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Market-Based Environmentalism vs. the Free Market

Roy Cordato

Dr. Cordato is the Lundy Professor at Campbell University in Buies Creek, North Carolina. For a much more detailed discussion of this issue see Roy E. Cordato, “Market-Based Environmentalism and the Free Market: They’re Not the Same,” The Independent Review, vol. 1, no. 3 (Winter 1997).

People on both the left and right are realizing that direct regulation of production and market activities—“command and control”—is too costly. Yet free markets and the outcomes they are likely to generate continue to be unappreciated. To the extent that policymakers value markets, it is not because markets maximize liberty and social welfare but because they can be manipulated to produce centrally planned ends.

That is the basic argument for market-based environmentalism (MBE). In spite of its calls for decentralized decision-making, the purpose of MBE is to subvert freely made decisions by coercively altering incentives. Thus, most MBE policies should be viewed with suspicion, if not disdain, by those whose primary interest is to advance individual liberty. (MBE should not be confused with free-market environmentalism, which is not subject to these criticisms.)

Markets and the Environment

The standard view of environmental problems is that they are inherent in a free society. If people are left free to pursue their own self-interest—to produce and consume whatever they want, how and when they want it—the result will be polluted air and waterways, littered streets, and depleted natural resources. Pollution and environmental degradation are often cited as evidence that Adam Smith was wrong. People pursuing their own self-interest may not advance the well-being of society.

Advocates of MBE fully subscribe to this view. As MBE advocates Robert Stavins and Bradley Whitehead argue, “policies are needed to . . . harness the power of market forces . . . to link the . . . forces of government and industry.”[1]

That view, unfortunately found in many economics texts, misunderstands the nature of both a free society and a free-market economy. Environmental problems occur because property rights, a prerequisite of free markets, are not identified or enforced. Problems of air, river, and ocean pollution are all due to a lack of private property rights or protection. Since clarifying and enforcing property rights is the basic function of government in a free society, environmental problems are an example of government failure, not market failure.

In a free society, environmental problems should be viewed in terms of how they impinge on human liberty. Questions should focus on how and why one person’s use of resources might interfere with the planning and the decision-making abilities of others. Since people can legitimately make plans and decisions only with respect to resources that they have rights to, environmentalism that has human well-being as the focus of its analysis must center on property rights.

From this perspective, environmental problems arise because different people attempt to use the same resource for conflicting purposes. This can occur only if the property rights to that resource are not clear or are not being enforced. Two simple examples can highlight the possibilities. Imagine a community that has a cement factory that emits cement dust into the air. The dust causes people in the community to have to wash their cars and house windows more frequently than otherwise and creates respiratory problems for those who have to breathe it. That is clearly a property-rights enforcement problem. Note that the problem is not that the dust is emitted into the air but that it lands on people’s property—their cars, houses, and lungs—and interferes with their use of it. In this case, ownership rights are clearly defined, but are not enforced.

Another example might involve a public waterway, such as a river. Along the river, there is a factory that dumps the waste from its production process. Downstream are homeowners who use the river for recreational purposes, possibly fishing or swimming. The factory waste renders the river unsuitable or less useful for those purposes. The central problem here is that the rights to the river are not clearly defined. The public-policy issue involves who should have those rights or how they should be divided. It should be noted that the idea of privatizing rivers or sections of rivers is not new. Early American Indian tribes had clearly defined and enforced property rights to sections of many rivers. State governments nullified those rights.

Since free markets require well-defined and enforced property rights, the solution to environmental problems lies in extending capitalism, not restricting it.

Altering Incentives

Market-based environmentalism has little in common with this approach. Under MBE, government authorities deem a level of effluent emissions, the amount of recycled paper in grocery bags, or some other outcome a desirable goal. Individual behavior is then manipulated to achieve the goal. MBE policies are meant to control markets by altering the incentive structure—that is, individual decision-making—in order to thwart the outcomes of free-market activity.

Even the free-market advocate and chairman of President Reagan’s Council of Economic Advisers, Murray Weidenbaum, has argued, “the environmental pollution problem is not the negative task of punishing wrongdoers. Rather, the challenge is a very positive one: to alter people’s incentives.”[2]

The two most common MBE approaches are excise taxes and “tradable permits.” The excise tax is a direct implication of traditional welfare economics, which argues that pollution is evidence of “market failure” in which prices fail to incorporate the full “social cost” of production; that is, the external costs associated with the pollution are left out. Since, under this theory, markets fail to generate the correct price and output, an excise tax equivalent to the pollution costs would “correct” for the failure. The problem is that this entire analysis is both practically and conceptually unworkable. The concept of social cost, if meaningful at all, would be the sum of the pollution costs experienced by all the individuals in the community. Yet in reality, each person’s costs are strictly personal and subjectively experienced. They cannot be measured and certainly cannot be added to the “pollution costs” experienced by others.

Furthermore, because any tax would cause a complete reallocation of resources in the economy, it could not possibly be known whether the tax would end up making society as a whole better or worse off. Such policies ignore not only sound economics but also sound science. The result is proposals that promote the political agenda or aesthetic values of policymakers and interest groups.

For example, the World Resources Institute (WRI) has published a study claiming that the use of automobiles imposes $300 billion annually in external costs on society.[3] That figure includes the “costs” of global warming, even though decades of satellite data actually show mostly global cooling, and such pure aesthetics as the unsightliness of shopping malls and the loss of open space due to urban sprawl. The proposed remedies are all “market based” and meant to “alter people’s incentives.” They include hefty new taxes on gasoline, user fees for roads, and forcing all shopping malls to charge for parking.

Tradable permits (TPs), while often referred to as a “property rights” approach, are not intended to expand property rights but to rearrange and restrict existing ones to achieve an “environmentally correct” and politically determined result. This approach begins by identifying an undesirable activity and then restricting it by issuing a fixed number of permits to pursue the activity. The permits then can be bought and sold in a market setting. Firms can boost their revenues by reducing the level of the activity in question and selling permits to other firms that wish to increase their activity beyond what their permits allow. While TPs “harness” market forces to achieve politically determined environmental goals, they are in fact disdainful of truly free markets based on the recognition and enforcement of property rights.

TPs simply legalize trespass to the extent they allow actual rights-violating pollution to continue, for example, allowing cement companies in the example above to pollute without compensation to victims. As Robert McGee and Walter Block have argued, “perhaps the major fault with trading permits is that . . . they entail a fundamental and pervasive violation of property rights.”[4]

In other instances, they simply create new kinds of rights in an attempt to centrally plan industries in the name of environmental protection. The Progressive Policy Institute, President Clinton’s favorite think tank, is calling for tradable permits to promote recycling. The government would issue permits to newsprint companies limiting them to a certain level of nonrecycled materials in their paper. Companies could sell their permits if they increase the recycled content. Those proposals exist, even though, as reported in the Washington Post and the Wall Street Journal, too much recycling may be causing increased pollution and waste of resources. Such policies are best viewed as an attempt to impose personal attitudes, such as a disdain for landfills, on society.

Market-based environmentalism and the free market are not the same. Free-market policies, even with respect to the environment, would not have “environmental protection” per se as their central focus. Instead the focus would be on resolving conflicts among human beings as they put natural resources to use. An important by-product of that would be a cleaner environment and a more conscientious stewardship of resources.

MBE sees human activity as something that must be harnessed by the government, albeit through market incentives. The conflict, from this perspective, is not among human beings but between them and the natural environment, with human beings wearing the black hats.

  1. Robert Stavins and Bradley Whitehead, The Greening of American Taxes: Pollution Charges and Environmental Protection (Washington, D.C.: The Progressive Policy Institute, 1992), p. 3.
  2. Murray Weidenbaum, “Reforming Government Regulation to Promote Prosperity,” The World and I, August 1992, p. 497.
  3. James MacKenzie, Roger Dower, and Donald Chen, “The Going Rate: What it Really Costs to Drive,” World Resources Institute, June 1992.
  4. Robert McGee and Walter Block, “Pollution Trading Permits as a Form of Market Socialism and the Search for a Real Market Solution to Environmental Pollution,” Fordham Environmental Law Journal, vol. 16 (1994): 58.
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