Selling Environmental Indulgences

According to a common and currently influential diagnosis, the environmental crisis has essentially economic roots. The problem is not just that there are too many people, or even that they are on average enjoying too high a standard of living. All that is true, too, of course. More fundamentally, however, problems of environmental despoliation are said to derive from skewed incentives facing agents as they pursue their various goals. For some things, people must pay full price. For others, they pay only partially or indirectly or belatedly. To an economist, it goes without saying that the lower the costs, the more people will consume of any particular commodity. Where some of the costs of their activities will be borne by others, agents looking only to their own balance sheets will overengage in those activities. Because some of the costs are “external” (which is to say, are borne by others, rather than themselves), agents will undertake more of those activities than they would have done had they been forced to pay their full costs. They will do more of them than is socially optimal, taking due account of costs and benefits to everyone concerned (Pigou 1932). Environmental despoliation poses problems of economic externalities of just that sort. Environmental inputs are typically “common property resources.” Clean air and water, fisheries, the ozone layer, the climate are everyone’s business—and no one’s. No one “owns” those things. There is no one with standing to sue you if you take them without paying; nor is there anyone you could pay for permission to impinge on them, even if you wanted to do so. That fact inevitably gives rise to a divergence between the full social costs created by your actions and the portion of those costs sheeted back to you as private costs, to be entered on your own ledger. It is, of course, only the latter sorts of costs to which economically rational agents can be expected to respond (Freeman et al. 1973; Fisher 1981; Pearce et al. 1989, esp. p. 5).