Market-Based Approaches to Environmental Policy; Resources, Summer 2003

pon hearing the term “market-based approaches to (or economic incentives for) environmental protection,” some people assume this means letting unfettered competition between unregulated private firms determine how clean our air or water will be, how much open space we will have, or how many fish stocks will be driven to collapse. Nothing of the sort is intended. In fact, market-based approaches to environmental protection are a clever form of government regulation. They are premised on the recognition that while competitive markets are a wonderfully efficient means of deciding what types and quantities of consumer goods should be produced, they generally fail with respect to environmental quality, the provision of “public goods” like open space and common-property resources like fisheries. Every undergraduate and graduate economics textbook discusses this notion of “market failure,” and the environment is always the first illustration that is used. Given the very necessary government role in protecting the environment, the real question becomes how best to do this. Market-based approaches to environmental protection are premised on the idea that it is possible to confront private firms, individuals, and even other levels of government with the same kinds of incentives they face in markets for labor, capital, and raw materials—that is, prices that force them to economize. The rationale for market-based approaches, in other words, is to try to put the powerful advantages of markets to work in service to the environment.