Main Page | See live article | Alphabetical index

Free-market environmentalism

Free market environmentalism is the application of free market structures, institutions and interventions in order to solve environmental problems.

Table of contents
1 Economists' views on the origins of environmental problems
2 Property rights
3 Taxation
4 Free-market environmentalists
5 Bibliography

Economists' views on the origins of environmental problems

Economists view many environmental problems as arising from the negative externalities of industrial production and other activities. An industry may receive the full benefit of producing a pollutant but, in general, they do not pay the full social costs of polluting the environment. This leads to a situation analogous to the tragedy of the commons where the industry keeps all the benefits of an activity itself but shares the costs with all the other members of society. In such a situation it is rational to pollute. 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 expected that management will be economical in its use of coal and wasteful in its use of water.

A conventional strategy to try to solve such a commons problem is by governmental regulation to proscribe polluting activities. Free market economists have criticised this approach as being at best inefficient and at worst ineffective. By allowing industries to pollute up to a specified limit, regulators effectively set the value of a clean environment at zero. Research at Amoco concluded that were the money that is currently spent on meeting regulations instead spent on reducing pollution, in ways that the company itself was already able to identify, the net benefits to the environment would be greater. Furthermore, the demands of regulation seldom appeal to the social conscience of industries or individuals and violation is often seen as legitimate business practice.

Property rights

Economists argue from the Coase Theorem that, were industries compelled to internalise the costs of their negative externalities they would face an overwhelming incentive to reduce them, perhaps even becoming enthusiastic about taking advantage of opportunities to improve profitability through lower costs. Moreover, this would strike the optimal balance between the benefits of pursuing an activity and its environmental consequences. One well-known means of iternalising a negative consequence is to establish a property right over some phenomenon formerly in the public domain. This requires a little abstract thinking in the case of environmental problems as we are talking about a right to pollute or to exploit some limited natural phenomenon. This is a sophisticated variant of the polluter pays principle. There are a number of problems for which such solutions have already been proposed or implemented.

Water resources

In the 19th century, early gold miners in California developed a trade in rights to draw from water courses based on the doctrine of prior appropriation. This was curtailed in 1902 by the Newlands Reclamation Act which introduced subsidies for irrigation projects. This had the effect of sending a signal to farmers that water was inexpensive and abundant, leading to uneconomic use of a scarce resource. Increasing difficulties in meeting demand for water in the western United States have been blamed on the continuing establishment of governmental control and a return to tradeable property rights proposed.

Sulphur dioxide

The US Clean Air Act of 1990 set up a system of emissions trading for sulfur dioxide.

Kyoto protocol

The Kyoto protocol seeks to establish a system of emissions trading for carbon dioxide and other greenhouse gases.


The implementation of property rights provides governments with an opportunity to raise revenues. This has been illustrated by recent auctions of bands of the electromagnetic spectrum for telephony, another example of an attempt to manage a scarce resource through property rights rather than regulation. Such auctions offer an alternative to conventional taxation for funding public spending. Some economists, most notably Henry George in the 1870s, have argued that taxes on income and profits represent taxes on productivity, innovation and creativity and that we should rather tax bads such as pollution, consumption of fossil fuels and road congestion. Environmental property rights offer a means to shift taxation from goods to bads.

Free-market environmentalists

Economists who have written on free-market environmentalism include: