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Environmental Economics And Government Policy Essay

3522 words - 14 pages

Economists often talk about letting the economy work through the mechanism of the free market versus government control and regulation. Some believe that if the market is allowed to "do its thing" unprohibited and without government interference, then resources will be allocated efficiently, equilibrium will be found, and so on… However, this is not always possible. Of course, government control is not perfect either. Thus, it would seem that at times the market may be more appropriate than the government; other times the government may be needed because the market is not able to function properly; and other times a combination of the two working in unison may provide the best and most effective and efficient answers.

The market may fail if there is, for example, "imperfect market structure" and thus the presence of "monopoly power." In this case then chances are that the prices that are established will be higher than "necessary" and the quantity supplied less than "adequate" to meet the needs and desires of people. The market may also fail if there is the presence of "public goods." This is when something is characterized by being "nonexcludable" and "nonrival." That is to say that anyone who wants to can "consume" the good or service and that everyone can have as much of it as they want, even if they have not paid for the use of it. The presence of "externalities" can also cause the market to be inefficient because the private costs and social costs are not equal. Pollution is one such problem where the market may or may not be able to function "properly," since there seems to be a divergence between individual and collective incentives.

Property rights determine how producers and consumers use environmental resources. In a capitalist economy, property rights are vested with individuals. Oftentimes the source of environmental problems in a capitalist economy is from the pursuit of profits, which means that the market system itself is not working well and other things may be needed to help. Property rights that would lead to efficient allocations have four main characteristics: universality, exclusivity, transferability, and enforceability. "Universality" is when all resources are privately owned and the entitlements are specified. "Exclusivity" refers to the fact that all benefits and costs due to owning and using the resource should be directed solely at the owner. "Transferability" refers to the fact that all property rights should be transferable from one owner to another in voluntary exchange. And finally, "enforceability" simply means that all property rights should be secure from involuntary seizure by others. With all of these in place, one would certainly use a resource efficiently because a decline in the value of the resource would represent a personal loss. Furthermore, individuals will only buy as much of something so that the marginal cost is equal to the marginal benefit that they receive from...

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