In the early 19th century, the Louisiana Purchase (1803) and Mexican Cession (1848) doubled the United States land mass, changing it politically and culturally. The image of the cowboy, the homesteader, and westward expansion has shaped much of American popular culture ever since (Ficken and Hausladen, 2003).
These new lands also brought forward one of the oldest questions in economics: How to effectively use new resources? Studying this question in the American West can highlight how misinformed policy choices can lead to an environmental catastrophe and how a coordinated government response can help alleviate its consequences.
In the American West, common law implied that any land not claimed by an individual or entity could be used by anyone free of charge. The results of such non-existent property rights for open-access common lands have attracted the interests of mathematicians (e.g., William Forster Lloyd in 1833) and ecologist Garrett Hardin in 1968, who coined the term ‘Tragedy of the Commons’:
“Picture a pasture open to all. It is to be expected that each herdsman will try to keep as many cattle as possible on the commons. (…) As a rational being, each herdsman seeks to maximize his gain. Explicitly or implicitly, more or less consciously, he asks, “What is the utility to me of adding one more animal to my herd?” This utility has one negative [overgrazing] and one positive [sale of additional animal] component. (…) Adding together the component partial utilities, the rational herdsman concludes that the only sensible course for him to pursue is to add another animal to his herd. And another; and another…. But this is the conclusion reached by each and every rational herdsman sharing a commons. Therein is the tragedy. (…) Ruin is the destination toward which all men rush, each pursuing his own best interest in a society that believes in the freedom of the commons.” (Hardin 1968, p. 1244).
When economists took up this problem, two solutions emerged. First, Samuelson (1954) suggested that in the presence of externalities, well-defined property rights to publicly-owned lands can achieve first best outcomes when the incentives of regulators and private individuals are aligned.
“It is in the selfish nature of each person to give false signals, to pretend to have less interest in a given collective consumption activity than he really has. (…) No decentralized pricing system can serve to determine optimally these levels of collective consumption.” (The Pure Theory of Public Expenditure, 1954, p. 387).
Second, although economists typically associate him with privatization instead of government regulation, Coase (1960) argued:
“From these considerations it follows that direct governmental regulation will not necessarily give better results than leaving the problem to be solved by the market or firm. But equally, there is no reason why, on occasion, such government administrative regulation should not lead to an improvement in economic efficiency.” (The Problem of Social Cost, 1960, p. 18)
At face value, while Samuelson suggests that no private market mechanism can solve the Tragedy of the Commons, Coase argues that privatization and publicly-owned lands could both achieve first-best outcomes. To paraphrase Coase then, ‘What are these “occasions” in which the government gets it (accidentally) right?’ Interestingly, this question can be studied using the American West as an experimental setting.
The privatization of the public domain: the Homestead
Nearly one hundred years before Samuelson or Coase, the US Government had to decide what to do with the vast areas west of the Mississippi. Whether to find space for immigrants to settle, finance the states, or built the railway crossing the United States, the government saw land as a resource to be privatized. This national policy culminated in the Homestead Acts, which recently attracted renewed interest from scholars studying its long-run economic consequences (Mattheis & Raz, 2019) or the impacts of land concentration (Smith 2021).
Attempts to pass a nationwide homestead act began in 1846, but only succeeded after southern Democrats left the union in 1862. The original Homestead Act enabled settlers to acquire up to 160 acres for 12 USD up front, and 6 USD after the settler could prove he had “improved” the land during his five years of residency; a bargain compared to outright purchasing the land for 200 USD. As most of the prime agricultural lands were quickly homesteaded, the enlarged Homestead Act of 1909 expanded the number of acres to 320, if farmers accepted more marginal lands.
However, these acts did nothing to solve the underlying problem of the homesteader in the American West. Hundreds of square miles of rangeland were plowed up and marked by deserted shacks and rusty windmills. The human cost was high and the destruction of the range was a tremendous loss to those remaining. What Congress did not realize in their efforts to privatize these lands was that the acreage involved was too small to support a grazing operation, and the land was generally unfit for agricultural farming (Foss, 1960, p. 26).
In 1916, the last homesteading act (Stock-Raising Homestead Act) further enlarged homesteads to 640 acres. While it addressed the limited acreage for marginal lands, it also lured in homesteaders to whom 640 acres sounded a lot of land. These new homesteaders reduced the grazing areas available to existing stockmen and overgrazed all available lands due to their unfamiliarity with their new surroundings, thus further reducing income for stockmen and productivity of already marginal lands (Foss, 1960, p. 27). Thus, the 1916 act did not solve the issue of overgrazing; it made it worse.
This problem was already apparent in 1875, when President Hayes’ administration realized that the Homestead Act was not working as intended and commissioned a report on the “Lands of the Arid Region”. Therein, J.W. Powell reported that in some areas of the American West, 2,560 acres were necessary for a rancher to be sustainable. However, since the land was not worth the 1.25 USD per acre, or farmers could not afford it, farmers only bought their homestead and used all lands around it free of charge. Thus, after the government sold their prime agricultural land, it was left with more than 200 million acres of public land that no one owned, but everyone used free of charge.
Land quality degraded due to overgrazing, and public opinion began to sway in favor of regulation. Senator Foster introduced the first leasing bill in 1899, “to provide for the leasing of the public lands for grazing purposes and to produce revenue for agricultural development” (Foss, 1960, p. 41). Despite a 1903 survey by the public land commission showing that 77% of ranchers favored some sort of government control over the public domain, this and more than ten other bills failed to leave committees or pass through Congress until 1933.
The public grazing solution: The Taylor Grazing Act
The first bill to pass Congress and Senate was the Taylor Grazing Act in 1934. It prohibited the sale of 142 million acres of more than 173 million acres of public land in the West and instead created large grazing districts to which existing ranchers were given well-defined property rights (‘access rights’). Such access rights were sold at a discount and for a period of up to ten years, following the self-reported previous use of the commons.
Several factors combined for this largest land-transfer in the American History: Under the impression of Hover’s failure to address the soaring unemployment during the Great Depression, the American people elected a democratic president in favor of big government in 1932. He installed new heads of the department for agriculture and interior who were in favor of regulation. Finally, the Dust Bowl made it evident that the government needed to act to protect nature and profitability of famers and stockmen.
This setting turns out to be helpful in answering the initial question on how to allocate property rights to resources. In nine states, thousands of homesteaders, the result of a 70-year long privatization policy, now lived immediately next to publicly owned land with regulations. The boundary between these two systems, and the open-access common lands outside of the Grazing Districts, was drawn using a rigid public land survey system that established 1×1 mile sections, which deterministically evolve from one origin point. Thus, it provides a discontinuity at which to study the question whether to publicly manage or sell resources – a visible fence that continues straight for miles on end.
In my research, I use satellite-based data on vegetation to calculate productivity for every square mile of the American West, and compare observations in the open-access control outside the grazing districts (`the commons’) to privatization and publicly owned lands inside the grazing districts (Bühler 2021).Throughout all specifications, both property rights regimes increase productivity by about 10 percent compared to the open-access regime. Perhaps surprisingly though, there are no differences in outcomes between the two potential solutions to the Tragedy of the Commons: privatization and public ownership with regulated access rights increase productivity by the same factor.
The Taylor Grazing Act also constituted one of the largest wealth transfers in the United States’ history. Thousands of ranchers, who previously used lands free of charge, now paid 0.05$ per cattle. In exchange, their farms now effectively ended well beyond the limits of their homestead: Farm values now included the 640 acres of their homestead and thousands of acres they had exclusive access to under the Taylor Grazing Act. The productivity increases from establishing property rights to these lands nearly doubled the number of cattle on farms and increased their value by more than 40 percent in the years following the Act.
Is this one of the few cases in which the government, to quote Coase, “occasionally” got it right? Indeed, as Coase predicted, once incentives of regulators and ranchers are aligned, the institutional settings enable a credible enforcement of property rights, and these rights are easily transferred or sold, it does not matter for productivity who owns lands.
Naturally, drawing conclusions for modern examples of open-access and the Tragedy of the Commons is complicated. Take India, where more than 50% of rural farmers depend on grazing in forests or on community lands. Well-defined access rights to such communal lands for a per-animal fee could lift millions out of poverty who could not afford to purchase lands outright. However, without credible enforcement and transferability or property rights, such a reform might only lead to more elite capture and achieve the exact opposite.
Yet, especially in times of climate change increasing the frequency and severity of draughts, the value of coordinated government action becomes ever clearer. The historical example of land rights in the United States, along with numerous other examples (e.g., for water rights: Ayres et al., 2021), highlight and inform about the potential benefits – when regulation is done right.
Ayres, A. B., K. C. Meng, and A. J. Plantinga (2021). Do Environmental Markets Improve on Open Access? Evidence from California Groundwater Rights. Journal of Political Economy, 129(10).
Bühler, M., (2021). On the other side of the fence: Property rights and productivity in the United States. Working Paper.
Coase, R. H. (1960). The Problem of Social Cost. Journal of Law and Economics 3, 1–44.
Ficken, Robert E. and Gary Hausladen 2003. Western Places, American Myths: How we think about the West. University of Nevada Press.
Foss, P. O. (Ed.) (1960). Politics and Grass. Seattle: University of Washington Press.
Hardin, G. (1968). The Tragedy of the Commons. Science 162(3859), 1243–1248.
Mattheis, R. and I. T. Raz (2020). There’s no such thing as free land: The homestead act and economic development. Working Paper.
Powell, J. W. (1878). Report on the lands of the arid region. Washington: Government Printing Office.
Samuelson, P. A. (1954). The pure theory of public expenditure. Review of Economics and Statistics 36(4), 387–389.
Smith, C. (2020). Land Concentration and Long-Run Development in the Frontier United States. Working Paper.