Have you ever wondered why unregulated markets lead to degradation of the environment and depletion of fisheries, degradation of forests and adverse impacts to other natural resources? Economists have studied this extensively, and there are well understood reasons why many natural resources tend to be overused and degraded in unregulated markets. This is what economists call “market failure”.
So if free markets fail to effectively utilize many natural resources, why not just leave it to the government? Unfortunately, there are also well know reasons why management by government agencies will also not effectively utilize natural resources, and this is called “government failure”.
Why do free markets work so well for producing regular commercial goods, but not well at all for protecting the environment? When firms “use” the environment (pollute) to produce, they can “use” the environment for free, while the rest us of bear the costs of pollution damages. This leads to a form of “market failure”. Follow this link to learn more about Market Failure.
Economists have developed policies that capitalize on the power of markets, while at the same time correcting for problems of market failure. Green markets address the problem of market failure by making firms pay when they “use” the environment (pollute). One example of a green market is the so-called “carbon tax”, or pollution tax. The pollution tax is an example of the “Polluter Pays Principle”, which makes the polluter pay the full cost of production, including the costs of pollution damages. Learn more about green markets and the Polluter Pays Principle.
Green markets can be based on a “carrot” and a “stick” approach. The pollution tax approach is an example of a green market that is based on a “stick” approach—the Polluter Pays Principle. Polluters are penalized (the “stick”) by being charged for the pollution they emit. Payments for Ecosystem Services (PES) are an example of a “carrot” approach. Find out more about Payments for Ecosystem Services.
Green markets also include cap-and-trade, pollution offsets, product eco-labeling, and many other programs. They have great potential for creating a sustainable and productive world economy. But in order for them to be effective, green markets require careful design. There are many examples of green markets that failed miserably because they were not structured properly. Environmental economists have studied these cases in detail, and have much to say about what to do (and what NOT to do) in order to create effective green markets.
Learn more about green markets here: