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The
debate is over
Challenges to the Economic
Approach:
The Case for Market
Intervention
-Are Markets Free?
-Missing
Information
-Why
do Prices Matter?
-The Promise of Correcting the Market
Free Market Strategies
Carbon
Taxes
Emissions
trading: Cap and Trade
Economic Adaptation
Further
Information
Comments & questions to:
awerth@macalester.edu
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The Case for Market Intervention
Are Markets Free?
The basic argument for “altering” the free market is
similar to the “hands-off” argument, except for one assumption.
Is the market free or not? If one thinks that the existing market
for goods is free, that is to say that it allows for open competition
and participation, than it would make sense to leave the market
alone. However, if one sees the market as highly distorted, as
many in environmental economics feel, the argument for taxes etc. makes
a lot more sense. As Paul Hawken puts it “To argue today that the
free market should control the extraction and sale of natural resources
ignores the state of the commons and the free market. The market
works to the benefit of the whole of society when it includes all costs
and benefits. ” The concept that markets will reflect the value
of a product in the price (one pays more for a better product) is
limited by the information available to determine prices. If
information is missing, than prices will not reflect the true value of
a product, be that greater or less than the market price. One
example is fair trade coffee. The argument for it is that the
social conditions that the coffee is produced under give the coffee
more values than non fair trade and the price is therefore
higher. The challenge of reforming the market is to incorporate
all relevant information into prices and determine what they are worth.
Missing information
"In the United States, the gasoline pump price was
over $2 per gallon in mid-2005. But this reflects only the cost
of pumping the oil, refining it into gasoline, and delivering the gas
to service stations. It does not include the costs of tax
subsidies to the oil industry, such as the oil depletion allowance; the
subsidies for the extraction, production, and use of petroleum; the
burgeoning military costs of protecting access to oil supplies; the
health care costs for treating respiratory illnesses ranging from
asthma to emphysema; and, most important, the costs of climate change.
”-Lester Brown
The economic term for “missing information” in a market is known as an
externality. This comes from the idea that the benefit or harm
from a certain action is not borne by the person taking the
action. The most common example of an externality related to the
environment is pollution. A company will traditionally make their
product and price it according to how much it cost to make, plus their
profit margin. The smog that the company emits in the process is
generally not included in the price. While the benefit from
burning the smog forming fuel goes entirely to the company doing it,
the cost is being borne by many in the form of health problems, acid
rain and of course global warming. The goal is to then
internalize the externality, to incorporate the dispersed cost of the
pollution and put it back in the price and therefore make the producer
bear the full cost of their actions. In ecological economics the
focus is on looking at environmental impacts of individuals actions and
adjusting accordingly.
Why do prices matter?
If one accepts that these important values are being
left out of prices, then there are two major challenges that must be
considered. How does one value the externality and how does one
correct for the externality? The latter will be discussed more
later, but the imperative is aptly described that:
"Where
harm and
suffering exist because of market dealings -when the real cost of that
market are not factored into the price of goods and services- we
require the government as representative of citizenry to step in to
prevent those abuses, one way or another. "
When confronting the challenge of valuing things like human and
environmental sustainability, we are often left in the odd and morally
questionable activity of pricing animals, plants and quality of
life. The crux is that these values are often determined by use
value, that a life is valued by the economic benefit others gained from
them. A person is valued then, by the value of the labor they
produce. This clear profanation of the idea of value and
traditional morals by anyone’s standard has caused many to reject the
use of prices to account for clearly non-monetary values, like life and
sustainability. It is important to distinguish between turning
something or someone into a commodity through use value and using
prices to reflect value.
A central concept in economics is the effect of
price on behavior, or incentives. It is obvious to anyone that
people buy products that are the cheapest if they have a choice (most
of the time). It makes perfect sense; if two products are
equivalent and one costs more than the other, someone is going to buy
the cheaper one because they will be getting more for their
money. This is not universal of course. For example, many
people choose to buy more expensive fair trade coffee instead of
generic brands. It could be argued that this is not an exception
at all because for that person, the two kinds of coffee are not longer
equivalent and have become separate products. The important
aspect to consider is that people make decisions based on price and
generally expect price to reflect value. The distinction it is
important to make is that quality of prices that we base decisions on
and putting monetary value on things is different. Relative price
differences act as signals to a person that one good is worth more than
the other and shape their decisions. To put a tax on coal plants
and make them more expensive than wind power, for example, is not as
important as a price tag on the many negative effects of burning coal
as it is as an incentive that changes behavior. If the goal is to
decrease the use of coal power because wind is a better alternative and
prices will cause people to choose wind over coal, then the relative
price difference operates as an effective mechanism to guide ethical
decisions.
The Promise of
Correcting the Market
"Putting an appropriate
price on carbon – explicitly
through tax or trading, or implicitly through regulation – means that
people are faced with the full social cost of their actions. This will
lead individuals and businesses to switch away from high-carbon goods
and services, and to invest in low-carbon alternatives."
–The
Stern Review
There is great potential in using market mechanisms
to confront global warming. While carbon markets are a new idea,
the mechanisms are proven in many environmental and non-environmental
contexts. There are peculiarities to any market, but people have
used markets for a long-time and understand how they work. Beyond
this, market based solutions pass the costs of mitigating carbon on the
users themselves. When the real price of using a resource is
expressed in a market, users begin to understand the cost of the
resource and are allowed to decide the most efficient way to reduce
emissions. Allowing consumers to decide means that overall costs
of reducing emissions would be much lower than a ‘command and control’
measure. The relative advantages and nuances of the two
strategies: carbon taxes and emissions trading will be discussed in the
next two sections.
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Last updated: 2/2/2006
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