Free Market Environmentalism.

• Author: Adler, Jonathan H.

Terry L. Anderson and Donald R. Leal New York: Palgrave, 2001, revised ed., 241 pp.

In the first edition of Free Market Environmentalism, Terry Anderson and Donald Leal of the Political Economy Research Center sketched an environmental vision that eschewed government mandates in favor of markets, and replaced regulatory prohibitions with property rights. At the time, 1991, this was radical stuff. Ostensibly conservative policymakers had controlled federal environmental agencies for over a decade with little to show for it. Though the authors were reluctant to admit it, free market environmentalism (FME) was still a fringe idea. Environmentalists remained wedded to the use of government, and the federal government in particular, to achieve environmental goals. Some economists and policymakers used the language of economics in discussing environmental problems, or professed fealty to "market incentives," but few were prepared to unleash unfettered markets on the ecology. Genuine free market environmentalism--that is, the use of market institutions, particularly property fights, voluntary exchange, and common law liability rules to protect environmental resources--existed mostly in the minds of a handful of scholars and think tank researchers.

During the intervening decade, free market environmentalism has come of age. The failure of centralized regulatory systems has sent analysts searching for alternatives. Dissatisfaction with existing regulations has produced gradual experimentation with market approaches, while ecological entrepreneurs, what Anderson and Leal call "enviro-capitalists," have sought ways to make environmental protection pay. In 1991, FME may have been "more theoretical than applied" (p. ix). Now there are models that illustrate the FME paradigm in practice. The authors take advantage of this fact, providing numerous examples of FME principles put to practice in the real world. The result is a blend of theory and implementation that provides a highly useful introduction to the power of market institutions to advance environmental protection.

From the start, "free market environmentalism" may have been a bit of a misnomer. FME is not so much about "markets" as it is about institutional arrangements. As Anderson and Leal explain, "At the heart of free market environmentalism is a system of well-specified property rights to natural and environmental resources" (p. 4). Property rights provide the foundation for markets, and so establishing property fights in environmental resources enables individuals and organizations to pursue environmental goals in the marketplace. Pigouvian economists seek to alter human behavior by levying taxes and imposing regulations to correct for the "failure" of market prices to account adequately for environmental concerns. FME, on the other hand, seeks to create and expand markets in environmental resources through the extension of market institutions to cover environmental resources that were heretofore external to market processes.

Anderson and Leal center their analysis on two concerns: incentives and transaction costs. Recognizing that people tend to act in their own self-interest, whether enlightened or otherwise, Anderson and Leal emphasize the importance of institutional arrangements that generate positive incentives for environmental stewardship. "The question is not whether the right solution will always be achieved, but whether good decisions are rewarded and bad ones penalized" (p. 6). No doubt this candid refusal to promise ecological nirvana may dissatisfy some environmentalists. The question, however, is not which environmental paradigm is perfect--none is--but which offers the greatest...