Humane Studies Review

Volume 8, Number 1 Fall 1992

Economics, Ecology, and Exchange: Free Market Environmentalism

by Robert Taylor

Bibliographic Essay


In recent years, the environment has become one of the most important public policy battlefields. Classical liberalism has a good deal to contribute to the questions regarding how to understand and solve our environmental problems. This has been recognized by the awarding of the 1991 Nobel Prize in Economics to Ronald Coase, a scholar who has done pioneering work demonstrating the importance of property rights to social coordination (see his important essay, "The Problem of Social Cost," in The Journal of Law and Economics Vol. 3 [October, 1960], pp. 1-44; reprinted in The Firm, the Market, and the Law [Chicago: University of Chicago Press, 1988]). Following the path blazed by Coase, scholars in fields as diverse as political science, forestry, economics, biology, and law have begun to point the way out of our environmental quandary. The vast literature that has emerged provides both theoretical and practical foundations for a free-market environmentalism. While not pretending to have offered all the answers to ecological questions, this market-oriented literature can at the very least serve as a starting point for further research into solving environmental problems.

Theoretical Foundations: Market Failure and the Environment
Systematic analysis of environmental problems must begin with the theory of market failure. Market economies generally do a good job serving the needs of consumers. Why, then, should the market fail to provide environmental amenities -- from clean air and water to nature preserves and wildlife conservation -- that many consumers clearly desire? This ostensible inability of the market to provide certain goods and services has been labeled by economists "market failure."

What are the fundamental causes of market failure? Two qualities of goods and services have been recognized as contributors to market failure: nonexcludability and nonrivalrous consumption. Nonexcludability means that the seller of a good is unable to prevent nonpayers from consuming the good (or that it is inefficient to do so because the marginal cost of exclusion exceeds the marginal benefit). National defense, for instance, is a nonexcludable good: once the good is produced, the seller is unable to exclude those who refuse to contribute to the good's production. Nonrivalrous consumption means that the marginal cost of a seller providing the good to an additional customer is zero; that is, any number of consumers may enjoy a good characterized by nonrivalrous consumption without detracting from the enjoyment of others. One good that has this quality is a movie theater: any number of patrons may enjoy a movie (up to the theater's capacity) without detracting from the enjoyment of other viewers and without imposing any additional costs upon the owner.

			A Taxonomoy of Market Failure

			NONRIVALROUS CONSUMPTION
N
O
N
E
X
C			NO			YES
L
U	NO		PRIVATE			PUBLIC
D			GOODS			GOODS
A
B
I	YES		COMMONS			COLLECTIVE
L						GOODS
T
Y

These two qualities can be used to construct a chart that gives a taxonomy of market failure. (See above figure.) This chart has four components. First, there are goods, called "private goods," that display neither of the two qualities. These goods do not contribute to market failure. Second, there are goods, which we may label "public goods," that are characterized by nonrivalrous consumption alone. A private movie theater would be a useful example of a public good, because the owner can exclude those who refuse to pay, but an additional patron's consumption imposes no costs on others. Third, there are goods, named "commons," that display nonexcludability but whose consumption is rivalrous. The living room of a student apartment is a good example of a commons: no one living in the apartment can be prevented from using it, but its use by one individual does often detract from the enjoyment of other users. Finally, there are those goods, which we may label "collective goods," that have both qualities. Again, national defense is the paradigmatic example: one can't exclude nonpayers from enjoying the benefits of national defense, and one person's consumption doesn't detract from the consumption of others.

Why do collective goods, public goods, and commons pose a problem for the marketplace? Commons and collective goods are both characterized by nonexcludability. Nonexcludability leads to a difficulty known as the "free-rider problem." Certain individuals may benefit from a good without paying to support the good's production; they are called "free-riders." In the commons, such free- riding may lead to an inefficient exploitation of the commons resource; because nobody has the power to exclude, the commons will be used without regard for the costs imposed. This problem is typically referred to as "The Tragedy of the Commons" (see the essay of the same name by Garrett Hardin in Science, December 1968, pp. 1243-8). The problem has been known for centuries and was dealt with by great thinkers from Aristotle (see The Politics, 2. 3. 1261b33-37) to David Hume (A Treatise of Human Nature [Oxford: Oxford University Press, 1888], p. 538). (For more recent scholarship, see Scott Gordon, "The Economic Theory of a Common Property Resource: The Fishery," [The Journal of Political Economy, April 1954, pp. 124-42], Bonnie J. McCay and James M. Acheson, eds., The Question of the Commons [Tucson: University of Arizona Press, 1987], and Elinor Ostrom's Governing the Commons [New York: Cambridge University Press, 1990].)

This problem is especially noteworthy in such commons as the atmosphere. Arthur Pigou used the example of atmospheric pollution to illustrate his well-known distinction between social and private costs (The Economics of Welfare [London: Macmillan, 1920]). Pigou argued that because industrial polluters did not take into account the costs their pollution imposed on neighboring landowners, pollution would be produced at an inefficiently high level. By taking the pollution of factories into account through imposition of effluent charges, the private costs of production could be brought in line with the true, social costs of production, and pollution would fall to an efficient level.

Nonexcludability problems with collective goods have long been noted. Adam Smith recognized this problem (The Wealth of Nations [Indianapolis: Liberty Classics, 1976], Vol. 2) and felt that government would have to erect and maintain "those public works, which, though they may be in the highest degree advantageous to a great society, are, however, of such a nature, that the profit could never repay the expense to any individual or small number of individuals..." (Smith, p. 723). Why did Smith think that private provision of some goods is out of the question? The nonexcludable quality of collective goods leads consumers to free-ride. Free-riding, of course, may substantially reduce revenues to the good's producer, leading to the good's underproduction -- or perhaps making its production impossible.

Public goods and collective goods are both characterized by the second quality, nonrivalrous consumption. Paul Samuelson, in an article dealing with the problem of market failure, defined a public good as a product "which all enjoy in common in the sense that each individual's consumption of that good leads to no subtraction from any other individual's consumption of that good" ("The Pure Theory of Public Expenditure," Review of Economics and Statistics, November 1954, pp. 387-9). Why do public goods, so defined, present a problem for the marketplace? Because the cost of providing a public good to one additional customer (the marginal cost of provision) is zero, exclusion of any consumer would be inefficient. The only way to avoid excluding consumers, however, is to provide the good for free -- but no private company could afford to do this. Therefore, private companies that provide public goods will do so in an inefficient manner; they will end up excluding people who could have enjoyed the good at no cost to the owner or to the other customers. (See also Francis Bator, "The Anatomy of Market Failure," Quarterly Journal of Economics, August 1958, pp. 351-79.)

How have classical liberal scholars responded to this criticism of the market economy? The quality of nonexcludability shared by collective goods and commons areas has been extensively analyzed by classical liberal economists, and the theories of orthodox market failure theorists have been scrutinized and criticized in turn. The problem of commons exploitation can in many cases be solved by simply allowing exclusion; that is, privatization is the solution of commons exploitation. Frank Knight made this point in his noteworthy critique of Pigou ("Some Fallacies in the Interpretation of Social Cost," Quarterly Journal of Economics, August 1924, pp. 582- 606), and this theme has provided a common basis for political economists ever since (see, e.g., John Baden and Richard Stroup, Bureaucracy vs. Environment: The Environmental Costs of Bureaucratic Governance [Ann Arbor: The University of Michigan Press, 1981], and "Property Rights and Natural Resource Management," Literature of Liberty, October/December 1979, pp. 5- 54). If commons such as the continental shelf and inland waterways were private property, then owners would have an incentive to prevent inefficient levels of exploitation through their right of exclusion.

The quality of nonexcludability in collective goods is somewhat harder to deal with, however. Privatizing a field or a stream may be fairly easy, but privatizing some defense services may be impossible -- how could the private operator of a defense service exclude nonpayers? Even this dilemma, however, may be susceptible to a market solution. Earl Brubaker, in a seminal article, examines the nonexcludability problem with collective goods and devises a contractual solution ("Free Ride, Free Revelation, or Golden Rule?" Journal of Law and Economics, April 1975, pp. 147-61). Brubaker argues that private providers of collective goods could use pre-contract exclusion to induce individuals in a community to contribute to such projects. Providers would simply present the community with an ultimatum: either contribute and/or contractually pledge enough money to fund the good, or it will not be provided at all. Brubaker argues that, faced with this choice situation, individuals would tend to give up their free-riding tendencies and would pledge money in support of collective projects. (Another excellent article dealing with pre-contract exclusion is David Schmidtz, "Contracts and Public Goods," Harvard Journal of Law and Public Policy, Spring 1987, pp. 475-503, the argument of which is expanded in Schmidtz's The Limits of Government [Boulder, CO: Westview Press, 1991].)

The economist Anthony de Jasay has argued (in his Social Contract, Free Ride [New York: Oxford University Press, 1989]) that many -- if not most -- "market failure" problems are created, not solved, by state action. Political authorities insist that goods be made available on a "free" basis and, "once discriminatory access ceases and the passage from exclusion to inclusion is set free, at least for the particular group of persons defined by the common interest they have in the good, none of that group needs to contribute in order to benefit, and a public goods 'dilemma' emerges" (p. 61). "Many of the most important de facto public goods owe their publicness not at all to the 'logistics' of exclusion, but to what we tend glibly to call, for want of a less question-begging word, 'social choice'" (p. 129). The result is that the state does not eliminate free riders; it generates them. "Once, however, contributions cease being voluntary, the whole incentive structure changes. Restraint in consumption is rewarded by a uniformly zero average and marginal payoff, for it does not affect the probability of the good being provided" (p. 221).

As for the quality of nonrivalrous consumption, which is common to public and collective goods, strong criticisms have been made of Samuelson's insistence that nonrivalrous consumption will necessarily lead to market failure. Harold Demsetz noted that as long as the exclusion of nonpayers is possible, public goods can be provided efficiently by the market ("The Private Production of Public Goods," Journal of Law and Economics, October 1970, pp. 293-306). In fact, companies already provide public goods, such as airline travel and movie theaters, through the use of price discrimination: consumers are charged different prices for the same good according to their valuations of the good. In this way, the inefficient exclusion of consumers can be prevented. (Actually, companies that provide public goods charge consumers according to the category they are in. For instance, movie theaters charge different prices for children, adults, students, and senior citizens. This process of differentiating the market into groups of consumers by valuation may be quite difficult.)

How does this analysis of commons areas, public goods, and collective goods apply to environmental problems? In fact, all forms of environmental problems can be classified under these three categories of market failure. Air and water pollution are clearly problems of the commons: lakes, streams, the ocean and the atmosphere are all unowned resources that are over-exploited due to their common status. Wildlife conservation is a collective good: exclusion of nonpayers is often a problem, and enjoyment of the animals is nonrivalrous (unless, of course, one happens to be hunting them). Finally, parks and nature preserves tend to be public, and perhaps even collective, goods. Thus, environmental problems, as instances of market failure, are susceptible to the types of solutions described above.

FME: A Classical Liberal Environmentalism
The classical liberal response to orthodox market-failure theories forms the foundation of "free-market environmentalism," or FME. FME provides a set of tools for policy makers that is more cost- effective and market-friendly than the set offered by current "command-and-control" doctrine. As John Baden and Richard Stroup have argued (Bureaucracy vs. Environment: The Environmental Cost of Bureaucratic Governance [Ann Arbor: The University of Michigan Press, 1981]), current environmental policy is bankrupt, for it relies heavily upon inefficient, top-down bureaucratic administration. Rather than changing economic incentives to encourage voluntary action and cooperation, government administrators rely primarily upon state ownership and intensive, heavy-handed regulations. As Terry Anderson argued in one of the first articles dealing explicitly with free-market environmentalism ("New Resource Economics: Old Ideas and New Applications," American Journal of Agricultural Economics, December 1982, pp. 928-34), FME offers a promising alternative to expensive and moribund "command-and-control" environmental policies. (An excellent recent overview of FME can be found in Terry Anderson and Donald Leal, Free Market Environmentalism [San Francisco: Pacific Research Institute for Public Policy, 1991]. See also the Spring 1982 issue of the Cato Journal, "A Symposium on Pollution" [Vol. 2, No. 1].)

What policy prescriptions does FME propose? These prescriptions fall into three general categories: privatization, rules-based regulations, and liability. Privatization would be appropriate for many commons areas, such as streams and the continental shelf (on water rights, see Terry Anderson, Water Crisis: Ending the Policy Drought [Washington, DC: Cato Institute, 1983], and Rodney T. Smith, Trading Water: The Legal and Economic Framework for Water Marketing [Claremont, CA: Claremont McKenna College, Center for Study of Law Structures, 1986]). It would also be a good strategy for improving management in parks and nature preserves (see, for instance, Robert Deacon and M. Bruce Johnson, eds. Forestlands: Public and Private [Cambridge: Ballinger Publishing Co., 1985]). Rules-based regulations, which would decrease the discretion of regulators and increase the range of choice for the regulated, would be especially useful for maintaining the quality of commons that cannot be privatized, or as a transition to privatization. These rules- based regulations could take the form of effluent charges (see Wilfred Beckerman, Pricing for Pollution [London: The Institute of Economic Affairs, 1975]) or marketable pollution permits (see William Baumol and Wallace Oates, Economics, Environmental Policy, and the Quality of Life [Englewood Cliffs, NJ: Prentice-Hall, Inc., 1979]). Finally, strict liability would help prevent accidental oil spills and the unsafe disposal of toxic wastes (see Milton Copulos, "Disposing of Hazardous Wastes: How to Deal with the 'Toxic Terror'," in Doug Bandow, ed., Protecting the Environment: A Free Market Strategy [Washington, DC: The Heritage Foundation, 1986], pp. 69-81, and "A Symposium on Pollution," Cato Journal, Vol. 2, No. 1, Spring 1982).

FME has a number of advantages over traditional environmental policy. First, by emphasizing rules over commands, it favors the use of dispersed knowledge and spurs innovation. The advantage of rules over commands has been pointed out by many (see, e.g., T. Alexander Smith, Time and Public Policy [Knoxville: University of Tennessee Press, 1988], pp. 199-205, and Michael Polanyi, The Logic of Liberty [Chicago: University of Chicago Press, 1951]), but its implications for environmental policy are only now being explored fully.

Second, FME is also superior to present policy on the question of intergenerational equity: privatization will favor future generations more than governmental stewardship will. This position has been argued by Richard Stroup and John Baden ("Property Rights and Natural Resource Management," pp. 19-24). The value of resources in the market tends to equal the sum of all future rents discounted by the rate of interest. We can get an intuitive sense of what this means by imagining how a landlord decides whether to buy a rental property: will the price paid for its purchase be less than the present values of all the rents that will be generated by the property? If the answer is yes, then it is worthwhile to buy the property; if no, then it is not. The present value of this property (or piece of capital) is determined by the income stream it will yield over time. Anything that diminishes this future income (such as a failure to repair the roof) costs the owner now by decreasing the capital value of the resource. Anything that increases the future income (such as painting or repairing the property) benefits the owner now by increasing the capital value of the resource. As Harold Demsetz has said, "In effect, an owner of a private right to use land acts as a broker whose wealth depends on how well he takes into account the competing claims of the present and the future." ("Toward a Theory of Property Rights," in Svetozar Pejovich and Eirik Furubotn, eds., The Economics of Property Rights [Cambridge, MA: Ballinger Publishing Co., 1974], p. 38) This process only works, however, when there is an owner (or "residual claimant") who suffers the harm or reaps the benefit of this change in the ability of the resource to satisfy future wants. If natural resources are controlled through the political process, then, over-exploitation will occur, because political actors have little incentive to conserve, precisely because they have no transferable ownership rights. (For an excellent discussion of intergenerational equity and the efficacy of market conservationism, see J.W. Milliman, "Can People Be Trusted with Natural Resources?" Land Economics Vol. 38 [1962], pp. 199-218. This issue is also directly addressed by David Schmidtz in The Limits of Government, with particular application to coral reefs.)

Third, FME will foster market competition and preserve governmental neutrality better than the current regime of environmental law. The present structure of environmental regulations, which is command oriented, tends to favor large, established business at the expense of new and smaller enterprises. (See both Lloyd Orr, "Social Costs, Incentive Structures, and Environmental Policies," in Baden and Stroup, eds., Bureaucracy vs. Environment, pp. 46-63, and B. Peter Pashigian, "The Effect of Environmental Regulation on Optimal Plant Size and Factor Shares," The Journal of Law and Economics, April 1984, pp. 1-28.) Command- based regulations tend to impose fixed costs, which bigger businesses can spread over larger amounts of output. As George Stigler has argued ("The Theory of Economic Regulation," in Stigler, The Citizen and State [Chicago: University of Chicago Press, 1975], pp. 114-41), these regulations may be sought after by large enterprises in order "to retard the rate of growth of new firms" (p. 118). This point has been made in reference to environmental regulation by a number of scholars, including B. Peter Pashigian ("Environmental Regulation: Whose Self-Interests Are Being Protected?" in Economic Inquiry, October 1985, pp. 551-84), Michael Maloney and Robert McCormick ("A Positive Theory of Environmental Quality Regulation," The Journal of Law and Economics, April 1982, pp. 99-123), and James Buchanan and Gordon Tullock ("Polluters' Profits and Political Response: Direct Controls versus Taxes," The American Economic Review, March 1975, pp. 139-47). Command and control systems are plagued by other forms of "rent-seeking" (pursuit of profits through the political process), as well. (See, for instance, Robert Crandall, "Ackerman and Hassler's Clean Coal/Dirty Air," The Bell Journal of Economics, Vol. 12, Autumn 1981; and Robert Leone and John Jackson, "The Political Economy of Federal Regulatory Activity: The Case of Water Pollution Controls," in Gary Fromm, ed., Studies in Public Regulation [Cambridge, MA: The MIT Press, 1981]. Another collection of studies pointing out the problems of command and control is Environmental Politics: Public Costs, Private Rewards, Michael S. Greve and Fred L. Smith, eds., [Westport, CT: Praeger Publishers, 1992].)

Finally, FME is more congruent with the guiding principles of a free society than are "command-and-control" systems. By emphasizing the role of private property and consistent rules, free-market environmentalism offers a solution to ecological problems that is consistent with personal liberty, defined as freedom of action under a known and equally applied rule of law. (See F.A. Hayek, The Constitution of Liberty [Chicago: The University of Chicago Press, 1960], pp. 11-21.) FME diminishes the discretion of policy makers and guarantees the certainty, equality, generality, and negativity of law -- essential prerequisites for a political order founded upon the rule of law.

FME Applications: Present and Potential
Free-market environmentalism provides a superb theoretical foundation for understanding the problems of environmental policy, but can these theories be successfully applied to real-world problems? In fact, free-market principles are already being successfully used to improve environmental quality, and further improvements could be made if FME were applied more broadly.

Wildlife conservation has already been aided through private initiative. This initiative has taken many forms, including fee- hunting. Under this system, which is used widely in the western United States, landowners charge hunters to kill game on their land. This quasi-privatization of wildlife encourages conservation by controlling the level of hunting and by providing landowners with an incentive to improve wildlife habitats. (See Matt Ridley, "Privatizing America's West: Profits From the Wild," The Economist, 22 October 1988, pp. 21-22, and Jo Kwong, "Evolving Institutions in Wildlife Management: The Case for Fee Hunting," Western Wildlands, Spring 1988, pp. 26-31.) Another form private conservation efforts have taken is the private preserve. Numerous organizations, from the Nature Conservancy to the Audubon Society, have preserved million of acres of wildlife habitat with primarily private money. (See John Baden and Richard Stroup, "Saving the Wilderness," Reason, July 1981, pp. 28-36, and Robert J. Smith, "Special Report: The Public Benefits of Private Conservation," in Environmental Quality: The 15th Annual Report of the Council on Environmental Quality [Washington, DC: US Government Printing Office, 1986], pp. 363-429.) Finally, straight private ownership of wild animals has been tried successfully (with sea turtles, for instance), but such efforts have been hindered by government interference, or even banned outright (see Robert J. Smith, "Private Solutions to Conservation Problems," in Tyler Cowen, ed., The Theory of Market Failure: A Critical Examination [Fairfax: George Mason University Press, 1988], pp. 341-360).

Another area in which market-oriented solutions to environmental problems have been used is pollution abatement. Privatizing the commons has been tried with excellent results in at least one instance: British streams. In Britain, the right to fish a particular part of a lake or stream is a private property right that can be bought, sold, and traded. This property-rights structure has not only prevented overfishing but has also kept British streams remarkably clean: owners of fishing rights take polluters who damage their fishing grounds to court -- and the owners consistently win. (See Jane Shaw and Richard Stroup, "Gone Fishin'," Reason, August/September 1988, pp. 34-7.)

Another market-friendly method of pollution control that has been tried successfully is emissions trading in the United States. Under this system, polluters may reduce their air pollution below the level prescribed by law, receive credit for these excess reductions, and sell the credits to other firms. This system is more efficient than uniformly mandated pollution output levels because it allows firms for whom pollution reduction is quite expensive to buy credits rather than invest in antipollution devices. Thus, the same amount of pollution reduction is achieved for a lower price. Although this system has only been used in a limited fashion, Senator Timothy Wirth and the late Senator John Heinz estimated in a recent report (Project '88, Harnessing Market Forces to Protect Our Environment: Incentives for the New President, Robert Stavins, ed., [Washington DC: December, 1988], p. 26) that emissions trading has saved US industry over $4 billion. (See also Project '88, Round II, Incentives for Action: Implementing Market-Based Environmental Policies and Programs [Washington, DC: 1990].)

Finally, effluent charges -- a rules-based system of environmental quality control -- have been used to reduce water and air pollution in Europe and Japan, respectively. In West Germany, effluent charges, or per-unit taxes on discharges, have been levied on industries that pollute the Ruhr River; this system has maintained the river's quality despite the high volume of effluent released into it. (See Baumol and Oates, Economics, Environmental Policy, and the Quality of Life, pp. 256-8, and Ralph Johnson and Gardner Brown, Jr., Cleaning Up Europe's Waters: Economics, Management, and Policies [New York: Praeger Publishers, 1976].) Japan has also used effluent charges successfully in its effort to reduce SO2 emissions and provide compensation to those injured by the emissions (see "Pollution- Related Health Damage Compensation Law Amended," Japan Environment Summary, 10 October 1987, pp. 1-2.)

One final area in which market solutions have been successfully applied is park services. Park services, often considered quintessential public goods, have long been provided by private groups, both charitably and for profit. For instance, the Colorado Trail, a 470-mile hiking trail in Colorado stretching through a variety of scenic areas, was built and funded solely through volunteer efforts. It is now maintained by volunteer crews, who are provisioned through voluntary donations. A more extensive bundle of park services is provided by North Maine Woods, Inc., an association of twenty landowners formed in 1974. North Maine Woods manages recreational activities on 2.8 million acres of mostly private commercial forests (an area almost twice the size of Delaware). It controls access to the park through 17 checkpoints, registers campers, and charges various user-fees to maintain the park, improve campsites, and educate users. (For a detailed description of North Maine Woods, see Robert J. Smith, "Special Report: The Public Benefits of Private Conservation," pp. 381-7.) Ravenna Park in Seattle, Washington, was also run privately from 1887 to 1911. The park was immensely popular: on busy days, it saw between 8,000 and 10,000 visitors. In 1911, however, the city of Seattle seized the park through eminent domain. After government management of the park began, the giant Douglas firs in the park began to disappear; the city managers of the park cut them down and sold them for short-term gain. Despite public protest, all the Douglas firs had disappeared by 1925 (see Terry Anderson and Donald Leal, "Rekindling the Privatization Fires: Political Land Revisited," Reason Foundation Federal Privatization Project, Issue Paper 108, p. 11).

Wildlife conservation would be greatly enhanced through the extension of market principles. Some have suggested that whales could be successfully privatized. Whale "pods" (groups) could be auctioned off to private owners, who could track the pods electronically. Funds raised in this way could be used to provide international enforcement of whale property rights (see John Majewski, "Own Your Own Whale," Economic Affairs, October/November 1987, pp. 45-6, and "Trends," Reason, November 1986, p. 21). Elephants, which are quasi-private property in some southern African countries, could be privatized on the rest of the continent. Such privatization would encourage owners to increase herd sizes and to invest in stopping poaching. We rarely hear of the poaching of cows, which are usually privately owned, but we hear a great deal about the poaching of elephants, which are typically state property. (See Randy Simmons and Urs P. Kreuter, "Herd Mentality: Banning Ivory Sales Is No Way to Save the Elephant," Policy Review, Fall 1989, pp. 46-9.)

Pollution control could be improved as well by the adoption of rules-based environmental quality controls. Prospects for the reform of air pollution laws in the United States look the most promising at this point. The Clean Air Act has been widely criticized for its inefficiency ("Fresh Approaches Needed to Free Air From Pollution and Regional Politics," FREE Perspectives on Economics and the Environment, 1 June 1989, pp. 4-5, 10, 12), and a number of reform proposals have recently emerged. Project '88 suggested the use of marketable pollution permits to solve such perceived problems as the greenhouse effect, ozone depletion, acid rain, and local air pollution (Wirth and Heinz, Project '88, pp. 10-34; also see John Hood, "Environmentalism Corners the Market," Reason, March 1989, p. 18).

Finally, market principles can be used to aid the conservation of natural resources. The recurrent water shortages facing the western United States are a direct product of ill-defined property rights in water. A clearer definition of these rights, coupled with an open and competitive interstate market in water rights, would lead to a more efficient use of water resources. (See Terry Anderson, ed., Water Rights: Scarce Resource Allocation, Bureaucracy, and the Environment [Cambridge: Ballinger Publishing Company, 1983], and Marc Beauchamp, "Whiskey's for Drinking, Water's for Fighting Over," Forbes, 24 July 1989, pp. 74-5.) The seabed and the continental shelf could also be sold to private owners. Such an action would free ocean resources from monopolistic control by national governments and would enhance incentives to explore and develop the ocean's bounty (see Kent Jeffries, "Who Should Own the Ocean?" [Washington, DC: Competitive Enterprise Institute, November 1991], and Donald Denman, Markets Under the Sea? [London: Institute of Economic Affairs, 1984]). Market solutions could also be used to preserve the rain forests of South America. Present policies of the Brazilian government encourage deforestation. Under a stricter system of private property, one undistorted by extensive subsidies, owners of the rain forests would likely prefer to hold the land speculatively or to sell it to foreign environmental organizations. In fact, the Nature Conservancy has already managed to protect millions of acres of tropical rain forests in precisely this way (see Jane Shaw, "Private Property Rights and the Environment: Two Views," The Freeman, January 1989, pp. 39-40, and "The Vanishing Jungle: Ecologists Make Friends with Economists," The Economist, 15 October 1988, pp. 25-6).

Conclusion
The theoretical and practical aspects of FME, though substantial, need to be further researched and developed. The theories of market failure, governmental failure, and environmental economics need to be more solidly unified than they are now. Although this effort at unification has to some extent been attempted (see, for instance, William Baumol and Wallace Oates, The Theory of Environmental Policy [Cambridge: Cambridge University Press, 1988]), no one has yet unified them in a way that fully takes account of property rights and their use in solving environmental problems. For instance, how can migratory herds be privatized? What contractual methods can be used to provide environmental amenities on a large scale? On a more practical level, further research needs to be done into the implications of FME in the real world. And finally, are there some environmental problems (e.g., nonpoint toxic discharges) that are simply not amenable to a market solution? (Even if this were true, of course, it does not detract from the superiority of private property solutions for other environmental problems.)

As should be obvious by now, free-market environmentalism is a young discipline, with much work remaining to be done. What should also be clear, however, is how well FME fits within the larger framework of classical liberal thought, with its respect for individual rights, social harmony, justly acquired property, and freedom of exchange. Free-market environmentalism will no doubt prove to be a fertile field for future research by classical liberal scholars from a number of disciplines, including economics, law, political science, and even the applied sciences, such as biology and engineering, to the extent that these scholars can devise better methods for voluntary cooperation to implement the ideas which arise from other disciplines.


Robert Taylor is a graduate student in Economics at Duke University.

Copyright 1992 by the Institute for Humane Studies

Return to Fall 1992 Humane Studies Review menu IHS homepage