A Transaction Cost Approach to Environmental Cooperation : The Case of Haze Pollution in Southeast Asia

Hardin (1968) discusses how the absence of property rights causes such tragedy. In our study, it is shown that incomplete or no liability on transboundary harms is one of primary reasons why the ASEAN haze has had such a huge damage but remains unresolved for several decades. An example of upwind (polluter) and downwind (victim) countries is constructed to explain the Southeast Asia haze crisis. Coase (1960) arguments are extended to the cross-boundary haze case: Under perfect information and complete liability rule, international rule on pollution liability does not matter. Under any rule, negotiations always lead to the optimal control of haze. In other words, the burning and clearing of the forest will be optimally restrained through exchanges of rights and liabilities. However, under imperfect information and incomplete liability (or incurring high transaction costs), negotiations between parties may not be feasible. In this case, institutions do matter. In this respect, we need to pay attention to transaction costs on haze disputes. It is argued that Southeast Asia’s haze problems are characterized by unique attributes of transaction costs. Among others, state sovereignty, asymmetric information, and ill-defined liability on haze uniquely define transaction costs in the haze dispute of the region. After many preliminary measures, ASEAN states reached the ASEAN Agreement on Transboundary Haze Pollution (ATHP) in 2002. Is it viewed as an ad-hoc consultation or institutionalized cooperation (i.e. a hierarch)? In taking Williamson’s (1979; 1991) transaction cost view, the Agreement can be seen as a ‘quasi-institutional’ or ‘quasi-hierarchical’ regime in the continuum of regimes between the two extreme, an ad-hoc consultation and a hierarchy.