Green Economics 5/12
Excerpts From Chapter 4: Useful Insights From Mainstream Economics
[Over an extended period ZNet has been publishing excerpts of chapters from Robin Hahnel’s latest book, Green Economics: Confronting the Ecological Crisis, available from M.E. Sharpe. Excerpts published here are not the full chapters which are made available inside the book. More information about the book and links to purchase it are below. Or, if you want, first, go to previous excerpts: Introduction / Chapter 1 / 2 / 3 / 4 / 5 / 6 / 7 / 8 / 9]
When properly understood, a number of mainstream concepts and theories can help us understand why in private enterprise market economies we overpollute, overexploit, and underprotect the natural environment. Understanding the nature of what economists call “perverse incentives” created by externalities, public goods, free access to common property resources, and resource extraction under private ownership can take us a long way toward understanding the sources of environmental problems.
Since mainstream economists invariably defend the private enterprise market system, environmentalists who correctly sense that our major economic institutions are largely responsible for environmental distress assume there is little in mainstream economic theory that sheds light on where problems arise. Surprisingly, this is not the case. The problem is that the mainstream literature on perverse incentives is underadvertised by a profession dedicated to providing ideological support for the dominant economic system of our age, and these perverse incentives are rarely interpreted as reason for concern.
Why We Pollute Too Much and Protect Too Little
Mainstream economic theory teaches that the problem with externalities is that the buyer and seller have no incentive to take the external cost or benefit for others into account when deciding how much of something to supply or demand. And mainstream theory teaches that the problem with public goods is that nobody can be excluded from benefiting from a public good once anyone buys it, and therefore everyone has an incentive to “ride for free” on the purchases of others rather than revealing their true willingness to pay for public goods by purchasing them in the marketplace. In other words, mainstream economics concedes that the laws of the marketplace will lead to inefficient allocations of productive resources when public goods and externalities come into play because important benefits or costs go unaccounted for in the market decision-making procedure.
If anyone cares to listen, standard economic theory predicts that market forces will tend to produce too much of goods whose production and/or consumption entail negative externalities -- and consequently lead us to pollute too much -- too little of goods whose production and/or consumption entail positive externalities, and much too little, if any, of public goods – and consequently lead us to protect the environment too little….
The Tragedy of the Commons
Much of the natural environment is a common pool resource (CPR)…. Ocean fisheries, the upper atmosphere where greenhouse gases are stored, the lower atmosphere where smog and local pollutants accumulate, groundwater aquifers, and large tracts of land whose titles are either nonexistent or unenforced are examples of important common pool resources. Mainstream environmental economists often illustrate the problem Garrett Hardin made famous as the “tragedy of the commons” by exploring incentives for fishermen, and conclude that CPRs such as fisheries will be over exploited because users have no incentive to take three negative external effects into account: (1) The more fish any boat catches from a fishery, the fewer fish others will catch for a given amount of effort now. (2) The more fish any boat catches now, the fewer fish will be available for all fishermen to catch later. (3) The more fish any boat catches now, the fewer fish will reproduce, and therefore the fewer fish will be available to be caught later….
Resource Extraction and Rates of Time Preference
Decision-making by private owners of natural resources under the pressure of market competition often leads to decisions based on a rate of time discount that is higher than can be justified for social decision-making purposes. When this is the case, resources are extracted faster than would be socially efficient. But the reasons for this unfortunate outcome are not as simple as often believed….
Despite first impressions, the fact that individual humans are mortal while the human species is less so does not lead private owners to extract natural resources faster than can be ethically justified. However, because future markets are usually thinner, and because the average rate of profit has been substantially higher than the rate of growth of net national economic welfare per capita, private owners of natural resources have been driven by competitive conditions to extract natural resources far faster than has been socially efficient for quite some time….
The Problem with Green Consumerism
Markets provide incentives for individuals to express their desires for private goods in the marketplace by offering to buy them, since otherwise they cannot benefit. But markets provide no incentives for individuals to express their desires for public goods in the marketplace by offering to purchase them. Quite the contrary, in a market economy it is almost always foolish for individuals to buy public goods no matter how much they may value or want them. And therein lies the problem with green consumerism in market economies. The problem is not that when people choose to engage in green consumerism the world is not better off because of it. The problem is that markets penalize those who practice green consumerism and reward those who do not, which means that socially beneficial campaigns encouraging green consumption must always swim upstream in market economies.
Green Economics: Confronting the Ecological Crisis by Robin Hahnel is available from M.E. Sharpe.
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