Finding The Middle Ground: The Use of Market Incentives to Protect the Environment

Because environmental resources—air, water, soil, ambience, and so on— are available at little or no cost, not surprisingly they are over-used. This means less clean air, clean water, uncontaminated soil, and fewer quiet environs than we should like. It follows that proper pricing will reduce the use of environmental resources by providing the correct incentives for firms, for organisations, and for households as they make their decentralised resource-use decisions. That is, since clean air and water and waste sites are not unlimited resources, they should not be available at no cost to the users. Rather, users should pay a price for the use of the resource, a price which reflects the relative scarcity of the clean air or water or waste sites, or the cost imposed on neighbours from noisy behaviour. Moreover, resource-use decisions are most efficiently and flexibly made by those closest to the technologies, in a decentralised fashion. This proposal—user pays—requires the imposition of taxes, and is firmly in the context of a decentralised economy, in which decision-makers respond to relative prices in making their choices, and have the freedom and flexibility to determine how to behave. In the case of pollution, such a scheme leaves it to the factory managers to decide how best to deal with the additional cost their unaltered behaviour would impose on society. If the cost of altering their practices to reduce pollution is less than the cost of such pollution on society—as reflected by the level of the pollution tax—then they should alter their practices and produce less pollution, that is, use up clean air and water at a lower rate. More fundamentally, however, the issue is one of altering the behaviour of firms, organisations, and individuals or households. For instance, if we wish to reduce the amount of fuel used on our roads, and hence reduce the amount of carbon dioxide produced as a product of combustion, there are four sorts of decisions we should like to affect: