Environmental Economics

Paper Summary:

In this article, the writer maintains that the primary reason for government regulation is to correct perceived or actual market failures. The writer notes that increasingly, people are saying that government regulation does not appear to be working. However, the writer points out that government regulations are really failing because trying to alter market dynamics does not work. True, the dynamics of the market created the market failure, but the dynamics of the market will eventually resolve it as well if only given the chance. The writer concludes that market dynamics, by their very nature, are more efficient because all factors possible are considered and because the consumer is the better regulator as the laws of supply and demand eventually take hold.

From the Paper:

"One form of market failure, a negative externality, arises when the actions one party result in a benefit or cost accruing to some external party that did not consent to the impact. Examples of negative externalities might be a manufacturer that irresponsibly releases pollution or consumes scarce natural resources. Market failure results because the manufacturer bears no costs for its actions; instead, costs are imposed on downstream parties that did not cause them. Advocates of government regulation believe that it can correct this type of market failure by imposing taxes or using tradable permits to force firms to internalize some of these social costs. According to Field and Field, taxes will force businesses to adjust emission rates so that the equimarginal rule is satisfied and to innovate so that cheaper ways of reducing emissions may be discovered. Tradable permits allow the government control over desired emission levels by giving a company the right to pollute at a certain level that is transferable to another company as a reward for keep emission levels low."

Sample of Sources Used:

• Capitalism. http://wiki.objectivismonline.net/wiki/Capitalism
• Field, B.C. and Field, M.K. (2006). Environmental economics: An introduction. 4th Edition. Boston: Irwin/McGraw Hill).
• Franco, N. C. (2001, March 8-11). Corporate environmental disclosure: Opportunities to harness market forces to improve corporate environmental performance." U.S. Environmental Protection Agency. http://www.rosefdn.org/images/EPA.Disclosure.Study.pdf
• Invisible hand. http://en.wikipedia.org/wiki/Invisible_Hand
• Rivlin, Alice M. (1972). Why can't we get things done. The Brookings Bulletin, Vol. 9, No. 2.

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