Economics @ ITT

Green Market Failure

Posted in economics, environment, externalities, microeconomics, Policy Issues by ittecon on March 1, 2010

Market failure is the Achille’s heal of Classical Economics. The sustainability of the environment is a prime example. Unlike homo economicus, who can see clearly into the distant future, humans are short-sighted and have a bad track record of predicting the future. Exascerbating this, humans weigh more heavily near-term events over long-term events. This is one reason we don’t do a very good job saving for the future. A lack of retirement savings is a good case to make. We’d rather take a vacation, buy a bigger house, or a new car,  now because we cannot predict or weigh what the impact will be when we retire. We may even tell ourselves, “Who knows if we’ll even be alive to spend the money we we retire? You can’t take it with you, can you?” Whilst this sentiment may be true, it does not obviate the risk that we will be here—and we’ll come out short in our Golden Years.

This inability to correctly account for future eventualities is important when it comes to pricing production that leads to long-term environmental damage. The value of an environment that is sustainable cannot be auctioned off as desired by Cap and Trade advocates. The environment is a social good. We only have to look at the giveaway of the public broadcast frequencies or mineral rights in the United States to see that auctions do not correctly capture the societal cost of these goods.

See what Raj Patel has to say about free market pricing in this Youtube video promoting his book The Value of Nothing.

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