Environmental inefficiencies


The environmental movement has often discredited its cause by resorting to alarmism underpinned by poorly substantiated claims. It’s a pity. Not many people nowadays deny that human behaviour has an effect on the Earth's ecosystem. But, equally, no serious environmentalist who aspires to influence policy can advocate a return to the Stone Age. The environmental movement can be, and should be, a pro-market movement in which you, as a consumer, determine the policy.

Pollution and climate change in general affect consumers in two ways: firstly, if firms must change their production patterns to become more environmentally friendly then you, as a consumer of goods, will face higher prices. Secondly, if firms fail to change their production patterns, you as a consumer of clean air will receive a lower quality product. Clean air affects your quality of life now, and the consumption of limited non-renewable resources affects your quality of life later. If we put the histrionics and baby seals aside, there is no reason why a little old fashioned economic logic can’t make everyone, as global consumers, better off.

The problem right now is that there is no existing market mechanism to ‘price’ environmental degradation. Yes, different people value it differently, but that shouldn’t be a barrier to exchange. Other markets handle infinite different valuations to determine a price at the intersection of the supply and demand. Why, therefore, has as a market for this not emerged?

An externality is a benefit or cost to an external party that results from the action of unrelated party. Pollution is an externality. According to Coase’s theorem, if the rational parties with properly rights that incorporate externalities are able to engage in costless bargaining, an efficient allocation should emerge regardless these externalities. In short, markets should be able to account for externalities.

However, the problem with the market place for clean air is that property rights of the parties involved are ill defined. For example: My roommate believes that she has the right, as a co-paying member of our flat, to listen to Swedish House Mafia until 4AM. I know, however, that she does not. Our negotiation process will inevitably degenerate into whining, screaming, and maybe armed assault with a hairbrush, because our property rights at the beginning is not clearly defined. If we both agreed that house music was an inalienable right irrespective of time and place, then I might be willing to bribe her by doing her dishwashing or with chocolate. In short, we could establish a mutually agreed upon ‘price’ by which to trade a unit of house music.

The tragedy of the global commons therefore stems from tragically poorly defined property rights. Our current allocation of consumer goods –in short, our current lifestyle, is inefficient because market prices do not reflect the true costs and benefits of the production and consumption of goods. Do factories have a right to pollute? Do children have a right to clean air? What balance should be struck between the two? These seem like nebulous questions, but a clear answer to each is necessary for the success of any market-based strategy to climate change.