Market-based environmentalism and the free market: they're not the same.

• Author: Cordato, Roy E.

Since the collapse of communism in Eastern Europe, overtly socialist solutions to public policy problems have fallen into disrepute, even among socialists. It now seems to be widely accepted among policy analysts of both the Left and the Right that direct government control of market activities and market outcomes--the so-called command-and-control approach to public policy--is an excessively costly way to achieve public policy goals.

Yet despite widespread rejection of outright socialism and command-and-control policies, there is little appreciation of truly free markets and the outcomes they are likely to generate. Policy makers do not value market exchange because it maximizes liberty and personal satisfaction of wants. Instead, policy makers value the market because they can manipulate it to produce a centrally planned outcome. This approach describes so-called market-based environmental policy.

All approaches to market-based environmentalism (MBE) tend to follow the same pattern. As MBE advocates Robert Stavins and Bradley Whitehead (1992) point out, "There are two steps in formulating environmental policy: the choice of the overall goal, and the selection of a means or `instrument' to achieve that goal" (3). Specifically, government authorities first select a particular outcome (e.g., level of sulfur dioxide emissions or amount of recycled paper used in grocery bags) as a desirable goal. Viewing the behavior of individuals making exchanges in the relevant markets as something to be manipulated through public policies that create incentives to "do the right thing," policy makers then select an appropriate means for this purpose. In environmental policy, the two most highly touted instruments are excise taxes and tradable permits. These market-based approaches, advocated by professional economists and think-tank policy analysts on both the Left and the Right, actually use markets against themselves. In reality they are often meant to thwart the outcomes of true free-market activity.

I shall criticize the arguments advanced for market-based environmentalism, the most important of which have their roots in Pigovian welfare economics.(1) My criticism relies on arguments advanced by F. A. Hayek to demonstrate the impossibility of efficient central planning and by James Buchanan regarding the subjective nature of costs and benefits. The economic arguments for MBE have given it widespread appeal across the political spectrum. I shall argue that MBE has the same defects as full-blown socialism: it is inconsistent with individual liberty and, in practice, impossible to implement successfully.

Environmental Problems: Market Failure or Government Failure?

The reigning view of environmental problems considers them as inherent in a free society. If people are free to pursue their own self-interest--to produce and consume whatever they want, how and when they want it--polluted air and waterways, littered streets, and depleted natural resources will result. The typical characterization in most of the social science literature is that such problems represent "market failure." Pollution and environmental degradation are cited as evidence that Adam Smith was wrong, or at least naive. People pursuing their self-interest do not necessarily advance the well-being of society as a whole. Therefore, it is not only appropriate for, but incumbent on, government to correct the market's failings.

This view constitutes a misunderstanding of the nature of a free society and a free-market economy. Contrary to the standard view, environmental problems are not an unavoidable side effect of a free-market economy. Instead, they occur because the institutional setting--the property rights structure-required for the operation of a free market is not fully in place. Because, in all modern societies, government has taken nearly complete responsibility for the establishment and maintenance of this institutional setting, environmental problems are more appropriately viewed as manifestations of government failure, not market failure.

Environmental Problems as Conflicts over the Use of Property

In current debates over environmental issues, it has become common to abstract from individual decision makers in society and to view certain uses of resources as inherently problematical. Traditionally, conditions such as air and water pollution aroused concern to the extent that they harmed people. More recently this view has been abandoned. Now many argue that certain uses of resources should be regulated or proscribed not because they harm third parties but because they degrade "the environment." For example, for many, strip mining, the use of landfills for the disposal of trash, and the cutting down of old-growth forests do not constitute problems because of harm to humans. Indeed, the fact that humans usually benefit from these practices is viewed with disdain. The traditional view of environmental problems, that they should concern policy makers because these problems involve harm to human beings, has been turned on its head. The modern view, adopted by many who advocate market-based "solutions" is that harming humans is justified in the pursuit of "saving" some aspect of the nonhuman environment.(2)

In a free society, concern for human beings must take center stage. In assessing environmental problems, the core question is how and why such problems interfere with individual decision making, construed as the formulation and execution of plans. As all formulation and execution of plans involve the use of physical resources, and such plans can legitimately employ only resources to which one has rights, any environmental analysis focused on the individual decision maker must pay attention to property rights.

For example, air pollution creates a problem to the extent `that it interferes with individuals as they formulate and execute plans. This can happen only if the pollution somehow interferes with. an individual's exercise of rights to his or her property or if uncertainty prevails concerning who actually has the rights to a particular resource. Viewed in this way, all environmental problems involve conflict over the use of property. Person A and person B are attempting to use resource X for conflicting purposes. Either A or B clearly has the relevant rights to X but these rights are not being enforced, or the rights to X have not been clearly defined, that is, neither A nor B nor anyone else has the relevant rights to X. In the former case, the environmental problem is one of property-rights enforcement. In the latter case, an authoritative decision must be made regarding who should have the rights. The foregoing conditions establish the relevant parameters of environmental problems from a humanist, as opposed to an environmentalist, perspective.

Two simple examples can highlight each of these possibilities. Imagine a community with a cement factory that emits dust into the air without the consent of people nearby. Because of the dust, people in the community must wash their cars and house windows more frequently. The dust also soils clothing hung out to dry and creates respiratory problems for those who breathe it. This problem is clearly one of property-rights enforcement. The problem arises not because the dust is emitted into the air but because it has direct contact with what is indisputably people's property--their cars, houses, laundry, and lungs--and thereby interferes with their planned use of it. Here the conflict concerns the use of property to which ownership is clearly defined but regarding which some rights are not being strictly enforced.

An example of the second type of problem involves the use of a public waterway such as a river. A factory uses the river as a receptacle for waste generated by its production process. Downstream, homeowners use the river for fishing and swimming. Suppose factory waste renders the river unfit or at least less fit for these purposes. The central problem here is not simply that the river is being polluted, but that plans for its use are in conflict. Unlike the rights in the cement-dust case, the rights to the river are not clearly defined, so the public policy issue involves who should have what rights.

Property rights must be clearly defined and enforced in order for a free market to exist. If problems arise because these institutional requirements are not met, it is wrong to blame the free market for the problem. In each of the examples just presented, a problem arises because the institutional prerequisites of a free market are, in one way or another, not fulfilled. The problems should not be blamed on market failure when a free market is prevented from coming into existence. The problem actually represents institutional failure, as the institution of private property itself is not being sustained. From a public policy perspective, a "crack" exists in the property-rights structure. In general, a genuine free-market policy would first identify...