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Victoria
Graphic Designer at Clean.org
Asked a question last year

Is economic prosperity associated with a cleaner environment?

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Sherri Payne
Terrestrial Biologist

I’d suggest yes.

First, let us recognize that “cleaner environment” exists on a continuum (for ease of discussion I will talk about the dirty extreme and the clean extreme without making it clear what either of these is exactly). Second, many of our economic activities have pollution as a by-product. Third, pollution is not irreparable but mitigating it has costs. Fourth, pollution itself has costs (think of how asthma rates rise as you get closer to coal fired power plants and how those asthma rates decreased as coal fired power plants instituted different procedures to clean up their act or converted to burning of natural gas). Fifth, economic prosperity is about getting as much from our resources, labour, and ingenuity as we can. The mathematical necessary condition for this is when the marginal benefit of our activities is equal to the marginal cost of those activities, i.e. additional benefits from partaking in more of the activities is less than the additional costs.

These 5 propositions suggest that there is an optimal level of pollution. That is, on that continuum of clean environment, there is a point where if the environment was any dirtier, the cost of the pollution would be more than the cost of cleaning up the pollution or stopping it from being emitted. Given many of the side effects of pollution (asthma mentioned above, cancer from chemicals leached into drinking water, burning lakes, acid rain, higher UV content entering through atmosphere, hotter temperatures, more volatile weather patterns, etc…) I assert that the optimal level of pollution is much closer to the clean extreme than to the dirty extreme. Thus, for the economy as a whole weighing all the costs and benefits, it would be better if we were more environmentally friendly than we are.

However, pollution and the environment fall into a situation that faces two, maybe three, market failures: the tragedy of the commons, externalities, and the free rider problem. The first of these, the tragedy of the commons, involves a common good (Something which no one can stop you from enjoying but it is finite). Externalities occur when my decisions have effects on people that are not involved and have no influence on my decisions. The free rider problem stems from attempts to voluntarily mitigate the tragedy of the commons, I would be better off if everyone else curtailed their action but I did not; Everyone makes this deliberation, so no one acts to curtail their actions. Because of this confluence of market failures, the free market does not bring us to the optimal level of pollution.

Economists have devised several methods to handle this problem: The Coase theorem, Pigouvian/sin taxes, Cap and trade schemes. The Coase theorem says that if we make the property rights clear, people will negotiate toward optimal solutions, assuming negotiating costs are small enough. The problem is that when the negotiations have to take place between >325 million US residents or >150 countries the negotiation costs are astronomical, far higher than the benefits from the optimal trade. Pigouvian or sin taxes are just a tax on activity that we want to discourage. The problem with these is that we do not know what the appropriate level of the tax should be. So, the tax level will be arbitrary to a certain degree. Cap and trade schemes are like Pigouvian taxes in that they put a price on the activity to account for the externality. They let the market decide on that price, but they do not get away from the arbitrary nature of that price. The number of tradable licenses must be set in advance, we don’t know what the optimal level of tradable licenses is. So, someone has to set it somewhat arbitrarily. The price of the license will be determined by the demand for those licenses and the supply. Ultimately, all of these methods have one thing in common, they force those who choose the activity to pay for all of its costs, even the external costs.

Economists have, by and large, come down in favour of Pigouvian taxes and Cap and Trade Schemes. I think Cap and Trade schemes are the best.