Wednesday, September 22, 2004

How do Economists Think About the Environment?

I found this stimulating paper from Resources for the Future on their website in which they try to highlight common misperceptions about economists' views of the environment:
First, despite their apparent reputation, economists do not necessarily believe that the market solves all problems. Indeed, many economists--ourselves included--make a living out of analyzing "market failures" such as environmental pollution. These are situations in which laissez faire policy leads not to social efficiency, but to inefficiency.
Yes, but these, as Coase showed with his example of English lighthouses public goods may often be privately provided.

Second, when economists identify market problems, they do not (or, at least, should not) always recommend market solutions. Admittedly, our profession's tendency is to consider first the feasibility of market solutions, because of their potential cost-effectiveness, but the "hot-spot" example makes clear that market-based approaches to environmental protection are no panacea.
No, but the public sector - like public toilets - are seldom what we would prefer to use, for inescapable reaons of human motivation.

Third, when market or non-market solutions to environmental problems are being assessed, economists do not limit their analysis to financial considerations. The scope of economic analysis is much broader than financial flows. The only reason that monetary equivalents are used in benefit-cost calculations is that a more convenient set of units is simply not available.
True, true, but not everyone has the brains to crack open a textbook like the fine one written by Joe Stiglitz to figure that out.

Fourth, and finally, although the efficiency criterion is by definition aggregate in nature, economic analysis can tell us much about the distribution of both the benefits and the costs of environmental policy.
Yes, indeed.