Environmental Economic

INTRODUCTION

A market is an exchange institution that serves society by organising economic activity.

The market relies on bilateral exchanges between investors and companies, workers and employers, producers and consumers. The concept of the market consists in the diversity of individual entities who take part in it. These entities choose and express, trough economic exchanges, their preferences concerning the possibilities of rare resources' exploitation.

The market system is considered when a set of competitive markets generates an efficient allocation of resources between and within economies.

However, it is commonly known that market has some limits that we can call "market failures".

Market failure is a situation in which markets do not efficiently organize production or allocate goods and services to consumers. To economists, the term would normally be applied to situations where the inefficiency is particularly dramatic, or when it is suggested that non-market institutions (such as public policing and fire fighting) would be more efficient and wealth-producing than their private alternatives. On the other hand, many market failures are situations where market forces do not serve the perceived public interest.

There are three main types of market imperfections. First of all, we will see the externalities, and then we will discuss the difficulties due to public propriety. To finish we will deal with "non-exclusion and non-rivalry" problems.

I/ Externalities

1) Definition:

The first reason of market place fail is due to externalities. Giving a clear definition of this concept is a hard task. According to Pierre Picard, externalities are 'moment where agent's consummation or production directly impact other agent's satisfaction or benefit; without that market place calculates and compensates the agent for this action'.

The main characteristic of an externality is the separation between the source of the effects and the affected individual. Because of this it is difficult to get the perpetrator to pay for the costs of the harmful effects or the beneficiaries to reimburse those who create benefits to society. Thus, externalities are not built into the market price of a good or service.

2) Examples:

Pollution is the best example of negative externality. The production process of a steal making company includes pollution which is dumped into river. This contamination presents a negative effect over fishes' reproduction, and in a long term vision it reduces fisherman profits. However, no any compensation is paid.

From the other side, scientific and technical knowledge diffusion is a classic case study of positive externalities. From a public point of view, it is profitable for a company to make public results obtained about a search. Without the patents which permit to secure knowledge but also to commercialize it, the research and development cost should not be efficient and finally no more firms will invest in this domain. Copyright permits to increase the research involvement.

3) Solutions

How can the negative link between 'market failures' and environment be stopped? States should set up emission standards, with a maximum rate for each economical sector sentenced by financial penalty. Instead of being the best solution, this one is in a mid-term vision viable for a large number of countries.

Another way should to establish taxes over emission. This purpose permits to control the cost and have a positive effect over technical progress.

The third and last way is to create emissions' market places. 'Polluter buyer' theory could be applied, each actor which pollute should pay for that. The unique problem of the idea is about denining the 'initial allocation' of contamination authorizations.

II/ Public goods

1) Definition:

The second source of market failure concerns certain goods and services which we qualify as collective possessions. It is about possessions which can benefit simultaneously to several agents.

Formally, three characteristics make of the good a public good:

- It is the not rival good, it is no - rivalry. This wants to say that is possible to consume it several times without modifying it and that several agents can consume it simultaneously. Most of the possessions are not rivalry, for example a food can be consumed only by a single person. In the case of a public good having a negative impact, as pollution the facts that a person is impacted do not protect the other agents.

- it is the good with non-exclusion. It is impossible to prevent an agent from consuming it.

- It is of compulsory consumption.

Examples of public goods include national defence, street lighting, and environmental regulations.

2) The tragedy of the commons

The first thing to be mentioned is that the public goods are always associated with externalities. Indeed an agent who produces a public good in fact to benefit the other agents and the consumption cannot pass by a market given that the good is not-exclusion.

Indeed, every agent set individually should rather consume some public good, but he should not rather finance it. We use often the image of the stowaway to illustrate this problem. Indeed the stowaway takes advantage of a means of locomotion while he did not pay. In the case of a pollution global as it is the case for the emissions of carbon dioxide creating the greenhouse effect, every country has interest in the fact that the other countries decrease their broadcasts and doing nothing itself, and the more the other countries decrease their emissions, the less fuels are expensive and more it should rather consume it.

In the case of the common good which regenerates slowly, the problem of the exhaustion of the resource settles with acuteness. It is what we call the tragedy of commons. For example if the cutting down of the wood in a forest is in free access an agent is going to take into account only the cost of the slaughter and not that of the regeneration of the forest. This is going