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Friday, November 7, 2008

Free-market environmentalism

Free-market environmentalism is a position that argues that the free market, property rights, and tort law provide the best tools to preserve the health and sustainability of the environment. This is in contrast to the most common modern approach of proactive environmental legislation.

Economics of environmental destruction

Some view environmental problems as arising from market failures. In contrast, free market environmentalists argue that environmental problems arise because of:

1. Laws governing property rights that fail to adequately protect or define those rights; and
2. Laws governing class or individual tort claims that provide polluters with immunity from tort claims, or interfere with those claims in such a way as to make it difficult to legally sustain them.

Because free-market environmentalists believe these things, as a rule they further believe that the best way to protect the environment is to change laws governing property rights and tort claims so that those laws no longer suffer from the defects they believe give individuals and corporations perverse incentives not to guard the environment.

The market failure view

Some economists believe that the market is unable to correct the negative externalities of industrial production and excessive depletion of non-renewable resources. In this view, firms receive the full benefit of creating their products in a way that generates pollutants but do not bear the full social costs of the increased pollution. They have no economic incentive to create products in a way that minimizes pollution and absent targeted environmental regulations, will continue to do so. This activity would be rational, because it would be profitable for a firm to overpollute, while letting others absorb the costs of its effects and cleanup. Regarded this way, opponents of market solutions to the problem of pollution assert that market mechanisms left to their own devices contain built-in incentives for environmental degradation.

Ecological economist Robin Hahnel has enumerated what he terms the four basic defects of a market economy with respect to the environment as:

1. overexploitation of common property resources;
2. overpollution;
3. too little pollution cleanup; and
4. overconsumption.

The free-market environmentalist response

In response to these concerns, economists who prefer the free-market environmentalist approach argue that:

1. Overexploitation occurs to the extent of the lack of ownership incentives to care for the property, and that this communalization effect occurs to the extent of multiplicity of ownership. Overexploitation reduces the intrinsic and retail value of the property, the effect of which is most clearly felt by individual owners or through limited co-ownership.
2. Pollution occurs where and to the extent that victims are prevented or hindered from seeking tort restitution for such aggression. Legislative and Judicial authorities have tended to favor heavy industries over individual or class action in favor of "public property" and the "common good".
3. Pollution cleanup also occurs naturally in a free market, because reducing the negative value of a property is a net gain, again leading to a higher intrinsic or retail value, and thus marketability.
4. Overconsumption is a flawed concept, because it assumes that resources are nonrenewable. The market, through supply and demand, regulates consumption by adjusting it according to supply. For example, if a resource becomes more scarce, its value increases and thus also its cost. This forces consumers to redirect their purchases to alternate resources which are in more plentiful supply. In addition, the higher market value of the resource creates an incentive to create more of the commodity, and allows for a greater expenditure in doing so.

The prevalence of externalities would have serious implications for market efficiency in its static and dynamic dimensions. If negative externalities are unnaccounted for, it would imply that market prices will not accurately reflect true social opportunity costs, leading to misallocations of goods. As the elementary economics text book by Baumol and Blinder observes When a firm pollutes a river, it uses some of society's resources just as surely as when it burns coal. However, if the firm pays for coal but not for the use of clean water, it is expected that management will be economical in its use of coal and wasteful in its use of water.

The standard approach to addressing negative externalities is governmental regulation proscribing polluting activities. This approach has been criticized by free-market economists and others as being inefficient and ineffective. Furthermore, the demands of regulation seldom appeal to the social conscience of industries or enterprise owners and violation is often seen as legitimate business practice. Critics have noted that studies sponsored by firms assessing their own activities are invariably biased and typically exemplify an illegitimately narrow focus that ignores a competitive market context and the prevalence of external effects throughout the supply chain. Amoco's attempts at voluntary measures have met with resistance from the four or five oil refining corporations with greater market share, who expressed a preference to be forced by state regulations before lowering their sulphur content. Following Amoco's gestures, prominent environmental groups were unimpressed. For example, the Earth Day 2000 report, "Don't Be Fooled" named Amoco as one the top 10 "greenwashers" of the year.

While some environmentalists advocate compromises such as carbon trading schemes, most free-market environmentalists would prefer full accountibility as dictated by courts that respect the rights of property owners in absolute terms.

Property rights

Some economists argue from the Coase Theorem that, if industries internalized the costs of negative externalities they would face an incentive to reduce them, perhaps even becoming enthusiastic about taking advantage of opportunities to improve profitability through lower costs. Moreover, economists claim this would lead to the optimal balance between the marginal benefits of pursuing an activity and the marginal cost of its environmental consequences. One well-known means of internalizing a negative consequence is to establish a property right over some phenomenon formerly in the public domain. This requires a little abstract thinking in the case of environmental problems as these Coasians are talking about a grant to pollute or to exploit some limited natural phenomenon. This is a sophisticated variant of the polluter pays principle. However, critics have charged that the "theorem" attributed to Coase is of extremely limited practicability because of assumptions, including that it was theorized to account for adjacent effects where transaction costs for bargaining agents are typically small, but is ill-suited to real world externalities which have high bargaining costs due to many factors.

A number of libertarians, such as Rothbardians, reject the proposed Coasian solution as making invalid assumptions about the purely subjective notion of costs being measurable in monetary terms, and also of making unexamined and invalid value judgments (i.e., ethical judgments). The Rothbardians' solution is to recognize individuals' Lockean property rights, of which the Rothbardians maintain that Wertfreiheit (i.e., value-free) economic analysis demonstrates that this arrangement necessarily maximizes social utility.

Proponents of free-market environmentalism use the example of the recent destruction of the once prosperous Grand Banks fishery off Newfoundland. Once one of the world's most abundant fisheries, it has been almost completely depleted of fish. Those primarily responsible were large "factory-fishing" enterprises driven by the imperative to realize profits in a competitive global market. It is contended that if the fishery had been owned by a single entity, the owner would have had an interest in keeping a renewable supply of fish to maintain profits over the long term. The owner would thus have charged high fees to fish in the area, sharply reducing how many fish were caught. The owner also would have closely enforced rules on not catching young fish. Instead commercial ships from around the world raced to get the fish out of the water before competitors could, including catching fish that had not yet reproduced.

Another example is in the 19th century early gold miners in California developed a trade in rights to draw from water courses based on the doctrine of prior appropriation. This was curtailed in 1902 by the Newlands Reclamation Act which introduced subsidies for irrigation projects. This had the effect of sending a signal to farmers that water was inexpensive and abundant, leading to uneconomic use of a scarce resource. Increasing difficulties in meeting demand for water in the western United States have been blamed on the continuing establishment of governmental control and a return to tradable property rights has been proposed.

Regulatory capture

Many free-market environmentalists argue that the problem of regulatory capture whereby large companies play a large role in setting regulations has created a system where things are far too biased in favor of large companies. For instance, in the United States lands that could be more valuably used for tourism are often used for resource extraction because the many disorganized tourists cannot have the same impact on government as the few organized corporations. If the land was privately held the land owner would realize that tourism would make more of a profit than logging and nature would be preserved.


The implementation of property rights provides governments with an opportunity to raise revenues. This has been illustrated by recent auctions of bands of the electromagnetic spectrum for telephony, another example of an attempt to manage a scarce resource through property rights rather than regulation. Such auctions offer an alternative to conventional taxation for funding public spending, by capitalizing the expected rent earned by the privatized good. Some economists, most notably Henry George in the 1870s, have argued that taxes on income and profits represent taxes on productivity, innovation and creativity and that we should rather tax land rents and externalities such as pollution, consumption of fossil fuels and road congestion. Environmental property rights offer a means to shift taxation from "goods" to "bads" and rents.

Nature preserves

One example of free market attempt to protect the environment is The Nature Conservancy organization. It has been successful in protecting many sensitive, ecologically important places by simply purchasing them, although this practice has met with controversy in some areas. In some cases the lands are donated or sold to government agencies for management, while in others the Nature Conservancy itself manages these preserves.

Billionaire Ted Turner has a similar private program that has seen him buy up tens of thousands of acres of wilderness around the United States.


There are a number of arguments against free-market environmentalism:

* Not all aspects of the public domain are easily "privatisable" in practice. It may be impossible to establish property rights on things like air and water that circulate the globe, so stopping air pollution or global warming would be very difficult. Coasian environmentalists often support carbon trading schemes advocated by other environmentalist movements. The US Clean Air Act of 1990, for instance, set up a system of emissions trading for sulfur dioxide. The Kyoto protocol also seeks to establish a system of emissions trading for carbon dioxide and other greenhouse gases. Rothbardians reject government-imposed emissions trading schemata, and instead maintain that pollution is by definition a matter of Lockean property rights being violated, and hence should be handled as a subject of individual or class action tort, as any other invasion of property. As long as there is an aggressor and a victim, there is a tort.

* The conservation of endangered species is not necessarily achievable using the free market, especially where there is little economic value in the species in question. For example: there might be only limited profit to be made from a piece of land by maintaining it as the habitat of a rare beetle, whereas alternative economic uses for that land (which might be deleterious to the welfare of the beetle) - such as building a parking lot on it - might yield a greater profit. Regardless of the broader ecological importance of the beetle, it is much more likely that the landowner will prioritize short-term profits to be gained from development, rather than a long-term benefit which may be of comparably little (perhaps even imperceptible on the surface) benefit to himself. Thus, threatened or endangered species could be lost by relying on the willingness of individual landowners to take a loss in order to protect them. However, this view does not account for nonprofit organizations which would exist solely for the purpose of preserving rare species.

* A related philosophical objection is that free-market environmentalism is entirely anthropocentric and ignores the "innate" value of nature outside of human perception. (see ecocentrism). But even in politics, someone must place a value on the environment in question.

* The principle of limited liability protects investors from the costs of the activities from which they benefit. In the U.S., there have been recent suggestions that, while limited liability towards creditors is socially beneficial in facilitating investment, the privilege ought not to extend to liability in tort for environmental disasters or personal injury. In fact, most free-market environmentalists oppose limited liability in torts as a form of corporate welfare and a limitation of full property rights.

* Countering the tragedy of the commons claim, Elinor Ostrom has studied a large number of empirical cases where common property resources have been managed successfully. Her work emphasizes neither private property/market arrangements nor government regulation but the successes of communities consciously designing institutional arrangements in response to particular common property dilemmas. The stress is on democratic institutions that allow the users of the common to govern the commons.

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