The
Market
What is the market? The free market?
Which parts of the environment are part of the market?
What function does the market perform in theory?
How does this apply to environmental goods?
What parts of the environment are not part of the market?
Why incorporate the environment into the market?
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Public
Goods
Externalities
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The Market
The market is a metaphorical term for all the buying and selling
that goes on in the economy. The market value or price of a commodity
is supposed to be based on supply and demand; that is, on how
much of it is available, and on how many people want it and what
they are willing to pay for it. Many economists argue that the
free-market system can attain the best possible allocation of
resources through individuals acting in their own best interests
and without intervention from the government. This is because
each individual consumer knows what he or she wants better than
anyone else does, and each individual producer similarly knows
what he or she is able to produce better than anyone else does.
Each will act upon this information in the market. If it were
any other way, all such information (about consumers' preferences
and manufacturers' capabilities) would have to be collected and
analysed. The market system automatically and efficiently collects
and handles that information, and determines which goods should
be produced, how they should be produced, and in what quantities.
The market is also responsive to change, and it allows consumers
to express their choices in the ways they spend their money.
Many economists assume that individuals act to optimise their
own interests &emdash;this is the principle behind the market
system. For them, 'the intelligent pursuit of private gain' is
the essence of rationality (Daly & Cobb 1989, p. 5). They
do not consider altruistic behaviour as rational.
Together with business people, they argue that government interference
with market mechanisms has led to distortion of market signals
in resource-using industries, and has itself encouraged environmental
degradation. For example, the Business Council of Australia claims
that price subsidies have led to inappropriate clearing of areas
susceptible to soil and water erosion, and that underpricing of
water in publicly funded irrigation schemes has led to severe
problems of soil salinity. Similarly, the ecologically sustainable
development working group on manufacturing said that:
The underpricing of certain public resources has almost
certainly had significant impact on the development of manufacturing
industry. Local government, for example, has an incentive to keep
general rates low to encourage development and therefore charges
lower prices for serviced land, water and other infrastructure
than if the full economic and environmental costs were incorporated.
The result, in turn, is an incentive to use more factory space
and a disincentive to save resources through recycling and waste
minimisation. Similarly, the underpricing of landfill areas for
rubbish tips means there has been little incentive for recycling
and reduction of factory wastes and also probably inadequate attention
paid to alternative disposal methods. (ESD Working Groups 1991a,
pp. 92&endash;3)
The market system also fails to accord appropriate prices to
environmental goods. The market works best for goods that can
be measured in terms of physical quantity and can therefore be
priced. The environment cannot easily be parcelled up in this
way. Even where it can be measured in quantitative terms, such
as by area or volume, such measures fail to incorporate the nature
of ecosystems which are more than just areas of land or volumes
of water; rather, they are complex interacting systems of living
and non-living things.
Some environmental resources; such as timber, fish and minerals;
are bought and sold in the market. But their price often does
not reflect the true cost of obtaining them 'because their valuation
has invariably been based on the resource as an entity by itself
and not as the component of a resource system' (Thampapillai 1991,
p. 15). Thus the price of a resource may include the partial but
obvious cost of obtaining it, but not the cost of environmental
damage caused in the process.
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