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Markets: Key Concepts for Environmental Policy

Markets: Key Concepts for Environmental Policy. Errol Meidinger www.law.buffalo.edu/eemeid. 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

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Markets: Key Concepts for Environmental Policy

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  1. Markets: Key Concepts for Environmental Policy Errol Meidinger www.law.buffalo.edu/eemeid

  2. 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

  3. 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

  4. 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

  5. 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

  6. 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

  7. 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

  8. 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

  9. Private Goods • Rivalrous: one person’s use is inconsistent with another person’s 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?

  10. 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)

  11. Public and Private Goods

  12. Public and Private Goods

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

  14. Environmental Goods and Services

  15. 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)

  16. 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

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

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