I was on a plane a few days ago, coming back from Austin, Texas, where I participated in a weekend conference of environmental journalists. The person next to me asked me what I did for a living and I said, "Well, I'm an environmental economist." There was a long, long pause and a blank stare. It began to occur to me that what that blank stare and that pause were really saying was that, in his mind, I had just uttered an oxymoron. So, am I a living, breathing oxymoron?
What does economics have to do with the environment, anyway? My answer to that is really in two parts. The first is that the causes of environmental problems in our society are fundamentally-economic. The second is that many of the consequences of environmental problems have important economic dimensions.
What is it about our market economy that causes these environmental problems?You already know, as we all know and observe every day (particularly if you're involved in any kind of business yourself), that the forces of the market economy normally force each of us to focus on the proverbial bottom line; to worry about the money that's coming in and the money that's going out; to worry about the benefits and the costs. The result of that competitive process is that if you don't do that, you go out of business, essentially.
And the result of that process--and this is not a simple matter, but we've observed it over and over again--is that firms in the private market tend to use the resources that they have, labor and capital, in a relatively efficient way. On average (there are lots of exceptions), they tend not to systematically use too much or too little of labor or capital.
It also means that firms tend to produce, on average, about the right amount of the various goods and services that we want to buy. We tend not to have very long queues waiting to buy products. We tend not to have exceptionally large surpluses--actually, the one exception is in cases in which government gets involved in offering subsidies, such as in agriculture. But other than that, in the market economy, we tend not to have long queues and huge surpluses, something, of course, [that] characterized, as you know, centrally planned economies, until very, very recently.
Unfortunately, some of the things that firms produce are unintentional byproducts. Those unintentional byproducts may not show up in the bottom line, with the result that the competitive forces of the marketplace, which do such a marvelous job in terms of ensuring that the right amounts of labor and capital and all sorts of inputs and outputs are utilized and produced, don't work. The market fails. Environmental pollution is a primary example of this.
You might be thinking as I'm speaking, "But wait. There are some real costs of this. There are some real costs of pollution, some social costs of pollution. It costs us something, as a society. It hurts us. It reduces our well-being." That's absolutely true. The problem, of course, is that those social costs are not showing up on the bottom line of the firms that have to make the decisions in the first place about what to produce, how to produce it, and how to dispose of their waste. In other words, those impacts are external to the firms (in some cases, the individuals, you and me) that are making the decisions. That's why, if you've ever spoken to an economist about environmental topics, for even one minute, you've heard them utter the word "externality," because that's our perception of this. The problem is that environment is outside, is external to the decision-making framework of the firm.
The textbook example of this is a factory producing a product you and I want to buy, at a reasonable cost. It's using a particularly dirty fuel. The result is that some stuff is going up the stack which we might act like very much.
The more technically oriented call this "total suspended particulates" or TSP. I'll simply refer to it, as an economist, as "gunk. …