benefit for effort = = marginal rate of transformation divided by the marginal rate of transformation divided by the number of individuals number of individuals Free-riding deters the willingness to contribute to Free-riding deters the willingness to contribute to management. The tragedy of the commons and management. The tragedy of the commons and efficiency loss hence occur.efficiency loss hence occur.

Outline CBEM ConclusionInterest-Pay-Say

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Principle of Equal ParticipationPrinciple of Equal Participation(application)(application)

Everyone is entitled to have a say in national or Everyone is entitled to have a say in national or local policies in most democratic countries (e.g., local policies in most democratic countries (e.g., the US, the UK, Canada and EU). the US, the UK, Canada and EU). - Keeping the drafts of policies open for public - Keeping the drafts of policies open for public discussiondiscussion- However, most of the - However, most of the comments come from comments come from interest groups and related industries rather interest groups and related industries rather than ordinary residentsthan ordinary residents who may be affected to who may be affected to a rather large extenta rather large extent

ConclusionInterest-Pay-SayEqual ParticipationEqual ParticipationCBEMOutline

Principle of Equal ParticipationPrinciple of Equal Participation(application)(application)

Community forest management in Meghalaya (India)Community forest management in Meghalaya (India)- A democratic way of management that increases p- A democratic way of management that increases participation has been introduced to replace the tradiarticipation has been introduced to replace the traditional consensus from selected adult males. tional consensus from selected adult males. - However, the - However, the emergence of a new elite dominates temergence of a new elite dominates the decision-making processhe decision-making process due to the introduction due to the introduction of the democratic way of management to replace thof the democratic way of management to replace the traditional consensus presents a threat to the voice traditional consensus presents a threat to the voice of the local people (Nongkynrih 2006). e of the local people (Nongkynrih 2006).

Outline CBEM Equal ParticipationEqual Participation Interest-Pay-Say Conclusion

Principle of Interest-Pay-SayPrinciple of Interest-Pay-Say (theoretical model) (theoretical model)

Def: A proportional share of interests and financial contribuDef: A proportional share of interests and financial contributions corresponding to votestions corresponding to votes bbi i == C Ci i / / ΣΣCCi i

Then, FOC:Then, FOC:

Marginal rate of substitution in utility terms = marginal rate Marginal rate of substitution in utility terms = marginal rate of substitution of production of substitution of production The share of benefit compensates the effort. Therefore, eacThe share of benefit compensates the effort. Therefore, each individual is willing to contribute to the optimal level.h individual is willing to contribute to the optimal level.

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Interest-Pay-SayInterest-Pay-Say ConclusionEqual ParticipationCBEMOutline

Water Boards of the NetherlandsWater Boards of the Netherlands- Integration of various interests- Integration of various interests- Allocation of the share of - Allocation of the share of participation according to participation according to the interests & responsibility the interests & responsibility that channel the costs & that channel the costs & benefits for each individual.benefits for each individual.-- 100% representation of the interests 100% representation of the interests

Principle of interest-pay-say Principle of interest-pay-say

Principle of Interest-Pay-SayPrinciple of Interest-Pay-Say(application)(application)

ConclusionInterest-Pay-SayInterest-Pay-SayEqual ParticipationCBEMOutline

Water associations (Genossenschaft) in Water associations (Genossenschaft) in North Rhine-Westphalia, GermanyNorth Rhine-Westphalia, Germany

- Principle of interest-pay-say- Principle of interest-pay-say- Famous for their efficiency of- Famous for their efficiency of water management water management

Principle of Interest-Pay-SayPrinciple of Interest-Pay-Say(application)(application)

ConclusionEqual Participation Interest-Pay-SayInterest-Pay-SayCBEMOutline

ConclusionConclusionConclusionConclusion

Challenging the appropriateness of applying the Challenging the appropriateness of applying the principle of equal participation in community-principle of equal participation in community-based environmental management.based environmental management.Advocating the principle of interest-pay-say as Advocating the principle of interest-pay-say as an alternativean alternativeReason: Offering proper incentives to meter, Reason: Offering proper incentives to meter, integrate, cooperate, and to solve integrate, cooperate, and to solve

Rent-seeking problemRent-seeking problem

Agency problems Agency problems

Not only good for environmental management, Not only good for environmental management, but also for providing other kinds of public goods but also for providing other kinds of public goods

Equal Participation Interest-Pay-SayCBEMOutline

ConclusionConclusion

Those who are interested in the decision-making Those who are interested in the decision-making have a have a corresponding proportion of responsibility corresponding proportion of responsibility (financial (financial contributions) and rewards (votes).contributions) and rewards (votes).Providing an alternative view of equity that takes differential Providing an alternative view of equity that takes differential interests and capacity into account.interests and capacity into account.A proper institutional design can strengthen the aspects of A proper institutional design can strengthen the aspects of expertise, information and incentivesexpertise, information and incentives100% representation of the interests 100% representation of the interests Offset or minimize the concerns of equity loss caused by the Offset or minimize the concerns of equity loss caused by the deviation from the principle of equal participation. deviation from the principle of equal participation.

CBEM ConclusionConclusionInterest-Pay-SayEqual ParticipationOutline