ational, because it would be profitable for a firm to overpollute, while letting others absorb the costs of its effects and cleanup. Regarded this way, opponents of market solutions to the problem of pollution assert that market mechanisms left to their own devices contain built-in incentives for environmental degradation. The case for free market valuation is complicated by uneven regulation, e.g. the standards set for recycling (under Resource Conservation and Recovery Act, of 1976) are more strict than the government regulation of mining (General Mining Act, 1872).
Ecological economist Robin Hahnel has enumerated what he terms the four basic defects of a market economy with respect to the environment as: [1]
overexploitation of common property resources;
overpollution;
too little pollution cleanup; and
overconsumption.
In response to these concerns, economists who prefer the free-market environmentalist approach argue that:
Overexploitation occurs to the extent of the lack of ownership incentives to care for the property, and that this communalization effect occurs to the extent of multiplicity of ownership. Overexploitation reduces the intrinsic and retail value of the property, the effect of which is most clearly felt by individual owners or through limited co-ownership.
Pollution occurs where and to the extent that victims are prevented or hindered from seeking tort restitution for such aggression. Legislative and Judicial authorities have tended to favor heavy industries over individual or class action in favor of public property and the common good.
Pollution clean-up also occurs naturally in a free market, because reducing the negative value of a property is a net gain, again leading to a higher intrinsic or retail value, and thus marketability.
Overconsumption is a flawed concept, because it assumes that resources are non-renewable. The market, through supply and demand, regulates consumption by adjusting it according to supply. For example, if a resource becomes more scarce, its value increases and thus also its cost. This forces consumers to redirect their purchases to alternate resources which are in more plentiful supply. In addition, the higher market value of the resource creates an incentive to create more of the commodity, and allows for a greater expenditure in doing so.
The prevalence of externalities would have serious implications for market efficiency in its static and dynamic dimensions. If negative externalities are unnaccounted for, it would imply that market prices will not accurately reflect true social opportunity costs, leading to misallocations of goods. As the elementary economics text book by Baumol and Blinder observes When a firm pollutes a river, it uses some of society's resources just as surely as when it burns coal. However, if the firm pays for coal but not for the use of clean water, it is expe...
