Dana and Wiseman, ‘Fracking as a Test of the Demsetz Property Rights Thesis’

ABSTRACT
Since its introduction in 1967, the account of property rights formation by Harold Demsetz has pervaded the legal and economic literature. Demsetz theorized that as a once-abundant, commonly shared resource becomes more valuable and sought-after, users will move to more clearly define property rights in the resource. Despite the high transaction costs of this approach, the costs of organizing and enforcing a rights regime become worthwhile in the face of scarcity. And privatization, in turn, leads to more efficient use of the resource by the individuals holding the property rights, with less externalization of the harmful effects of resource use. Modified accounts provide a more nuanced story in which ‘governance’ – broadly speaking – emerges to address scarcity concerns. This governance can include traditional regulation that draws clearer property rights in the resource and forces cost internalization as well as innovative, less formal regimes, such as monitoring and reporting of resource use, voluntary agreements to internalize certain harms, and other commons management tools. But a conundrum remains: in some cases, scarcity does not generate regulation or innovative governance, and legal scholarship has called for more empirical testing of the reasons for this anti-Demsetzian response.

Hydraulic fracturing, or ‘fracking’, presents a perfect case study for this sort of test. This oil and gas extraction technique, which has recently boomed in the United States, has identifiable and substantial negative externalities including, for example, air pollution and over-withdrawals of freshwater during droughts. Yet states and industry actors have not consistently responded with regulations or innovative governance strategies to internalize these externalities. In this Article, we explore the responses of three states experiencing a fracking boom and theorize the reasons for the diverse responses of these states to greater fracking externalities, including responses that do not track the Demsetz theory. We conclude that traditional political explanations, often pejoratively referred to as ‘capture’ or ‘rent-seeking’, political culture, and legal institutions – particularly courts – account for the divergence between what we observe empirically and what Demestz’s theory would predict.

David A Dana and Hannah J Wiseman, Fracking as a Test of the Demsetz Property Rights Thesis (2020) 71(4) Hastings Law Journal 845-900.

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