THE COASE THEOREM AND THE ALASKA NATIVE CLAIMS SETTLEMENT ACT

Transcription

1 THE COASE THEOREM AND THE ALASKA NATIVE CLAIMS SETTLEMENT ACT Chong Hyun Byun, Wabash College ABSTRACT The focus of ths paper s an applcaton of the Coase theorem to the Alaska Natve Clams Settlement Act (ANCSA). The ANCSA was a major event that settled ssues of Natve land clams and property rghts n Alaska, and had profound mplcatons for economc, socal, poltcal, and cultural aspects of lfe for Alaska Natves and non-natves alke. In partcular, the ssues of clearly defned and secure property rghts, and postve transacton costs wll be analyzed, as they both play a key role n the outcome of the negotatons. An analyss of the Coase theorem to the ANCSA s partcularly relevant here, snce the Coase theorem states that under a stuaton wth mnmal to no transacton costs, economc agents wll bargan wth one another to reach an agreement that s socally optmal. The ntroducton of economc frctons, ncludng transacton costs and nsecure property rghts, s partcularly relevant snce they are reflectve of the barganng stuaton between the Alaska Natves and the nted States federal government. These frctons had a profound effect on the barganng outcome, as s evnced by the outcome and subsequent mpact of the ANCSA on the Alaska Natve people. INTRODCTION The Coase theorem states that under a stuaton wth mnmal to no transacton costs, economc agents wll negotate wth one another to reach an agreement that s socally optmal (Coase 1960). As long as property rghts are fully enforced, ths outcome wll hold true, regardless of the ntal allocaton of property rghts. As a consequence, dsputes over so called market falures n the form of postve or negatve externaltes can be resolved by ndvdual agents engagng n prvate transactons to negotate for mutually benefcal outcomes. The am of ths paper s to contrbute to the law and envronmental economcs lterature by examnng for the frst tme the applcaton of the Coase theorem and all ts assumptons and mplcatons toward the Alaska Natve Clams Settlement Act (ANCSA, or the Act ). The relevance of the Coase Theorem to the ANCSA s rch and vared. The ANCSA was a major event that settled Natve land clams and had profound mplcatons for Natve law. It was unprecedented n terms of sze and scope, wth enormous nfluence on the economc, socal, poltcal, and cultural aspects of lfe for Alaskan Natves and non-natves alke. Wth so many ssues ncludng those of property rghts, transactons costs, and complex negotatons, t seems relevant to apply an analyss of the theorem to the ANCSA. Ths paper wll look at the role of economc frctons and how these affected the barganng process between the S federal government and the Alaska Natve peoples and the resultng outcome of the negotatons. In partcular, the ssues of clearly defned, secure property rghts and nonzero transacton costs wll be analyzed, as they both play a key role n the negotatons and settlement. Ths work s unque n that t s the frst analyss of the Coase theorem as t apples to the Alaska Natve Clams Settlement Act.

2 The structure of the paper s as follows. Secton II provdes an overvew of the Coase theorem, wth a dscusson of ts man aspects and bref summary of ts varous applcatons n envronmental economcs and law. Secton III contans a bref summary on the hstory of Alaska and the man events leadng up to the Alaska Natve Clams Settlement Act. Secton IV provdes the theoretcal model that wll be appled toward the case of barganng wth nsecure property rghts wth nonzero transacton costs, as was evnced n the negotatons between the Alaska Natves and the nted States federal government. Secton V concludes. THE COASE THEOREM In hs 1960 paper The Problem of Socal Cost Coase used an example of the cattle rancher whose grazng cattle cause damage to crops on a neghborng farmer s feld. The actons of the cattle generate a socal cost (a negatve producton externalty). Tradtonal economc theory regarded ths as a market falure, whereby markets do not account for ths externalty, and prvate costs are not algned wth socal costs. The typcal response to address the externalty was to mplement a Pgouvan style governmental nterventon, va ether the establshment of a regulaton or the mposton of a penalty to lmt the amount of damage the cattle could cause to the farmer. In the tradtonal Pgouvan sense, a governmental nterventon would resolve the dscrepancy between prvate and socal costs. The damagng party would be held lable for the damages caused and he would pay the damaged party a compensaton for the damage done. Thus the externalty would be nternalzed, and all would be well. Coase s vew was dfferent. He theorzed that as long as each party had clearly defned property rghts, the two of them could negotate for a mutually benefcal and socally optmal agreement, provded that transactons costs were mnmal or zero. A decentralzed soluton was perfectly adequate to address the externalty problem, and n fact, could lead to an outcome that s the lowest cost soluton, cheaper than the Pgouvan one. The damagng party (the rancher) can be held fully lable for the harms to the crops, and the prcng system works fully to determne the value of the damages. It s mportant to note that the farmer s property rghts over hs felds must be strctly defned and enforced as Coase stated. If ths s so, the farmer can request and receve compensaton for the damage done to hs felds. In the decentralzed soluton, the rancher and farmer would prvately negotate to determne a socally optmal outcome. The end result would be that ether the rancher would reduce the amount of cattle he rases n order to reduce the grazng herd s damage to the farmer s crops, the farmer would collect monetary damages from the rancher, or the rancher would brbe the farmer to reduce hs crop felds. The rancher can choose whether he prefers to pay the fnes or brbes, or reduce hs herd, and he wll choose the opton that s the lowest cost to hm. The externalty s nternalzed n any case. Alternatvely, f the rancher s not held to be the damagng party, the farmer could brbe the rancher to reduce hs cattle herd and thereby reduce the damages done to the farmer s crops. The cost to the farmer would be the same: ether cost of damages done by the cattle tramplng hs crops, or cost to brbe the rancher. The farmer wll choose a payment level that s at most equal to the damages that can be ncurred va the grazng cattle. The amount of cattle rased (or crops rased) wll be exactly the same as before. No governmental nterventon, ether va the establshment of a regulaton or the mposton of a penalty was even necessary to reach an outcome that was optmal for socety. Prvate party negotaton was effectve n achevng the least cost soluton and the problem was solved n a satsfactory manner for both ndvduals.

3 Based on ths analyss, Coase summarzed the stuaton as follows. Coase never explctly states hs famous theorem n hs 1960 paper, but what follows s the closest statement of t n the paper. It s necessary to know whether the damagng busness s lable or not for damage caused snce wthout the establshment of ths ntal delmtaton of rghts there can be no market transactons to transfer and recombne them. But the ultmate result (whch maxmzes the value of producton) s ndependent of the legal poston f the rcng system s assumed to work wthout cost. (Coase 1960) Other economc and legal scholars have stated the theorem n numerous ways. George Stgler was one of the frst, followed by many others. The theorem has had many statements and explanatons and the followng s a selecton of a few, startng wth Stgler s formal statement n The Theory of Prce n The Coase theorem thus asserts that under perfect competton prvate and socal costs wll be equal. (Stgler, 1966) If one assumes ratonalty, no transacton costs, and no legal mpedments to barganng, all msallocatons of resources would be fully cured n the market by barganng. (Calabres, 1968) In a world of perfect competton, perfect nformaton, and zero transacton costs, the allocaton of resources n the economy wll be effcent and wll be unaffected by legal rules regardng the ntal mpact of costs resultng from externaltes. (Regan, 1972) When partes can bargan together and settle ther dsagreements by cooperaton, ther behavor wll be effcent regardless of the underlyng rule of law (Cooter and len, 1988) The statements of the Coase theorem are vared, wth slghtly dfferent nterpretatons and mplcatons based upon on the precse wordng of each. However, an examnaton of each reveals two assertons that can be made about the man outcomes of the varous statements of the theorem. The frst clam, whch can be deduced from all of the above statements, s that the ntal allocaton of property rghts s rrelevant, snce ratonal partes wll bargan and reach an agreement about how the resources are to be best allocated. The fnal resultng allocaton of resources wll be effcent, and no outsde nterventon s necessary. Ths clam s often referred to as the effcency hypothess (Medema and Zerbe 1999) and t can be seen as a concluson of all the above statements of the Coase theorem. The second clam, whch does not appear n all statements of the Coase theorem s the so-called nvarance hypothess (Mederma and Zerbe 1999). The nvarance hypothess states that no matter what the ntal allocaton of rghts s, the end result of barganng wll result n an effcent allocaton of resources. Debates about the correctness or valdty of the Coase theorem are centered on the valdty of these hypotheses, wth arguments based on dfferent versons of the theorem: the strong verson that ncludes both hypotheses and the weak verson that ncludes only the frst. (Medema and Zerbe, 1999). There have been many attempts to prove the theorem ether theoretcally, or emprcally va a real world envronmental ssue.

4 In any of these analyses, the emphass of the theorem s on the mportance of clearly defned and enforced property rghts and prvate party barganng and negotaton. As a result, there s no need for state nterventon to acheve a socally optmal outcome. Externaltes can be nternalzed n the most effcent and least cost soluton s counter to the tradtonal Pgouvan answer of governmental nterventon. Coase s theorem has had a wde range of applcatons n economcs, law, and other felds. In partcular, a clear analyss of property rghts and Coasan barganng are relevant to envronmental goods and servces, especally when property rghts are nsecure and contested. The ssue of nsecure property rghts s especally relevant to a varety of envronmental dsputes. These can nclude endangered speces protecton or the restoraton of wldlfe to ther natural habtats lke the protecton of elephants from poachers n Kenya or the rentroducton of grey wolves n Yellowstone Natonal Park. Other examples of property rghts nsecurty nclude dsputes over water use and appropraton n the western nted States, watershed development and management around the world, and rghts for gold mnng n varous regons of Alaska. Insecure property rghts were a prme component of the dscusson and debate over natve land clams pror to the buldng of the trans-alaska ppelne, snce ths ssue had to be settled before the ol extracton and transport could begn. Further dscusson of Natve Alaskans nsecure property rghts wll be provded n secton IV. The applcaton of property rghts towards seemngly common property resources such as clean ar, clean water, forests, and other such resources seems counterntutve. The nstnct s to put n place governmental regulatons or penaltes to ether protect these resources or penalze the damagng partes for ther actons. But an analyss va the Coase theorem shows that these actons are not necessary and wll not lead to the most effcent, lowest cost soluton. A number of emprcal and theoretcal studes have been done to nterpret, model, and resolve ssues that arse from ether externalty problems or property rghts ssues and the lack of clearly defned markets n envronmental economcs. There have been many applcatons of barganng and property rghts to determne optmal allocatons of envronmental goods and servces, and to resolve ssues of externaltes. A few examples from the lterature are as follows. Ellckson (1986) gves emprcal evdence n support of the Coase theorem wth an nvestgaton of the cattle vs. rancher parable from Coase s orgnal 1960 paper. He fnds that the partes nvolved cooperate and settle ther dspute va nformal means n order to mnmze transacton costs. Socal norms are reled upon to determne culpablty and compensaton for damages, wth barganng occurrng n the shadow of the law (a phrase frst coned by Mnookn and Kornhauser, 1979). Cheung s fable of the bees (1973) s one of the frst attempts to provde emprcal evdence on the valdty of the Coase theorem. In t, Cheung studes whether the commodtzaton of a postve externalty: orchard farmers contractng wth beekeepers for the pollnaton servces of ther bees, and whether these contractual agreements are an effcent allocaton of resources. Hanley and Sumner (1995) consder the problem of externaltes n the case of the red deer populaton n Scotland. Rsng deer populatons cause economc damage to farmers and forest owners, and the authors suggests a Coasan barganng soluton to resolve the externalty. Another study by Quggn (2001) nvestgates ncreasng agrcultural development n Australa and how t has resulted n polluton externaltes for the Murray-Darlng rver system n the form of ncreased water salnty, harmful algal blooms, and waterloggng. The author ncludes an analyss of the conflct between prvate property rghts and common rghts, and how these affect the development of water markets to effcently allocate water among competng uses.

5 In many of these works, economsts and legal scholars dscuss the role transacton costs and how they affect barganng outcomes. The problem of transacton costs s an mportant one that cannot be easly overlooked. In realty, they are often large and have a sgnfcant nfluence on the outcomes of barganng. Transacton costs can nclude search, negotaton, montorng, and enforcement (Coase 1960), and/or resource losses ncurred due to mperfect nformaton (Medema and Zerbe, 1999). Other defntons make references to property rghts ncludng the costs assocated wth the transfer, capture, and protecton of rghts (Barzel 1989), and that they nclude the resources used to estmate and mantan property rghts (Allen, 1991). One mplcaton that can be drawn from these defntons s that f property rghts are complete and well defned, there are no transacton costs nvolved n barganng. Each party wll have complete nformaton and can make a fully nformed assessment of the offers made by the counter-party, wth zero cost. Therefore, the mportance of clearly defned property rghts cannot be understated, as they have enormous mplcatons for barganng effcency and outcomes. Less secure property rghts wll mpede effcent barganng, wth partes ether optng for an outsde opton or engagng n costly barganng battles. Both of these were possbltes or realtes n the lengthy negotatons between the federal government and the Alaska Natves over natve land clams. Although transacton costs can overwhelm or mpede the gans from trade and negotaton, ths s not to say that the standard Pgouvan soluton s necessarly the superor soluton. Rather, t ponts to the mportance of a proper accountng of transacton costs n all such externalty and property rghts stuatons. A due consderaton of whether the remedy to the externalty s better or worse than smply acceptng the externalty s necessary before makng any fnal decsons. As wth any case of barganng over envronmental goods and servces, clearly defned property rghts and nonzero transacton costs play mportant roles, n partcular n the case of barganng over lands and subsurface rghts n Alaska, whch culmnated n the Alaska Natve Clams Settlement Act. The next secton covers background nformaton on the ANCSA to properly establsh the framework for understandng the connecton to the Coase theorem. BACKGROND Some background nformaton on the Alaska Natve Clams Settlement Act s necessary to set the stage and make the connecton wth the Coase theorem. In 1971, Congress enacted the ANCSA. Its purpose was to settle natve land clams and provde clearly defed property rghts for the ownershp of land, subsurface deposts, and natural resources n the state of Alaska for ts Natve people. The mpetus for ts creaton and ndeed Alaska statehood stemmed from the dscovery of ol reserves n the Kena Pennsula and gold deposts n the northern part of the state. Pror to these dscoveres, the nted States purchase of Alaska from Russa n 1867 was ntally scorned as Seward s Folly, after.s. Secretary of State Wllam Seward who had advsed Congress for the purchase of the lands. Publc opnon quckly changed after the aforementoned dscoveres, and spurred the push for Alaska statehood, as well as the settlement of Natve land clams n the state. When Alaska attaned statehood n 1959, Congress gave the state the rght to select and develop mllon acres of federal land. However, controversy over the state s land selectons led Natve Alaskans to fle formal protests n The controversy led the Secretary of the Interor, Stewart dall, to nsttute a land freeze n whch no more land transfers would be granted to the state untl the Natve clams had been settled. Durng ths tme there were

6 addtonal dscoveres of ol felds n Prudhoe Bay n the North Slope. The need to settle land clams once and for all was necesstated by the fact that ol extracton and transport from the North Slope necesstated the development of extensve nfrastructure. Before ol companes could begn ther constructon projects, they had to know the ownershp of the lands and subsurface rghts to ol and other valuable deposts. Varous partes ncludng government offcals from the federal and state levels, Alaska Natve groups, and representatves from the ol ndustry and other busness concerns worked together n an effort to determne land clams. The ANCSA was ntended to clearly delneate the ownershp rghts once and for all before work would be started on the extracton and transport of the ol reserves n the North Slope. In smple terms, the ANCSA nvolved the dssoluton and relnqushment of all Natve land clams to over 360 mllon acres of land n Alaska. In exchange for ths, Alaska Natves would receve both a clear ttle to 45.5 mllon acres of land n other parts of the state, and payments totalng $962.5 mllon. In addton, Natve groups were requred to form corporatons at both the regonal and local levels n order to oversee the management of the lands and the mones receved n the settlement. Wth consderaton to geography and hertage, twelve Natve regonal corporatons were formed. These regonal corporatons also symbolcally represented the Alaska Natve communtes and arguably provded a cultural and poltcal structure for Natve groups. A thrteenth corporaton was also formed to represent the nterests of those Natves who were not resdng n the state. Each Natve Alaskan who was alve on December 18, 1971 was ssued 100 shares of regonal corporaton stock, based on ther geographcal resdence. The regonal corporatons were for-proft nsttutons and on a local level, Natve vllages were requred to ncorporate wth the regonal corporatons n order to receve any of the benefts outlned n the ANCSA. The ANCSA was a settlement desgned to both satsfy and compromse wth vared nterests, ncludng those of Alaska Natves, busness nterests, and state and federal governments. Further dscusson of the varous aspects of ANCSA can be found n Chaffee (2008) and the ANCSA SC. THE COASE THEOREM AND THE ANCSA The applcaton of the Coase theorem to the ANCSA has several aspects and each wll be nvestgated n turn. There are the ssues of transacton costs, and secure and nsecure property rghts. Each of these wll be nvestgated n turn, followng the model of Coasan barganng wth secure and nsecure property rghts by Cherry and Shogren (2005). Transacton Costs The ssue of transacton costs s partcularly mportant to the ANCSA. Economc frctons n the form of nonzero transacton costs, and nsecure property rghts have a sgnfcant mpact on the effcency of Coasan barganng outcomes. If transacton costs exst, they ntroduce a stumblng block to effcent and ratonal barganng. Coase hmself never assumed a zero transacton cost world. In fact, he explctly stated what my argument does suggest s the need to ntroduce postve transacton costs explctly nto economc analyss so that we can study the world that does exst (Coase 1988). Transacton costs can nclude the costs that arse from creatng and evaluatng offers and counteroffers that nclude meetngs, search fees, legal fees, and computaton fees (Cheung, 1989, Wllamson, 1982). Extensve work has been conducted on the effect of nonzero transacton costs on Coasan barganng, ncludng work by Cherry and Shogren (2005), Rhoads and Shogren (1999)

7 Snce transacton costs play such an mportant role n actual barganng, a careful analyss of them s necessary to see the mpact on the resultng outcome. Ths work draws on prevous work by Rhoads and Shogren (1999) and Cherry and Shogren (2005) on Coasan barganng wth transacton costs, and property rghts securty. Ths work s an extenson of those prevous works n that t s a specfc applcaton towards the ANCSA and the resultng effect on the Alaskan economy as a result of the Act. As Cherry and Shogren note, the level of property rghts securty has a sgnfcant mpact on the effcency of Coasan barganng outcomes. The Model The model s based on the framework of Cherry and Shogren (2005) wth ther analyss of Coasan barganng, transacton costs, and property rghts securty. In ther work, they assert that economc frcton (n the form of transacton costs, delays, or enforcement costs) matters less for barganng effcency f property rghts are less secure. If property rghts are strong, then barganng effcency s lessened; those property owners don t have much to lose when they are non-cooperatve n a barganng stuaton. They can always exercse an outsde opton and walk away from the negotatons, even though they may be leavng money on the table, snce t s relatvely cheap for them to do so. In addton, the strength of property rghts (secure versus nsecure) has an nverse relatonshp wth barganng effcency. If property rghts are more secure, then barganng s less effcent, and vce versa. In ths barganng envronment, two players, A and, bargan over lottery tckets γ A and γ. These lottery tckets defne the chance of wnnng a monetary payoff M. There are nonzero transacton costs assocated wth barganng C = c A + c, where c = P o o + P e e + P x x, = A,, represents the cost each player bears, n terms of offers o, the cost to evaluate each offer e, and all counter-offers z, and the assocated prce per unt P. Each player also has an ntal endowment of lottery tckets, ε A and ε help offset the transacton costs, so the total number of lottery tckets s γ T = ε A +ε +γ A +γ +γ H, where γ H represents the lottery tckets that are unclamed and left on the table (.e. when the house wns and money s left on the table when negotatons fal). In terms of property rghts securty, assume that player s the controller. Player has an outsde opton he can choose at any tme durng the barganng wth player A. Thus, Player has a threat pont snce he can qut negotatons at any tme and choose the outsde opton. Player has a fallback poston and player A does not. The probablty that player wll wn the monetary reward s denoted by γ o. Next, t s necessary to defne the strength of property rghts. Property rghts are secure when a strong government protects and defends the enttlements that represent ownershp over a resource f and when those rghts are challenged. Let 0 r 1represent the strength of property rghts. Note that f r = 1, then property rghts are secure and wll be upheld f challenged, and f r = 0, there are no secure unlateral rghts. When 0 r 1, there are nsecure property rghts. We can defne the expected payoff when secure property rghts exst; for the controller, player, t s merely hs outsde opton and hs ntal endowment of lottery tckets, γ o +ε, and for the noncontroller, player A, t s hs smply ntal endowment ε A. If there are no property rghts, or nsecure rghts, we must derve the expected payoff for the two players va a non-cooperatve contest from Dxt (1987). Based on the logt contest-

8 success functon from Tullock (1980), each player chooses an optmal level of effort z to maxmze the expected payoff. Hs optmzaton problem s as follows. z Max γ o z +ε for = A,; j = A,; j (1) z z + z j Takng the frst order condtons, we can solve for each player s best effort functons z = z γ z and z = z γ z, (2) j o j j o and consequently arrve at the Nash Equlbrum levels of effort o o NE NE γ γ ( z A, z ) =, (3) 4 4 Pluggng these Nash Equlbrum effort levels nto the expected payoff functons, we can calculate each player s expected payoff. o γ o o NE o EP 4 γ γ = γ + ε = + ε, for = A, (4) o o γ γ Insecure property rghts are represented by 0 q 1. If player exercses hs outsde opton, we can calculate the two partes expected payoffs as follows. EP o = r( g o + e ) + (1- r) EP NE o NE EPA = rε A + (1 r) EPA (6) Next, the Nash barganng soluton can be derved. The two players face potental gans from barganng. They negotate wth one another to obtan rghts over an exstng property, and are motvated to do so by the potental gans from the outcome. These gans are represented by the optmal number of lottery tckets each player wll receve after the negotatons end. The potental gans from barganng come from the followng optmzaton problem. Max" (γ c EP O +ε )(γ A c A EP O A +ε A ) γ # $ % subject to γ T = ε +ε A +γ +γ A +γ H. (7) The optmal number of lottery tckets for player can be derved usng the frst order condtons from the above constraned optmzaton problem. They are as follows. (5)

9 γ O = γ γ H + 2 O 2γ + γ H + ε σ = 2 c c A ω = 2 σ + ω where + ε A γ T (1 r) (8) (9) (10) Note that the optmal number of lottery tckets for player s affected by σ, whch reflects the effect of nsecure property rghts when 0 r 1. The mpact of σ s negatve on the optmal number of lottery tckets for player ; the more nsecure the property rghts, the smaller the value of r, and the bgger the mpact on player s optmal lottery tckets. The effect of transacton costs on player s optmal number of lottery tckets s reflected n the value of ω, whch represents the transacton costs that each player faces. The larger the dfference n transacton costs between player and player A, the bgger the mpact on the optmal number of lottery tckets for player. Overall, the equaton for player s optmal number of lottery tckets shows that he receves hs outsde opton and half of the house s tckets (the barganng surplus), but s penalzed for nsecure property rghts and transacton costs. Player A, who has no outsde opton, has the followng optmal allocaton: γ A = γ T γ (ε + ε A ) (11) Barganng for s always preferred for both players. For player, a comparson of equatons (5) and (8) ndcate that barganng s better than takng the outsde opton. The optmal allocaton from barganng leaves player better off than not barganng, snce the payoff s hgher than takng the outsde opton. No matter what the level of property rghts securty, ths holds true, and the only case n whch the controller prefers not to bargan s when transacton costs become too hgh to make barganng worthwhle. Smlarly, for player A, barganng leaves hm better off, as we can see from equatons (4) and (6). Player A s expected payoff from barganng s always larger than from not barganng, based on the expected payoff gven n equaton (4). For player A, nsecure property rghts helps hm, snce hs expected payoff wll be bgger when 0 r 1, and maxmzed when r = 0 (no secure property rghts). But n any case, player A should always bargan snce t leaves hm better off, wth a bgger expected payoff than hs ntal endowment εa. The Coase theorem states that wth mnmal or no transacton costs, partes wll bargan wth one another to reach an outcome that s socally optmal. The assumpton of mnmal transacton costs s mportant, snce the ntroducton of any economc frcton can reduce barganng effcency (Rhoades and Shogren 1999). But we must ntroduce such frctons nto the model n order to study the world that does exst (Coase 1988). We want to see how such frctons n the form of postve transacton costs and property rghts nsecurty can affect barganng and effcent outcomes. In a perfect vacuum, ratonal barganers wll fnd the Nash equlbrum and mnmze barganng costs. However, barganng n the real world rarely goes so smoothly. There are competng hypotheses for how economc frctons nfluence barganng effcency. Cherry and Shogren (2005) present two such hypotheses: the backsldng argument and the cost-of-non-cooperaton counterargument. The frst hypothess, the backsldng argument, mples f a party has more secure property rghts, ths helps barganng effcency snce that party can merely choose the outsde opton and avod costly barganng conflcts.

10 Although both partes lose out on unclamed resources (e.g. what the house wns), that s better than engagng n an expensve and possbly counterproductve barganng conflcts. On the other hand, greater nsecurty n property rghts wll lead to even lower effcency, snce partes wll engage n costly and tme consumng battles over the property rght and both end up the worse for wear. The second, the cost-of-non-cooperaton counterargument, mples that greater property rghts securty leads to greater neffcency. If a party has secure rghts, non-cooperaton becomes less costly snce the property owner knows he can hold out for a hgher payoff. Of course, a player can always take the outsde opton, wth the resultng loss n effcency beng whatever the house wns. If a party has a secure outsde opton to fall back on, that party can merely choose that outsde opton and avod the effort and expense of barganng. Applcaton to the Alaska Natve Clams Settlement Act The dscovery of vast ol reserves n the Prudhoe Bay olfelds n the North Slope of Alaska spurred the drve to settle Natve land clams once and for all. The ol had to be transported from the North Slope to the southern port cty of Valdez. But before constructon could begn on the physcal nfrastructure needed by ol companes to extract and transport the ol, the queston of ownershp and rghts over land and olfelds had to be determned. A ppelne feld study team comprsed of the Atlantc Ppelne Company, Humble Ppe Lne Company, and BP Exploraton.S.A. worked together to study the problem and to propose a desgn for the Trans Alaska Ppelne Project. The planned Trans Alaska ppelne system (abbrevated TAPS) would be 800 mles long and run from Prudhoe Bay n the North Slope to Valdez, the southernmost port n the state that s ce free year round. The constructon of the ppelne, pump statons, and drllng platforms would be a major undertakng, wth consderable envronmental mpact. Intally, the plan was to construct a bured ppelne, but the extreme challenges of such an endeavor due to the weather and physcal geography of the state made the plan mpossble. In the end, the ppelne was bult wth part of the lne bured and part of t bult on elevated supports. The ppelne project was projected to have sgnfcant mpact on the envronment of the lands through whch t was planned to run. An extensve envronmental mpact study was conducted by the.s. Department of the Interor, whch ssued a report on the estmated effects on the ppelne constructon and operaton. Property Rghts Snce the dea of clearly defned and enforced property rghts plays a predomnant role n the Coase theorem and ts applcaton, t s relevant to start the analyss wth ths concept. One of the most mportant components of the ANCSA was to grant Alaska Natves soveregnty by gvng them clear ttle to the lands they occuped. Whle t may seem obvous and self evdent that the Natves should ndeed already have a clam to the lands on whch they had lved for generatons, a closer examnaton of Natve Amercan law reveals why grantng ths clear ttle was necessary to begn wth. In the landmark Johnson vs. M Intosh case n 1823, the.s. Supreme Court determned that European explorers dscovery of Amerca had voded all Natve land ttles and clams. As a consequence the federal government owned ttle and holds n trust all Natve lands. Furthermore, the federal government had the exclusve power to extngush the rght of Natve Amercans to occupy the land (see 21.S. (8 Wheat.) 543), snce the nted States owned Natve Amercan land by obtanng ttle through conquest, and Natve

11 Amercan trbes became legally dependent on the federal government for ther contnued exstence (Chaffee 2008). The ANCSA reversed all ths. The Alaska Natve corporatons establshed under the Act receved clear ttle to agreed upon lands and the federal government would no longer hold these lands n trust, representng a shft towards clearly defned property rghts for Natve groups over these lands. In ths respect, the ANCSA was, by comparson, advantageous to the Alaska Natves n that t represented a departure from hstorcal treatment of the.s. federal government towards Natve Amercans n the rest of the nted States. The assgnment of property rghts over Natve lands was a lengthy and often contentous process. Competton between varous nterest groups, ncludng the Alaska Natve people, conservatonsts, and busness development nterests (ncludng varous ol companes and the state of Alaska as well as the federal government) led to extensve legal battles and debates n Congress as each group sought to protect ts needs and wants. Both envronmentalsts and the ol ndustry had a major role n shapng the ANCSA as they exerted a profound nfluence on Congressonal votng as the legslaton was wrtten (see Boyce and Nlsson 1999). Further dscusson of the ANCSA land selecton process can be found n Berry (1975), and Lazarus & West (1976), and, wth a detaled dscusson of the clash of nterests from busness, government, and Natve groups n the land selecton. In short, the negotatons between the Alaska Natves and the nted States federal government represented a barganng stuaton wth the nted States as the controller wth the outsde opton avalable to t. However, the ANCSA reversed Johnson v. M Intosh by gvng clear ttle to settlement lands to the Alaska Natve corporatons. Snce the federal government no longer holds these lands n trust for them, Natve Alaskans can now freely use the lands, or sell them as they deem necessary, and are not beholden to the Bureau of Indan Affars for supervson. The ANCSA arguably provded economc soveregnty to the Natves by gvng them ths clear ttle, snce the lands and mones receved could be used as a means of contnued economc ndependence and future fnancal securty. Gven the outcome of the Johnson v. M Intosh case, the federal government could have exercsed ts outsde opton at any tme and smply approprated the lands wthout compensaton to the Natve groups. The nted States could at any tme exercse the outsde opton, va hstorc precedents n Natve law and smply clam Alaskan lands based on the fact that they were deemed to be federal lands. In any case, the ANCSA provded funds and resources to Natve groups n order to support and sustan ther lves n a modern market based economy. However, mplementaton and executon of the dctates of ANCSA have been complcated. The language of the Act s frequently ambguous, and serous dffcultes already have arsen n ts mplementaton (Lazarus and West 1976). One chef problem was the ntal assgnng of land rghts to natve vllages. Vllage elgblty was determned by the number of natve resdents (a mnmum of 25) resdng n the vllage, and one possessng a modern, urban character the majorty of whose resdents are non-natve (43.S.C. 1606). nfortunately, the elgblty cases represented one of many cases where the ANCSA was admnstered n a way whch granted less than the law and regulatons seemed to promse (Lazarus and West 1976). Boundary dsputes were also a common problem, (see the Central Councl of the Tlngt and Hada Indans v. Chugach Natve Assocaton, cvl case no. A ), wth Natve groups ptted aganst each other n legal battles, a marked contrast to the peaceful coexstence once experenced by the Alaska Natves. It s clear that the assgnment of property rghts, counter to the tradtonal Natve way of lfe and lvng wth the envronment, was not only nsecure but also a cause for contentous dsagreement.

12 Further dscusson of the mpact of the postve transacton costs of the negotaton and subsequent legal battles over land clams and use can be found n Walsh (1985) and Chaffee (2008). It s clear that although the two partes, the federal government and the Alaska Natves engaged n lengthy and nvolved negotatons over land settlements, the resultng outcome was not necessarly one generated the optmal outcome from a socal perspectve. Transacton Costs Although the Act was meant to determne Natve land clams and bestow upon Natve groups clearly delneated propertes and boundares, t seemed also to herald an era of new and dffcult, not to menton expensve, legal problems and challenges. Pror to ts mplementaton, there were extensve legal battles waged over land use and dstrbuton, wth Alaska Natves, conservatonsts, and busness nterests at odds wth one another. Three conservaton groups, the Frends of the Earth, the Wlderness Socety, and the Envronmental Defense fund fled a sut aganst the Department of the Interor. Ther clam was that the DOI was n volaton of the Natonal Envronmental Polcy Act of 1969, from the permts t had granted to the owners of the trans-alaska ppelne. Natve groups also waged legal battles aganst the TAPS, clamng that the company had not hred Natve contractors as had been promsed. These are just a few examples of the lengthy and costly legal battles waged even pror to ts full mplementaton. Even after ts mplementaton, the legal battles and costs dd not end. A prme example s the case of the Konag Corporaton, one of the twelve Natve regonal corporatons formed under the Act. Konag encouraged the merger of the vllage corporatons wth the regonal corporatons n order to cut admnstratve costs and promote unty among the members. The regonal corporaton would assume control over all the vllage corporatons land, ncludng valuable tmber on those lands. nfortunately, the vllage corporatons fled sut aganst the regonal corporaton. It clamed that the regonal corporaton had deceved them as to the value of tmber assets on ther lands, wth msleadng statements sent to vllage corporaton shareholders, resultng n a favorable vote for the merger. Legal costs were estmated to be $2.5 mllon dollars, a sgnfcant amount for a corporaton that had receved only $24 mllon from the ANCSA. It s nterestng to note that the costs of settlng legal ssues came from the funds awarded under the Act. Any legal or consultng fees resultng from any ssues of Natve land clams or pendng clams were to be pad from the settlement funds (43.S.C. 1619, 2000). In effect, the Natve corporatons were responsble for ther own legal costs for preparng for and settlng any land clams assocated wth the Act. On the one hand, ths move may have reduced the moral hazard problem assocated wth excessve ltgaton. On the other hand, t represented yet another way that the accountng of transacton costs (n ths case, set up n a way to undermne the Natve corporatons f lengthy legal battles arose) s a vtal component of the analyss of the outcome of the ANCSA. CONCLSION The Alaska Natve Clams Settlement Act was an unprecedented pece of legslaton that determned Natve land clams n the state of Alaska. Issues of clearly defned property rghts and transacton costs n barganng were partcularly relevant as groups wth competng nterests sought to fnd a barganng outcome that was mutually benefcal. The mportance of transacton costs and secure and well defned property rghts cannot be understated, as nterest groups waged

13 legal battles over the use and allocaton of lands n the state. The applcaton of the Coase theorem to real world legal and economc stuatons necesstates a careful analyss of each of these, as they have a profound mpact on barganng and the outcomes of barganng. Insecure property rghts, as n the case of the Alaska Natve groups ndcates that barganng may lead to more effcent outcomes. The applcaton of the Coase theorem to the Act s an nterestng one that consders the theoretcal analyss and mplcatons of the theorem to a complex legal queston. REFERENCES Adelman, M.A., P. G. Bradley, & C. A. Norman (1971). Alaskan Ol: Costs and Supply, New York: Praeger Publshers. Alyeska Ppelne Servce Company: Trans Alaska Ppelne System: The Facts. (n.d.) Retreved September 19, 2014 from Alaska Natve Clams Settlement Act (2000). 43.S.C., h. Alavalapat, J.R.R., R.K. Shrestha, G.A. Stanback, & J.R. Matta (2004). Agroforestry Development: An Envronmental Economc Perspectve. Agroforestry Systems, 61. Arnold, R. D. (1976). Alaska Natve Land Clams, Alaska Natve Foundaton. Berry, M.C. (1975). The Alaska Ppelne: The Poltcs of Ol and Natve Land Clams, Bloomngton, IN: Indana nversty Press. Bertrand, E. (2010). What Do Cattle and Bees Tell s About the Coase Theorem? Communcaton to the XIIIth Conference of the Charles Gde Assocaton, Pars, May Boyce, J. R. & A.N. Nlsson, (1999). Interest Group Competton and the Alaska Natve Land Clams Settlement Act. Natural Resources Journal, 39. Brown, C. (1999). Konag: Lawyers and More Lawyers, The Juneau Empre. Chaffee, E.C. (2008). Busness Organzatons and Trbal Self Determnaton: A Crtcal Reexamnaton of the Alaska Natve Clams Settlement Act. Alaska Law Revew, vol. 25:107. Cherry, T.L. & J.F. Shogren, (2005). Costly Coasan Barganng and Property Rght Securty. Envronmental and Resource Economcs, 31, Cheung, S.N. (1973). The Fable of the Bees: An Economc Investgaton. The Journal of Law and Economcs, 16(1). Coates, P.A. (1991). The Trans-Alaska Ppelne Controversy, Farbanks, AK: nversty of Alaska Press. Colt, S. (2005). Alaska Natves and the New Harpoon : Economc Performance of the ANCSA Regonal Corporatons. Journal of Land, Resources, and Envronmental Law, 25(2), Berard, G (2005). The Alaska Natve Clams Settlement Act (ANCSA) Whose Settlement Was It? An Overvew of Salent Issues. Journal of Land, Resources, and Envronmental Law, 25(2), Berard, G. (1998). Persstent Poverty n Alaska Natve Vllages. Natural Resources Journal, 38, Farrell, J. (1987). Informaton and the Coase Theorem. Economc Perspectves, (1)2.

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