- Location: Zoom
Pigou (1920) pointed to “uncompensated damage done to surrounding woods by sparks from railway engines” as the canonical example of an environmental externality. We study a modern corollary – illegal tropical forest fires used for clearing land – using 15 years of daily satellite data covering over 107,000 fires across Indonesia. We exploit variation in wind speed and in who owns surrounding land to generate variation in the degree to which the use of fire at a given time and place represents an externality. We find firms overuse fire relative to a case where all spread risks are internalized. However, firms appear partially sensitive to the risks of government punishment, which deters them from burning near protected forest or populated areas on particularly windy days. Counterfactuals suggest that if firms treated all surrounding land the way they treat neighboring populated areas, fires would be reduced by 80 percent.