Many countries have large regions, often arid and semi-arid, which are perennially subject to severe local variability in environmental conditions such as drought, floods, fires, insect and disease infestations and so on. Much of the work on changes in environmental conditions has been on intertemporal variability, leaving local variability, i.e., the variability in rainfall, temperature, the ravages of fire, insects, and disease within a small area, virtually totally neglected. The paper develops a theory of risk-reduction applicable to the situation of local variability in environmental conditions. An important implication of the model is that private property rights, no matter how beneficial they may be in other respects and in other contexts, are unlikely to be the optimal property in this situation. The paper develops a hypothesis suggesting that the often maligned common property rights and zoning may be much more suitable in such situations. When risk-averse agents attempt to maximize their utility in the face of production and price risks arising from local as well as intertemporal variability of rainfall, it is shown that their welfare can be enhanced by an institution which allows every member access to every land parcel for at least part of the time. It is also argued that greater local variability should lower the degree of centralization or hierarchy of the social organization, both directly and indirectly. Finally, where different activities which generate negative external effects for each other are practiced in close proximity to each other, it may be very useful to practice some form of zoning. To assure efficiency, however, the zoning arrangements should be arrived at as if in a competitive auction. These hypotheses are demonstrated with empirical investigations of cross-sectional and over time analyses of certain regions which have been characterized by local variability of environmental conditions, namely the Sudan and the American West.
