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'Constant revolutionizing of production, uninterrupted disturbance of all social conditions, everlasting uncertainity and agitation distinquish the bourgeois epoch from all earlier ones ... All that is solid melts into air, all that is holy is profaned.' Marx

The IPA + market failure « Previous | |Next »
December 2, 2009

The key point about the use of emissions trading schemes to address green house gas emissions and global heating is that the market by itself is not able to mitigate greenhouse gas emissions. So what those free market institutes, such as the Institute of Public Affairs, who argue against the Rudd Governments emissions trading scheme, propose to do about mitigating greenhouse gas emissions.

Greenhouse gas emssions are what economists call a negative externality. If a firm pollutes the atmosphere when it produced electricity through coal-fired power stations, and if it is not forced to pay for the use of this resource, then this cost will be borne not by the firm but by society. Hence, the market price for this electricity will fail to incorporate the full opportunity cost to society of producing. More electricity will be produced from coal fired power stations than would occur were the firm to have to pay for all of its costs of production and the greater the cost to society (public good) from the pollution.

The existence of a market failure and the subsequent tragedy of the commons is often used as a justification for government intervention in a particular market. The market-driven approach to correcting externalities is to "internalize" third party costs and benefits, for example, by requiring a polluter to repair any damage caused. Two ways to address this are a carbon tax, or charging a fee for the right to pollute and allow polluters to sell the pollution permit.

The issue of market failures (and how they should be addressed) is a source of dispute between different schools of economic thought. Economists from the Chicago school and the Public Choice school, argue that market failure does not necessarily imply that government should attempt to solve market failures, because the costs of government failure might be worse than those of the market failure it attempts to fix. Others, from the Austrian school argue that there is no such phenomenon as "market failures".

Though the Institute of Public Affairs runs ETS chokes the economy argument I'm unclear about the position of the IPA on market failure. They appear to be both opposed to government attempt to solve market failure through an emission trading scheme and to not accept the concept of market failure.

If the IPA have any solution they seem to favour technological solutions based on entrepreneurial action through the normal workings of the market. On this account the existence of "market failure" is seen as irrelevant or temporary.

However, reliance on the Austrian School leads to a deadend. According to this account:

Conventional economics teaches that if the benefits or costs of one person's economic decisions spill over onto others, an externality exists, and it ought to be corrected by the government through redistribution. But, broadly defined, externalities are inherent in every economic transaction because costs and benefits are ultimately subjective. I may be delighted to see factories belching smoke because I love industry. But that does not mean I should be taxed for the privilege of viewing them...Another area where Austrians differ is how the government is supposed to go about the practical problem of correcting for market failures. Grant that somehow the government can spot a market failure, the burden of proof is still on the government to demonstrate that it can perform the task more efficiently than the market. Austrians would refocus the energy that goes into finding market failures to understanding more about government failures.

It leads to the dead end of individual subjectivism. I love electricity produced from coal fired power stations (its cheap), therefore I should not have to pay extra to use that energy. What is eliminated is the tragedy of the commons and the public good-- the contamination of the atmosphere, a shared resource. Hence the cooperative solution to the problem of the contamination of a shared resource is not possible.

The Austrian school is also opposed to government regulation:

For Austrians, economic regulation is always destructive of prosperity because it misallocates resources and is extremely destructive of small business and entrepreneurship.Environmental regulation has been among the worst offenders in recent years. Nobody can calculate the extraordinary losses associated with the Clean Air Act or the absurdities associated with wetlands or endangered species policies. However, environmental policy can do what it is explicitly intended to do: lower standards of living.

Planning and regulation inevitably result in failure because the abolition of private property, market competition, and money prices eliminates the institutional prerequisites for economic calculation, without which the central planner is left with no rational method to determine whether or not the resources under his control are being applied in an efficient manner. Hence we have the contradictions and inconsistencies that inevitably arise from all forms of government intervention and regulation in the marketplace.

There is no need for regulation because there is no tragedy of the commons or public good.

| Posted by Gary Sauer-Thompson at 4:36 PM |