Markets: Key Concepts for Environmental Policy Errol Meidinger 1

What is a Market? Trading (of goods, services, information, opportunities, etc.) Repeated or regularized – One trade is not a market Organized system for trading – Routinized Expectations – Rules and Property Rights (entitlements) Historical role of the market place Often regulated – Different rights to participate – Limits on what can be traded – Fees for participation – Information requirements – Enforcement mechanisms 2

Origins Spontaneous: people just started trading and set the rules (Hayekian model) Intentionally Created – Often by an authority, sometimes the state E.g.: medieval markets – State advantages: Contract rules Property rights Adjudication (courts) Enforcement Legal and illegal markets 3

Abstraction Supply Demand Markets facilitate the setting of prices whereby as much of a good, service or information is produced as can be done within the price buyers are willing to pay Price = MC 4

Political Economy Minimal State – Property rights – Contract law – Money supply Regulatory (or welfare) State: all of the above, plus – Taxation, public works, environmental and social regulation Coordinated market economies (Germany, France) versus Anglo-American liberal economies 5

Sociological Dimensions Embedded versus Dis-embedded (Polyani) Mechanisms of Accountability – State legal system – Private legal systems (e.g., diamond merchants) Inequality: perpetuation of unequal resources (terms of trade, bargaining power, etc.) Commodification of people and nature (people as means rather than ends) Markets as measure of social value: value of a person or thing is what the market will pay 6

Normative Justifications Utility: each party to a transaction is better off Liberty: individuals free to make and get what they want Democracy? Consumer sovereignty; markets produce what people want Short leap to think of markets as a good way of making whole societies better off – Public interest in promoting markets 7

Core Analytical Ideas Efficiency: Benefits > Costs Transactions Costs: costs of gathering information, negotiating, enforcing Externalities: benefits or costs not considered in deciding to execute the transaction – Tragedy of the Commons Moral Hazard: taking extra risks when the costs will be borne by others Private versus Public Goods 8

Private Goods Rivalrous: one persons use is inconsistent with another persons use Excludeable: access can readily be limited Classic type of goods or services traded in markets Question: to what degree is the nature of a good inherent, and to what degree is it socially defined and enforced? 9

Public Goods Non-rivalrous: use by one person not inconsistent with use by another Non-excludable: access is very hard to limit – Archetypical example: national defense Not readily provided by markets: no one will want to pay if others can easily free ride – Very difficult to organize people to figure out how to provide collectively States traditionally seen as best provider (Keynes) 10

Public and Private Goods RivalNon-Rival Excludable Private (e.g., Chair, Laptop, Logs, NTFPs) (?) Non- Excludable (?) Public (E.g., National Defense; Legal System?) 11

Public and Private Goods RivalNon-Rival Excludable Private (e.g., Chair, Laptop, Logs, NTFPs) Club (golf club; cable TV) Non- Excludable Open Access (atmosphere; ocean fisheries) Public (E.g., National Defense; Legal System) 12

Commons Tragedy of the Commons: insufficiently controlled access leads to overexploitation Tragedy of the Anti-Commons: excessively controlled access leads to under-exploitation 13

Environmental Goods and Services RivalNon-Rival Excludable Private (logs, timber, NTFPs, regulated commons, emissions rights) Club (certification, CSR) Non- Excludable Open Access (atmosphere, unregulated ocean fishery, unregulated forest commons) Public (land stabilization, water purification; biodiversity conservation; carbon sequestration) 14

Policy-Created Markets (often by innovating excludability) Emissions Trading: most pollution reduction at lowest costs (e.g., SO2 market in U.S) Tradeable Fishing Quotas: each fisher can keep or trade; often leads to consolidation Tradeable Development Rights (accumulate rights to develop some property by preserving other property) Wetlands Mitigation Banking: developing some wetlands requires locking in preservation (or even creation) of others Habitat Conservation Plans: (same thing for endangered species) 15

Common Problems Leakage: does development prevented in one place simply occur in another? Additivity: is anything really gained? – What is the baseline? – No new wetlands created – No new habitat preserved Equivalency: how know one wetland is equivalent or better than another 16

Non-Governmental Environmental Market Mechanisms Forest Certification Voluntary Carbon Offsets Markets – Laying foundations for crediting avoided development 17