Markets and the Environment: Friends or Foes?

Discussions surrounding how to stave off the most damaging effects of climate change are reaching a fever pitch. Often, markets that  operate without environmental checks and balances are blamed for our current state of environmental degradation. The natural conclusion for many environmentalists is that we must significantly curtail market activity in order to mitigate environmental impacts.

As an economist, I can appreciate the logic of tradeoffs. Yet what if I were to tell you that achieving sustainable environmental outcomes doesn’t necessarily have to entail punishing businesses? In fact, there is an entire strand of environmentalist thought which claims that we can use the logic of markets to help us achieve sustainable environmental outcomes. We don’t have to have flourishing markets or a clean environment. We can have flourishing markets and a clean environment if we just know how to align the institutions correctly.

This set of ideas, usually termed free market environmentalism, champions the carrot approach of rewarding businesses for behaving in ways that conserve natural resources and/or preserve the environment. This approach is starkly opposed to traditional stick environmental approaches, which favor taxing and/or regulating companies whose actions lead to environmental degradation or natural resource exploitation. 

Using the market approach requires understanding two key points: (1) the role that property rights play in creating incentives for preservation, and (2) the role that prices play in reflecting the relative scarcity of resources. In this post, I’ll examine the importance of property rights. I’ll turn to prices in my next installation. 

When property rights are undefined or poorly enforced, the incentives for conservation are sorely lacking. One example I like to use with my classes is asking where you’re more likely to see graffiti – on a city-owned overpass, or on the side of someone’s home? The answer is clear. Because you have stronger property rights in your own home, you’re much more likely to take care of it. 

As I discussed at length in an earlier post, it is the fact that so many natural resources lack clearly defined property rights that has led to consistent and damaging environmental problems. Overfishing is an excellent example. In order to help overcome the problem of rapid species depletion at many fisheries around the world, a variety of stringent regulations have been enacted. Most often these take the form of shortened seasons, which create incentives for fishermen to capture as many fish as possible within a short window of time. This is far from a sustainable practice. 

While establishing property rights over water might seem more difficult than establishing property rights over land, enviropreneurs (environmentally-minded entrepreneurs) around the world have found a variety of innovative ways to do just that. For example, there are now more than 200 individual transferable quota programs in effect around the world. These programs essentially assign rights to individual fishermen to catch a specified amount of fish throughout the season. The quotas assigned to each fishermen are set in accordance with what ecologists determine to be a sustainable that is, a total amount of fish that can be caught during a season, while still allowing for species rebound at the end of the season. Where these programs have been tried, in almost every case they have been able to overcome the multitude of problems associated with overfishing. 

The lack of well-defined and/or clearly-enforced property rights is at play in so many environmental problems. And enviropreneurs are hard at work determining how the property rights approach can help improve the air, the land, endangered species, and a variety of other environmental problems. For years, the tax and regulatory solutions to solving environmental problems have reigned supreme. Isn’t it time we at least try a new tactic?